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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Most economists are trained to not even consider such a pointLAISSEZ FAIRE — IT CAN’T POSSIBLY WORK LAISSEZ FAIRE CANNOT MAXIMIZE WEALTH GNP and productivity data show laissez faire has not maximized wealth. It is worse. Laissez faire cannot maximize wealth. Laissez faire must fail. For there are institutions that add economic value. But laissez faire is incompatible with these institutions. Just as classical economists are blind to the historical underperformance of laissez faire, they are oblivious to the demonstrable inadequacy of pure free market economics. Consider patent protection, which functions to support successful research and development (R&D). It assures those who develop new products of an interval in which they will be free from competition and will be entitled to exact monopolistic prices. Government will intervene to prevent others from copying those products. Such an institution violates the conditions of a free market. It creates an artificial monopoly and raises the prices of those goods. Abolishing patent protection would be an economic positive in the near term, resulting in lower prices and greater consumption. But the near-term positive of abolishing patent protection would be outweighed by a longer-term negative. Without patent protection there would be little incentive to develop new products. Others would copy those products and compete in the market, driving down prices and margins to the point that R&D could not be justified. In such an environment, no one would fund R&D and the flow of new products would soon dry up. We would be poorer in the long term. Paradoxically, despite each instance of patent protection being an economic negative, patent law itself is a positive, increasing the long-term wealth of society. This paradox in economics parallels one in a theory of ethics, utilitarianism, that came into vogue in England at the time of Adam Smith. Utilitarianism claims that the morality of an act should be judged solely in terms of the utility of its consequences, where utility is defined as pleasure minus pain. In judging an act, one would total the pleasure it creates for each person and subtract from that total the pain it creates for each person. The act that maximizes total pleasure minus total pain is the morally appropriate act. Utilitarianism and laissez faire both claim to maximize value: utility, or moral value, for the utilitarian; wealth for the free market economist. And both theories face similar questions about their notions of value. For the moral philosopher, are certain kinds of pleasure more valuable than others? For the economist, does money exhaust the notion of value? More important to economics is a distinction within utilitarianism, between act utilitarianism and rule utilitarianism. This distinction is necessary because of a paradox, parallel to that of the value of patent protection, within act utilitarianism. Just as the repeal of patent protection would add to immediate economic value but subtract from long-term economic value, act utilitarianism maximizes the utility of every single act but cannot maximize total utility. Suppose that by lying to your grandmother, who is about to die and so will never learn the truth, you can avoid being embarrassed. Then it is your moral duty to lie to her. For lying to her would have a positive impact on your pleasurepain balance and no impact on that of your grandmother. Lying to her would increase total utility. Were such a morality taken seriously, the institution of truthfulness could not develop. Whether a moral person were telling the truth or lying would depend solely on his calculation of the utilities created by the truth and by various lies. This is an example of a self-defeating element in act utilitarianism. Honesty creates utility. But if we did not determine to tell the truth — independent of the utilities involved — there would be no moral institution of honesty. Because honesty creates utility and because it is incompatible with act utilitarianism, act utilitarianism cannot maximize utility. This self-defeating element is avoided by a related theory, rule utilitarianism. Utility can be created by moral rules — “Be truthful.” Instead of judging the moral value of each act by its own utility, we could estimate the Laissez Faire — It Can’t Possibly Work utility created by various moral rules and retain those rules that maximize utility. We would then judge individual actions by whether they conform to the appropriate rules. This characterizes rule utilitarianism, which analyzes the value of rules as opposed to the acts themselves. We often act on what we believe to be the best set of rules. Legal rules of evidence are occasionally responsible for the wrong verdict, finding a guilty person innocent because the court must suppress evidence. Yet we abide by these rules and do not override them, for the systematic protection of our rights is more important than any tendency of rules of evidence to cause an occasional miscarriage of justice. Similarly, we do not cheat, even when nobody is looking and the cheating would not harm anyone. We act as rule utilitarians rather than act utilitarians. From a utilitarian perspective, we do this because utility is maximized by rule utilitarianism, not by act utilitarianism. The considerations that apply to moral theory apply equally to economics. Just as we benefit from moral rules that maximize total utility even if they diminish utility in particular cases, we benefit from institutions that maximize total wealth even if they diminish wealth in particular cases. This suggests a rule laissez faire that would parallel rule utilitarianism. We would adopt those economic and legal institutions that maximize wealth. Just as act utilitarianism is self-defeating because it is incompatible with moral rules that maximize utility, act