Profiting From Market Failure: How Today’s Capitalists Bring Bad Things to Life

By Douglas K. Smith, the co-founder of Econ4 and author of “On Value and Values: Thinking Differently About We In An Age Of Me. Cross posted from Alternet

The long-running General Electric slogan sums up what capitalist cheerleaders love to say about markets: "We bring good things to life."

But is it really true? In reality, some capitalists have figured out how to profit by actually bringing bad things to life.

Today, market forces organize, select and direct the production of goods and services in ways that would amaze and startle our ancestors. Consider the automobile: designed, engineered, provisioned, manufactured, marketed, sold and serviced by webs of hundreds of different organizations across the planet. Amazing. And a tribute to what’s possible through market successes.

But markets fail, too. All of the time. They are inherently unstable and inefficient. Cheerleaders of capitalism attribute failure only to government, to individuals and occasionally, to organizations – but never to markets. Yet except in the dream worlds of fact-free economists, markets are always out of balance and screwing up.

The same forces that so brilliantly coordinate resources in a global automotive market have also operated to plan obsolescence, to impede the provision of safety belts and air bags, and to obstruct the pace of fuel-saving innovation.

Clearly markets often fail in bringing us the things that make our lives better. Which raises the question: How do capitalists respond to market failures?

More specifically, to what extent do capitalists deploy their wealth in the search for new and better mousetraps? And to what extent do capitalists double down on market failures by intentionally perpetuating and profiting from the failures themselves? And, most importantly, how do the markets for gathering and deploying capital respond to failures in markets that deliver crappy products and shoddy services?

Consider Joe Wilson of Xerox, a Rochester, New York hometown boy who took the reins of the family office supplies business, learned about Chester Carlson’s invention of "dry writing," and then bet his company and capital for 14 straight years on the promise that xerography would dramatically improve communications. Fourteen years. This was not the "fast buck, no risk" capitalism of today’s swashbuckling pirates. It was difficult, nerve-wracking, persistent and risky.

Joe Wilson and Xerox reveal the persistence, focus and actual risk-taking demanded to convert market failures into market success. Such powerful forces, though, threaten incumbents. When better mousetraps emerge, some players lose. Xerox’s success pushed out carbon copies, and those who profited from them. Economist Joseph Schumpeter called this process “creative destruction.” Like water finding its own level, capital should flow to better mousetraps if capitalism is to fulfill its potential to expand "good things to life" for humanity.

Should. Not must. Just take a look at healthcare markets. Instead of taking Joe Wilson-style risks on innovation, too many captains of the heathcare industry and the capitalists who fund them choose to perpetuate market failures and enrich themselves in the process. They "just say no" to the risks inherent in searching for new life-saving drugs and treatments. Ditto to opportunities to dramatically expand access to those who currently cannot afford them. For these well-off incumbents, there is simply too much profit to be made by raising prices, manipulating intellectual property protections, bribing doctors, misleading the public, cutting costs, and choking distribution. (See Maggie Mahar's Money-Driven Medicine.)

The same thing happens in the health insurance market. Those with power avoid risking capital on innovative solutions that might expand insurance to the tens of millions of Americans without it. The same high priests of capitalism erect ever more complex, unreadable insurance policies supported by ever more withering and costly administrative procedures that, when combined, perpetuate a huge market failure: only a small percentage of premium dollars actually going to pay for care. Insurance markets go to war with customers in ways that increase, not diminish, the odds that folks who think they have coverage actually don’t.

Capitalists can pick between two responses to markets that are failing. They can bet their capital on fixing them – on bringing more good things to life. Or, they can do everything possible to extract more and more profit by extending, expanding and exacerbating the failures. 

Capitalist myth-makers claim the first response prevails. This is the core of the “God’s work” that Goldman Sachs CEO Lloyd Blankfein claims to do at his bank. The Blankfeins of our economy pretend there are many more Joe Wilsons than health insurance executives. 

The facts tell a different story. Profiting from market failures instead of expanding good things dominates the healthcare industry: Big Pharma, managed care and health insurance. And the same destructive activities dominate the housing market. For a decade at least, capitalists have siphoned off enormous wealth from deep and broad failures. Before the financial crash, two dramatically different types of lenders were competing in America’s housing markets. The first type of lender — the subprime group — offered bad products that caused borrowers to become delinquent and foreclosure rates to skyrocket. The second type of lender — America’s nonprofit housing enterprises — offered decent products that led to limited delinquencies and foreclosures. But investors in the second group were running against the tide of American capitalism.

Joe Wilsons are rare in health care and housing, and increasingly hard to spot in energy markets. BP, ExxonMobil and others rake in zillions while people freeze without heating oil and natural habitats, along with local economies that depend on them, get ruined, as we witnessed in the Deepwater Horizon explosion in the Gulf of Mexico.

There are too few Joe Wilsons in food markets that make us sick; financial services markets that leave us in debt; journalism markets that issue corporate press releases; infrastructure markets marked by potholes and falling bridges; accounting markets that facilitate bad numbers; law markets that ensure no accountability for massive wrongdoing; telecommunications markets that nickel and dime us; and labor markets that fail to produce jobs.

And, quite clearly, in capital markets. Capital operates in and through markets in which people and organizations with money to invest find organizations and people looking for investors. Joe Wilson’s success with Xerox depended on capital markets. He and his colleagues had to find the capital needed for their 14-year journey from idea to implementation. And executives and entrepreneurs in the healthcare, energy, food, housing, financial services, infrastructure, law, accounting and all other markets also must turn to capital markets for the funds – the essential fuel – needed in their quest to profit from either fixing or perpetuating the failures in their respective markets.

The forces driving today’s capital markets push far, far more capital toward squeezing more and more profits and wealth out of failures instead of innovating to fix those failures and increase the “good things to life.” 

Hundreds of trillions of dollars of capital – including taxpayer-provided funds — slosh through global markets in search of socially useless gains from trading in complex, unregulated and out-of-control financial derivatives, instruments Warren Buffet calls "weapons of mass destruction." Tightly interwoven boards of directors and top executives openly conspire to use executive compensation schemes to extract wealth for themselves even as they downsize and outsource jobs, cheapen and overcharge for products and services, and turn their backs on innovations that could spread good things to folks currently not served. The folks at Bain Capital claim to invest in fixing failures, but far too often they actually manipulate the tax code and capital markets to build huge personal fortunes on the suffering of others.

This is the big fail. Because capital markets are the uber-source of funds needed to operate all other markets, failures in capital markets multiply and worsen the failures everywhere else. The folklore of capitalism promises us that good things for life always and forever emerge from markets – but only from free markets unlimited and unconstrained by any government action. Only if the uber-markets for gathering and deploying capital are also free of all constraint, we’re assured, can we expect this bounty to flow.

If you’re part of the 99 percent, take a clear, long look around. Odds are, you’ll read about people distressed from the consequences of too many market failures in housing, financial services, energy, labor, law, accounting, healthcare, insurance, transportation, telecommunications and more. Likely enough, you have shared some of this distress yourself.

Buckle up. It’s going to get worse. Having extracted so much wealth and power from exacerbating instead of fixing failures in so many markets, the lords and ladies of free-market capitalism want even more by privatizing education, prisons, parking and tolls, the military, and with Citizens United, democratic politics.

Remember this: all markets both succeed and fail. The balance between more successes versus more failures is in the hands of ethical and responsible owners and investors like Joe Wilson, who invest capital in converting failures into good things for life. Today, those folks are losing out – badly — to people who thrive on failed capital markets that put a higher premium on perpetuating failures instead of fixing them. There is one way to fix the mega-failures in capital markets: regulation. Governments must step in now. Otherwise, capital markets free of all restraint will, as sure as night follows days, rain ever more pain on the many in order to generate wealth for the few.

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60 comments

  1. Capo Regime

    Governments have stepped in now to a very great extent. They have stepped in to an extent where they serve as appendeges to the so called “capitalists”. One could persuaisvely argue that the joining in of government and corporate interests have brought about most of the problems we face. K street specializes in insuring government and taxpayers insure the continued existence of failed enterprises. These are failures from a quaint view of markets but a success from the lawyers, PR hacks, lobbiests and over compensated under performing CEO’s. If only it were so simple as having government step in-they do but not for the reasons commonly believed.