laissez faire is self-defeating because it is incompatible with institutions that maximize wealth. Just as rule utilitarianism remedies critical deficiencies in act utilitarianism, rule laissez faire would remedy critical deficiencies in act laissez faire. In short, the rationale for act laissez faire — that it maximizes wealth — is invalid. Rule laissez faire (including patent protection) would generate more wealth than could act laissez faire. A laissez-faire economist truly committed to the maximization of wealth would be forced to adopt rule laissez faire, rather than act laissez faire. He would have to consider the propensity of various economic institutions to generate wealth. But the substitution of rule laissez faire for act laissez faire — necessary for the maximization of wealth — is impossible; for “rule laissez faire” is an oxymoron. The enforcement of any rule is incompatible with laissez faire. According to act laissez faire, each person naturally acts in his own best short-term economic interest. Because this is natural it does not require government enforcement. By contrast, in rule laissez faire each person must abide by certain rules whether or not they are in his best interest. A person must not violate copyright laws and reprint published material without paying a royalty, even if the royalty increases his cost of material or deprives him of the opportunity to sell such material profitably. Abiding by such rules is less appealing, as we know from the thriving industry of pirating intellectual material; so government would have to insure adherence to the rules. It would no longer be laissez faire. Laws protecting patent and intellectual property rights are not unique. Laws against the production and sale of unethical drugs have the same effect. Without such laws entrepreneurs could establish a thriving new industry, one that would add substantially to GNP and create new wealth. It might even stimulate other industries (prison construction). Yet, in the longer term, addiction would impoverish society. Similarly, repealing those laws that insist you must have certain qualifications before you can call yourself a doctor would have the immediate effect of increasing the supply of doctors and lowering one component of medical costs. But this benefit would come at the expense of lowering the overall quality of medical care. It would be a detriment to society. More generally, certain legal institutions may be necessary to facilitate the transition from private property to capitalism. Hernando de Soto (The Mystery of Capital) contends that the primary reason Third World and ex-communist countries lag the West economically is that they lack a simple coherent uniform code of law that governs property rights — how to attain them, how to transfer them, what can be done with them. Soto argues that such an institution is necessary to capitalize property, to leverage ownership into productive capital. If he is correct, and he makes a strong case, then government intervention is necessary to capitalism. Even at the most practical level, act laissez faire, if practiced consistently, would negatively impact the functioning of an economy. Citing a specific example of the dysfunction of laissez faire’s focus on immediate gain, Robert Kuttner notes: “In Law and Economics School theory, there is even a doctrine of “efficient breach”: If it is cost-effective for one party to a contract to breach it, that party should ignore the contract and pay the price. However, society pays a heavier price if norms of commitment and trust are casually breached.” (Everything for Sale, p.64) Clearly, a society with legal and economic institutions conducive to the development of a strong economy would create more wealth than one without such institutions. Laissez faire economies, because they are incompatible with wealth-creating institutions from patent protection to laws against drug trafficking, cannot create as much wealth as economies that incorporate such institutions. These institutions require the ability of government to intervene. Thus, if an economy is to maximize wealth it cannot be laissez faire. If our justification for laissez faire is that it maximizes the wealth of society, then our faith in laissez faire is misplaced. DO WE WANT WHAT LAISSEZ FAIRE PROMISES? Laissez faire has not maximized wealth. It is worse: Even in principle laissez faire cannot maximize wealth. It is still worse: As if these problems were not enough, there is another one. Is the maximization of wealth what we really want? This question may seem silly. Of course, we would rather be richer than poorer. But, that society has a greater total wealth doesn’t mean it is we who are richer. All the wealth might belong to a single individual with the rest of us living in abject poverty. Saudi Arabia is a rich country, but half its population is illiterate and the average life expectancy there is shorter than that in Albania, China, or Turkey. Most economists are trained to not even consider such a point. After all, they remind us, economics is a science and should be value neutral. The values of a broader dispersion of wealth and a greater average life expectancy are not part of economics. Nor should they be. (It is ironic that this sentiment represents a serious misinterpretation of Adam Smith. The patron saint of laissez faire was hardly value neutral. Smith, a utilitarian, wrote in The Wealth of Nations: “All for ourselves and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind….No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides.…”) Still, the free market system appears to fit the value neutrality espoused by contemporary economists. Any industry can be compared with any other in terms of objective arithmetic ratios: profit margin, return on investment, growth rate, economic value added. It is appropriate to invest in and develop industries with the highest ratios. This is a simple consequence of the arithmetic. In the financial community, quantitative analysts use these parameters to recommend portfolio overweighting or underweighting of various market sectors. There is no need to speculate on the moral value of the product — medical technology versus beer. While the virtue of such an approach may seem obvious, increasing GNP and standards of living, the appearance of virtue is misleading. More is involved in the real world than just these arithmetic ratios. According to these ratios the most impressive industry — and by a wide margin — is the drug industry. Not Viagra and Keflex and the quinolones; not Advil and Pepto-Bismol and the overthe-counter antihistamines; but cocaine and heroin and the hallucinogens. Although I am not privy to the details, the financial parameters of the unethical drug industry dwarf those of the nearest competitor. The CEOs of the best known of these companies, the late Pablo Escobar in Medellin and a syndicate in Cali, amassed fortunes in the billions of dollars. They must rank among the great entrepreneurs of classical economics. In a truly free market system, unethical drugs should be the industry of choice. It is clearly the highest value-added industry. The U.N. estimates it accounts for 8% of world trade. Just the domestic market is estimated at a rapidly growing and highly profitable $150 billion per year. What a great investment! (This was also a great investment in the nineteenth century. In midcentury the defense of free enterprise in unethical drugs expressed itself in the Opium Wars. The English, stalwart defenders of free markets, free trade and maximizing profits, used military force to compel the Chinese government to acquiesce to the sale of opium to its citizens.) Our attitudes toward this industry are inconsistent, for despite our attachment to the free market system, we have taken just the opposite tack. Even free market economists agree such drugs should be outlawed, claiming they cost the economy hundreds of billions of dollars a year. That may well be true, but such an argument seems out of place for a school of thought that has maintained, stridently, that it is not the job of government to optimize the economy. That should be left to the invisible hand of the free market. The cigarette and tobacco industry (the number one cause of premature death, according to the American Medical Association) is a pale shadow of the unethical drug industry. Its financial characteristics are impressive — not surprising, considering the addictive nature of the product — though not so remarkable as those of the drug industry. There are certainly powerful arguments as to the negative effects of tobacco, comparable to those of unethical drugs, on the economy, as well as on quality and expectancy of life. Tobacco industry executives have long known about both the addictive and the carcinogenic properties of tobacco. Despite their knowledge, they chose to not market a safer cigarette lest it damage their credibility. They deliberately misled Congress about attempts to make cigarettes even more addictive. And they targeted younger audiences. Philip Hilts quotes the assistant chief of R&D for R. J. Reynolds: Young people will continue to become smokers at or above the present rates during the projection period. The brands which these beginning smokers accept and use will become the dominant brands in future years. Evidence is now available to indicate that the 14- to 18-year-old group is an increasing segment of the smoking population. R J Reynolds must soon establish a new brand in this market if our position in the industry is to be maintained in the long term… (Smokescreen, p. 75.) [Hilts goes on to add:] Eventually, they did, with a style and ferocity unmatched in tobacco marketing history. It was Joe Camel. Indeed, there is sound economic reason for tobacco companies to pursue such a course of action, whether openly or surreptitiously. This addiction, fundamental to the trade, does not develop among adults. Among those over the age of 21 who take up smoking for the first time, more than 90 percent soon drop it completely. It takes more than a year, and sometimes up to three years, to establish a nicotine addiction; adults simply don’t stick with it. If it were true that the companies steer clear of children, as they say, the entire industry would collapse within a single generation. Put in market terms, the most important datum of the tobacco trade is that, among those who will be their customers for life, 89 percent have already become their customers by age 19. In fact, three-quarters had already joined the ranks of users by age 17. (Ibid., p. 65.) So it is not surprising that the tobacco companies have been disingenuous in their public pronouncements, from their pretense to a commitment to discourage young people from smoking to their misleading public response to EPA findings about dangers from second-hand smoke. Economically, they are behaving rationally. From the standpoint of free market theory, such action must be a benefit to society. Clearly it is not, despite the economic theory, and the behavior of the executives of these companies has been reprehensible. In some societies, less dominated by corporations purchasing political influence, it would be criminal. In our own society, despite the damage done to both lives and the economy by tobacco, industry officials have been able to use part of their profits to purchase considerable clout in Congress, which time and again has enacted legislation favorable to the industry. Hilts notes that every item of health legislation since the 1960s has specified an exemption for cigarettes. Even after the perfidious tactics and strategies of the tobacco industry had been exposed, Congressional leaders introduced a $50 billion tax credit for the cigarette industry in the 1997 budget bill. From the perspective of laissez faire, what is the difference between tobacco and unethical