    1. Johnny Clamboat

      Well said. Until the Total State is reduced drastically in size and scope, expect corporate fascism to rule the day.

      1. scraping_by

        Er, no. Until the State is a counterbalance to private wealth, every new turn in capitalism will be a turn for the worse. As long as it’s an appendage, it’s malign.

        1. Goin' South

          Wishing it doesn’t make it true.

          The State is the natural servant of Capital, not the defender of workers.

          The only solution is to treat the cause of the disease, not the symptoms.

          Get rid of private ownership of the means of production. Let communities and workers control their own destinies rather than being under the thumb of plutocrats and their government errand boys and girls.

        2. Johnny Clamboat

          “Until the State is a counterbalance to private wealth, every new turn in capitalism will be a turn for the worse.”

          No State has ever worked for the poor.

      2. rotter

        No.”Corporate fascism” IS the state, the only “state” you have ever known. It is an appendage of private wealth and power. We need to greatly restrict Private wealth power and all the evil that flows from it.

        1. Another Expat

          Actually, “corporate facism” is *not* the only state we Americans have known. Corporate facism is the other name for the Reagan-Thatcher revolution known as neoliberalism. And it was in the revolutionary fervor of rapacious businessmen that politics went from being “we’ll regulate you unless…” to “we’ll do whatever you want if you pay us enough.” Perhaps coincidentally, this shift paralleled the shift from 40 years of Democratic party domination of Congress to the gingrichian Republican takeover we are suffering under now.

          Which is to say, those of us who have been alive longer than, say, 35 years, were the often unwilling witnesses of the transformation of the American political system from a partially countervailing force to the not-illegal bribery based cabal it is today.

          It was different, and people were different then. Cabinet ministers had to resign because of remarks they made, for example. And a president had to resign because of crimes he was accused of committing. The American Bar Association vetted judicial candidates, and, oh, could I go on!

          We let this transformation (deformation?) happen to us. Unfortunately, like most cancers, the 1% tumor on the body politic would have been easier to treat had we heeded the early detectors and put the Reagan-Thatchers in prison instead of leadership positions. Now it’s a question of whether the cancer will kill us (not just the body politic, alas) or whether we can push this disease into remission.

          The lessons from cancer suggest that only treatments that bring us to near death can rid us of the pestilence. The Germans are one example, the Soviets another. We seem to be going in the Soviet direction, with our millions so wrapped up in themselves that they passively let the nuturing state wither away.

          Not that I am advocating the German example! Like all decent Westerners, I fear it. But the remedy for our current situation grows more drastic by the day.

          1. rotter

            Progressive Taxation is a peaceful and reasonably effective remedy when its mandatory, and not voluntary.But thats the problem with trying to reform capitalsim. Its forever trying to escape and exceed any limits placed on it. Any law becomes voluntary when you own the govt.

          2. F. Beard

            Progressive Taxation attempts to tax back what should not have been stolen in the first place!

            Given a debt-free economy, banks could not exist without government privileges, at least not to any significant extent.

            So bailout the entire population and remove those privileges! No more banking = no more theft of purchasing power = less need for Progressive Taxation.

    2. YankeeFrank

      Its the definition of “step in” that is confusing the issue. When government steps in as it did in the aftermath of the ’29 crash, to backstop the public and bring the financial criminals to heal, then stepping in is a good thing. When stepping in to backstop and protect the criminals and stick it to the public, its bad. The author was thinking of government in that window when, for a brief period, it actually looked out for the 99% instead of the 1%.

    3. NYC212

      Governments have stepped in now to a very great extent. They have stepped in to an extent where they serve as appendeges to the so called “capitalists”.

      Cushy arrangements between governments and market incumbents aren’t entirely a new phenomenon, the taxi medallion system that prevails in most American cities is a generations-old example, what’s new is the extent to which this is now viewed as the legitimate role of government rather than as corruption.

  2. Pitchfork

    I like that the author is exploring a very important topic in economics.

    However, I would make one point that I think both the “free-market” ideologues and their critics (including this one) seem to miss. This is more of a legal issue than an economic one, but the point the author makes about insurance companies using ever more complex contracts and denying claims, etc. — this to me seems a matter of what counts as a contract and what SHOULD count as a contract.

    By current legal standards, no matter how complex the contract, if it’s written on paper and signed by two parties, it usually counts as binding. However, when an insurance or other financial company deliberately hides important caveats in the fine print, one could argue (though I don’t believe this ever actually happens) that the party drawing up the contract is engaging in FRAUD.

    This is the argument I made with people about Elizabeth Warren’s goals for the CFPB — that simplifying contracts was not simply a matter of Big Government meddling in the market. Rather, mandating simple, easy-to-understand contracts amounts to preempting fraud on the part of financial institutions.

    It’s not, in these cases, that markets “fail,” but that our legal system fails to recognize what common sense understands to be trickery and fraud — which is the very opposite of a mutually agreed to contract.

    1. Newtownian

      Unfortunately a large chunk of the legal system does recognize commonsense but also understands legalistic ways to get circumvent such commonsense. This is unsurprising given the law is not the black letter of text books but an assembly of contradictions which has evolved over time. As a result to quote an old song ‘We all want justice but you have to have money to buy it, you’d have to be a fool to close your eyes an deny it.’ which all goes to show how capitalism inherently corrupts the law and indicates Grouncho Marx’s Night at the Opera character Rufus T Firefly and Larsen E. Pettifogger have been resurrected as models for at least part of that profession.

  3. F. Beard

    Governments must step in now. Otherwise, capital markets free of all restraint will, as sure as night follows days, rain ever more pain on the many in order to generate wealth for the few. Douglas K. Smith

    Government must ban or at least remove all privileges for credit creation since credit creation is INHERENTLY discriminatory and effectively steals from the poor. But here’s an historic example of the US Government encouraging that discrimination! And under FDR too!

    Although in the United States informal discrimination and segregation have always existed, the practice called “redlining” began with the National Housing Act of 1934, which established the Federal Housing Administration (FHA).[10] The federal government contributed to the early decay of inner city neighborhoods by withholding mortgage capital and making it difficult for these neighborhoods to attract and retain families able to purchase homes.[11] In 1935, the Federal Home Loan Bank Board (FHLBB) asked Home Owners’ Loan Corporation (HOLC) to look at 239 cities and create “residential security maps” to indicate the level of security for real-estate investments in each surveyed city. Such maps defined many minority neighborhoods in cities as ineligible to receive financing. The maps were based on assumptions about the community, not accurate assessments of an individual’s or household’s ability to satisfy standard lending criteria. Since African-Americans were unwelcome in white neighborhoods, which frequently instituted racial restrictive covenants to keep them out, the policy effectively meant that blacks could not secure mortgage loans at all. At various times the practice also affected other ethnic groups, including Latinos, Asians, and Jews. The assumptions in redlining resulted in a large increase in residential racial segregation and urban decay in the United States. Urban planning historians theorize that the maps were used by private and public entities for years afterwards to deny loans to people in black communities. from http://en.wikipedia.org/wiki/Redlining

  4. Jill

    This needed to be said. We are taught many lies in this nation. The idea that the “leaders” (or “quality” as Twain called them) are a strong, intelligent, hard working group of risk taking entreprenuers is certainly one of those lies.

    The most frustrating thing of all is that one could still be ungodly wealthy by doing something of value in society. Why can’t the 1% see that? Why don’t they want that?

    I’ll pick one thing the nonsociopath could consider investing in, something not even that risky–environomnetal cleanup. It’s necessary, it’s a social good, the jobs stay at home, the pay could be right for everyone, the profit potential is excellent.

    I grant you that most of the “quality” isn’t too bright but they are smart enough to hire people who are. Why not hire intelligent people to do what needs doing, make a pile of money and be happy? Further, what’s up with smart people (quants, I’m talking to you!) willing to work on things that harm other people? Why not expect something more from yourself than wreaking havoc on your society? Ya, something you can really be proud of, huh?