drugs that we should encourage and even subsidize the former but criminalize the latter? For, if the sole good is wealth, it should not matter what is the source of that wealth. There are parallels within the ethical drug industry. Suppose a company were to discover a cure for cancer and also a drug that modestly extends the lives of patients and relieves some symptoms, provided they keep taking it. There would be powerful economic incentive to suppress the cure but to aggressively market the symptom-relieving drug. Along these lines, it is only rational — economically — that modern medicine should do most to keep chronically sick people alive. This is the most lucrative area of medical care. The very structure of the medical industry insures the priority of profitability, even at the expense of safety and efficacy. Pharmaceutical companies have an economic incentive to minimize the money and time spent in the approval process for new drugs; so they seek to compress clinical trials into as short as possible a period, despite risks of missing longer-term effects. They apply pressure to get drugs approved for the widest range of indications, independent of efficacy. Professor David Reeves, chairman of the working party on antibiotic use of the British Society for Antimicrobial Chemotherapy, said that industry “has pushed quinolones very hard… Many quinolones are marginal antibiotics for treating respiratory infections. Yet the drug companies were keen to get respiratory infections as an indication, because if they were confined to urinary tract infections, you would be looking at a far smaller market.” (Cannon, Superbug: Nature’s Revenge, p. 71.) The pressure to maximize profits also accounts for the widespread use of antibiotics at a sub-therapeutic level in livestock, the end market for nearly half our pharmaceuticals. Small doses, well below levels useful to combat infection, increase the growth of these animals and their profitability, since they are valued by the pound. But this is done at the cost of breeding drug-resistant strains of bacteria. Multiple drug resistance, unheard of decades ago, is now widespread in cattle. Economic considerations also persuade companies to ignore products that — no matter how efficacious — have little profit potential. It has long been known that silver has broad-spectrum anti-microbial properties. The saying “Born with a silver spoon in his mouth” comes from the Middle Ages, when wealthy parents would give their children silver spoons to suck on. Of course, they knew nothing of microbes. But had they not somehow suspected that sucking on a silver spoon might have health benefits, it is unlikely that the silver spoon tradition would have developed. Before refrigeration, some farmers used silver milk pails to prevent bacteria growth from spoiling the milk. Early settlers threw silver dollars into their water wells. Before the First World War, silver was used as an oral and injectable antibiotic. Even now, lines of Foley catheters are silver plated to reduce the risk of urinary tract infections, and silver sulphadiazine is used to prevent and treat burn-wound infections. A colloidal silver product was recently tested at the Department of Microbiology at Brigham Young University and compared with representative antibiotics from five classes (tetracyclines, fluorinated quinolones, penicillins, cephalosporins, and macrolides) against a range of pathogens (S. gordonii, S. mutans, S. faecalis, S. pneumoniae, S. pyogenes, S. aureus, K. oxytoca, K. pneumoniae, E. coli, S. typhimurium, S. Arizona, E. cloacae, E. aerogenes, S. boydii, P. aeruginosa). The silver killed all the bacteria in vitro at 10 parts per million or less. Not one of the antibiotics achieved this result. The study concluded: The most interesting observation was the broad spectrum that the… solution possesses…. The data suggests that…solution exhibits an equal or broader spectrum of activity than any one antibiotic tested… solution is equally effective against both gram positive and gram negative organisms….The data suggests that with the low toxicity associated with colloidal silver, in general, and the broad spectrum of antimicrobial activity of this colloidal silver preparation, this preparation may be effectively used as an alternative to antibiotics. (Revelli, Wall, Leavitt, “Antimicrobial Activity of American Silver’s ASAP Solution”.) Additional testing on this solution has extended its scope as a potent antimicrobial agent. Studies at the University of California at Davis have demonstrated its ability to kill pathogenic yeasts. Tests at the Illinois Institute of Technology have shown it to kill anthrax spores (which are extremely difficult to kill, even with toxic agents). Tests in hospitals in Ghana have shown its ability to kill the plasmodia that cause malaria. Most important, colloidal silver may provide a critical weapon against microbes that are resistant to antibiotics. This has become an acute medical problem. In the 1950s, nearly all staphylococcus strains succumbed to penicillin. Presently, more than 95% of staphylococcus strains are resistant to penicillin. Fortunately, a new drug, methicillin, was found to kill staphylococcus, and in the late 1960s methicillin replaced penicillin as the treatment of choice for staphylococcus infections. But by the early 1990s, nearly 40% of staphylococcus strains isolated in large hospitals were resistant to methicillin. Vancomycin remains as a treatment of last resort for methicillin-resistant infections, but some physicians have reported staphylococcus strains that are resistant to vancomycin. Streptococcus has evinced similarly increasing drug resistance. In the early 1970s, penicillin and erythromycin could successfully treat nearly all streptococcus infections, but we are now beset by strains that are more virulent than most older strains and also resistant to antibiotics. Recently, particularly virulent strains of