    This is a well written, thoughtful argument that takes on several core lies of this society. Thanks Mr. Smith!

    1. Procopius

      You know, I can agree that Bill Gates contributed a real benefit to the world. On the other hand, I recently read an article attributed to Paul Allen, Bill’s early partner. Few people today remember how important it was to get a nigh level computer language that could fit on one of the early microcomputers. In those days we were working with 8 bits, so memory was limited to 64K anyway, and memory chips were expensive. I remember seeing ads for 1K memory boards for $1,000. Gates and Allen got their interpreter to run in less than 4K. OK, no question, a great achievement and one that helped make computers universal. But Allen points out a character trait that he attributes to Gates being the son of a lawyer — the negotiations are never over, everything is always up for renegotiation. Gates was adept at coming back and revising agreements so he got just a little more. Later, after Allen left Microsoft, Gates and Bullmer really got predatory, and a lot of their wealth came exploiting their relative powerful position in the industry.

  5. LeonovaBalletRusse

    Boesky’s “takeover” model was for ever: “Job creation” is for suckers. Romney is the “Republican hero” for following Boesky’s model.

  6. Johnny Clamboat

    “The same high priests of capitalism erect ever more complex, unreadable insurance policies supported by ever more withering and costly administrative procedures that, when combined, perpetuate a huge market failure: only a small percentage of premium dollars actually going to pay for care.”

    1. It’s quite a stretch to say that, in a market where the Total State spends over 50% of the money, capitalists are responsible for market failures. I won’t get into mandated coverage requirements.

    2. It’s dishonest to say that 75-80% MLR is a small percentage.

    1. Amateur Socialist

      the 80% MLR is a required minimum post ACA. It needed a regulatory minimum because so many policies paid out much less.

      Are you sure those are clams? they sure look like baloney from here.

      1. Johnny Clamboat

        75-80% was a conservative estimate of the average MLR in 2009.

        If my numbers/claims are bologna, please point out where I erred.

    2. Yves Smith Post author

      You are ignoring doctor time (and that’s before you get to staff costs) spent on insurers, as opposed to patient care. That is ALSO built into their price structure, and represents a huge hidden cost. It’s well known that tons of doctors who can are abandoning primary care for this reason, and are going into fields where they don’t need to deal with insurance (plastic surgery, or endocrinologists who now do only “anti aging”). They are sick of spending time arguing over the necessity of procedures and/or whether the costs are “ordinary and customary.”

      From what I can tell, doctors spend 20% of their time fighting with insurance companies. 80% x 80% gets you to 64%. 80% x 75% gets you to 60%. And as I said, we haven’t allowed for the office overheads that result from dealing with an insurer, as opposed to the patient directly, even when the insurers are playing ball nicely.

      1. skippy

        Even here in marsupial land, those that run GP offices can generate 2ish million cash flows and only net 50K a year. Until the 08 pop the gig was, set up shop, get some movement on the books and sell. Usually to some international hot capital mob, funnily enough, mostly Northern European outfits.

        Skippy… FYI the move to privatization is well underway. I wounder when/if they will privatize the judiciary… snort.

        1. Up the Ante

          Quote of the Day,

          “when/if they will privatize the judiciary … ”

          Privatize the judiciary, that’s like the Icelanders watching Diamond’s testimony ?

          :)

          1. David Chaney

            The judiciary is already privatized. If my experience – and many like me – who have gone before Federal Bankruptcy “Judge” Sandra R. Klein here in Los Angeles, who refused to discharge my bankruptcy even though I had met all the terms of discharge, because she knew I was going file a new BK to get an automatics stay to keep Chase from foreclosing on my paid on time for two years, but expired, loan. She ruled against every debtor that day in court, and from what other lawyers told me, she had ruled against every debtor standing before since “rising” to the bench last July.

            And to the comment that the 1% could make money by doing the right thing: CHase, it’s receiver, and the new owner have so neglected the property that I am getting abatement notices from the City of Los Angeles. No matter I lost control of the bldg. in October. And I was an exemlary owner – great landlord, beautifully restored historic bldg., well managed, had worked with LAPD to drive the gangs out. Do not expect such from the new 1% owners who are trying to sue me after buying the bldg. at auction because the rents “are low.” He had the audacity to say to me that he’s “victim.” Right churlish if you ask me. The bank lied and told him the rents were high. Got what he deserved trust a bank!

    3. A in Cali

      clamboat: “It’s dishonest to say that 75-80% MLR is a small percentage.”
      Perhaps it is better said, 20-25% overhead taken out of your insurance dollars is huge (more so compared to admin overhead of Medicare/Medicaid, where there’s <3% overhead, or in Canada ~7.5%). Would you like to have your bank take out a fee of 20-25% of your account balance for administering your checking account? And what for are these 20-25% of your insurance payments used? Not only obscene CEO pay, but also a nightmare of an administration whose aim it is to deny coverage to anybody who might have been sick, ever, and to deny legitimate claims (A diabetic colleague, always same claims for routine care, gets denied about once a year, then spends an hour on the phone, first insurance rep says, sorry, computer says your plan doesn't cover this, colleage points out that it was covered last quarter…. after 30 minutes or so, a supervisor finally agrees, yes it should be covered, we are sooo sorry, must be a computer error…Now how many people just fell for it.– On a small lab bill, ~ $14, after co-payment, my wife's insurance asked lab for copy of her insurance card three times, their second and third request having my wife's insurance number in the letter rejecting payment; I can't assume other that insurance co assumes that for small [illegally] refused payments collection cost exceed payment.) So there is an enormous overhead in addition on the side of the actual health care providers (doctors, hospitals, pharmacies).
      "Total State spends over 50% of the money, " Yes, and in countries like Great Britain, that total amount (prorated by population) is enough to give basic coverage to all citizens.

  7. Uncle Bruno

    Joe Wilson got $3mm in today’s dollars from the US Army to commercialize technology developed at Battelle, a non-profit which relied heavily on govt contracts. This from an idea first conceived by Chester Carlson at Bell Labs, a government-sanctioned monopoly. The risk and innovation seems largely borne by US taxpayers. The good ole days of capitalism seem pretty similar to today.

  8. jsn

    Years ago when I was studying the ways of the Chicago Wheat Exchange
    I suddenly grasped how they managed the whole world’s wheat there
    And yet I did not grasp it either and lowered the book
    I knew at once: you’ve run
    Into bad trouble.

    There was no feeling of enmity in me and it was not the injustice
    Frightened me, only the thought that
    Their way of going about it won’t do
    Filled me completely.

    These people, I saw, lived by the harm
    Which they did, not by the good.
    This was a situation, I saw, that could only be maintained
    By crime because too bad for most people.
    In this way every
    Achievement of reason, invention or discovery
    Must lead only to still greater wretchedness.

    Such and suchlike I thought at the moment
    Far from anger or lamenting, as I lowered the book
    With its description of the Chicago wheat market and exchange.

    Much trouble and tribulation
    Awaited me.

    Bertolt Brecht
    Plus ca change

  9. Mafer

    It is too late to get the regulatory capture genie back in the bottle once democratic politics have been “privatized” on both sides of the aisle and the intra-party dynamic precludes entryism sui generis.

  10. Amateur Socialist

    This article from a recent Nation seems relevant: http://www.thenation.com/article/168124/how-germany-keeps-amazon-bay-and-literary-culture-alive

    (sorry I think subscription is required for full access) But the key point isn’t just anti capitalism but actually pro-regulation. In one of the most tightly regulated market for books Germany has managed to allow far more small independent presses and booksellers to survive while keeping retail prices as low as almost anywhere in europe outside Finland and Iceland.