streptococcus A, known as flesh-eating bacteria, have been found that are resistant to nearly all antibiotics. An antibiotic-resistant strain of streptococcus was responsible for the death of Jim Henson, creator of the Muppets. A strain of tuberculosis, tuberculosis B, is resistant to every antibiotic in our arsenal. This is a dangerous contagious disease for which there is no effective treatment. Its spread raises the grim prospect of a deadly incurable epidemic. The effect is like a bad dream. No matter how fast we run, developing new antibiotics, the microbes are gaining on us. The threat is real that we could again find ourselves in a pre-antibiotic age. “Those who believe a plague could not happen in this century have already seen the beginning of one in the AIDS crisis, but the drug-resistant strains, which can be transmitted by casual contact in movie theaters, hospitals, and shopping-centers, are likely to be even more terrifying.” (Science, August 1992.) The spread of microbial resistance to antibiotics should not be surprising. Since the beginnings of life on this planet, bacteria, yeasts and fungi have been competing for turf. They have had more than a billion years both to develop their own biological weapons and also to adapt to each other’s arsenals by developing resistance to their biological weapons. These biological weapons are the basis for antibiotics, so it is natural that some bacteria are resistant to antibiotics. With the widespread use of antibiotics selecting for resistant bacteria, it is to be expected that resistant strains should become dominant. The matter is made worse by the ability of bacteria to exchange plasmids, bits of extra-chromosomal genetic material that occur naturally in bacteria and may contain genes for antibiotic resistance. In this way a virulent non-resistant bacterium can pick up genes for antibiotic resistance from an otherwise harmless bacterium. Microbes do not have a similar historical relationship with silver. Moreover, silver appears to act differently from any of the antibiotics. So it is plausible that bacteria would not develop resistance to silver. And tests at Brigham Young University in a “smart tank” containing bacteria that mutate rapidly have so far confirmed the inability of bacteria to develop resistance to silver. In light of this, it may seem surprising that the medical community has forgotten what it once regarded as a promising treatment for infectious diseases. This is related to the economics of the industry rather than the efficacy of the product. Simply, colloidal silver is too inexpensive. It could not generate billions of dollars for drug companies. Worse, it might compete with highly profitable antibiotics in a $40 billion per year market. This makes for strange contrasts. On one hand, there is no economic incentive for any drug company to pursue a potentially efficacious broadspectrum anti-microbial agent that has fewer side effects than any antibiotic. On the other, there is economic incentive to spend $10,000 per physician per year on gifts and entertainment. This has influenced many doctors to prescribe new expensive drugs where older cheaper drugs would do as well. Good for the drug manufacturers, or they would have stopped the practice. But not so good for the patient. What is the difference between a gift for which there is a reasonably expected, if unspecified, payback and a bribe? How does this free market institution benefit society? The subordination of life and health to economics is not confined to the drug producers. It characterizes our health care delivery system as well. Consider the priority of economics in health maintenance organizations (HMOs), apparently so named because they are okay only if you maintain your health. They select only the lowest risk prospects, leaving many in need of care without any medical coverage. Protocols treat laboratory results rather than patients. (It is more efficient that way, and it reduces legal liability.) Individuals with little medical training or experience commonly override doctors’ recommendations on economic grounds. Doctors complain about pressure to minimize expenditures, to avoid specialists and expensive tests, even at the risk of patients’ lives. Perverting the Hippocratic Oath, they are rewarded for lowering costs of care and penalized if costs exceed pre-established thresholds, independent of the needs of the patients. One might think that the decline in quality of medical care is a necessary consequence of improving the efficiency of the system and lowering costs. But it does not appear that “…HMOs reduce the rate of increase in medical costs after an initial savings substantially based on risk selection.” (Kuttner, Everything for Sale, p. 123) As one would expect of a system in which the bottom line is the ultimate measure, the conflict of interest between profits and health is routinely decided in favor of profits. Profits outweigh even lives. But despite our concern about our own health and the health of those we love, HMOs have metastasized throughout the country. Despite our spending more than any other country on health care, a recent World Health Organization (WHO) evaluation ranked the U.S. 37th in overall quality of health care. We may have different priorities from WHO, but this is hardly an impressive credential for our free market approach. Reflecting this, our life expectancy is lower than that in Australia, Austria, Belgium, Canada, Finland, France, Germany Greece, Italy, Japan, Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland, and the U.K. (U.S. Census Bureau’s International Data Base.) (Our life expectancy is low despite the facts that we smoke about as much as residents of other countries and that we have a lower than average consumption of alcohol and animal fats.) What makes sense — at least on the traditional economic model — is bad for our health. |
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