    From the article:

    “In Germany, approximately 90,000 new books are published each year, which per capita is about four times as many as in the United States. Among the new books of 2010 were 11,349 translations, including 6,993 English-language titles. Additionally, average book prices in Germany are the lowest in Europe, with the possible exception of Iceland and Finland. This ignominious “cartel” seems to be working to the advantage of readers, publishers, bookstores and authors, especially those who cannot expect total sales of more than 3,000 copies. The cultural advantage of this arrangement is obvious. Bestsellers—whether by Stephen King or Günter Grass—sell at the same price anywhere, guaranteeing the survival of independent booksellers. The small profit margin on bestsellers allows bookstores to keep in stock high-quality, low-selling titles. ”

    Today’s capitalism doesn’t require the players to get too big to fail. They just have to get too big to *compete*.

    1. Smellslikechapter11

      Very good description of the distinction between wealth creation and wealth extraction.

      The more wealth that is extracted the more people have work or borrow to stay just where they were. This truly a vicious circle is revealed by the long work weeks, stagnant wages and high consumer debt levels that have arisen over the past 30 years. Just a theory based on some very primitive correlations.

    2. Another Gordon

      An excellent item from the Nation about German bookselling.

      Britain had a similar scheme (known as the Net Book Agreement) until 1995. I was once pointed to an item in the (UK) Bookseller magazine from the time when this was first introduced a century earlier. It said, as nearly as I can remember, “Public and trade alike must understand that if Mr MacMillan’s scheme is introduced as we must now expect book prices will fall by 20%”.

      When the scheme eventually collapsed in the face of neoliberal hostility to this ‘cartel’ (a resale price agreement is quite different to a cartel but the latter makes a better talking point) surprise, surprise list prices soared. With discounts some bestsellers were close to what they would earlier have been but prices of less best-selling titles just went up. Also prices quickly became opaque: it was soon established practice to print a high price on the cover purely to enable a ‘discount’ to fool the punters. In short order publishing saw a wave of defensive mergers, bookselling became highly concentrated and authors lost out.

      So this ‘deregulation’ was actually a disguised reregulation in favour of Big Retail and at the expense of everyone else.

      1. Expat

        You are exactly right. What they called deregulation was in truth reregulation, with different winners and losers.

        A book by two Canadians, including one economist, “Rebel Sell,” discusses this phenomenon. Surely, this concept should be part of every economics and social science curriculum.

        Other than the usual silly stuff about “self interest,” Rebel Sell is a pretty fair introduction to what went wrong over the past 40 or 50 years.

  11. gc_wall

    Don’t forget why we need Willard so badly. We don’t need a president of the United States, (public servant – highest civilian office,) we need a C.E.O. of the Independent Corporate States of America. Everyone knows that C.E.O.s rarely, if ever, make mistakes. Everyone knows that business leaders are much better caretakers of the environment. When it comes to fairness are there any people with a stronger record of fairness than C.E.O.s? Who knows better how to screw people and leave them smiling than a C.E.O.? Without a C.E.O. running the country how can it possibly survive?

  12. gc_wall

    Corporate propaganda claims that government does not know business; therefore, it should get out of the way. The real situation we all face is that corporations have taken over the government and our representatives are used as stooges to sell everyone else on the propaganda. The “silent coup” by George W. Bush’s “shadow government” is almost complete. The grand experiment of a democratic republic will fall to defeat to big business manipulations. What remains will be an oligarchy, plutocracy or a fascist state. America will have lost the battle for freedom, dignity and equal opportunity, while many claim the banner of patriotism as they undermine democratic principles and ideals. Our representatives do not represent us, because they have lost faith in the system. The loss of faith in the historical style of governance lies at the root of systemic failure.

    1. rotter

      “Our representatives do not represent us, because they have lost faith in the system”

      Our representatives do not represent us becasue they are being wined and dined and s*cked and f*ucked by quintillionaires who are providing them with the lavish “lifestyles” to which they have become accustomed. I think its just that simple. When the whole thing collapses under its own morbidly obese weight due to its rotten frame, they will by then be dead, or in gated, moated defended castles, or living abroad as the guests of other grifters.Obviously they do not care about what happens to thier grandchildren,or perhaps greatgrandchildrenm because whats going to happen to many of them will be very ugly.

  13. fred

    The case of the healthcare industry is entirely due to the FDA’s regulations and the consequent incentive system. Those regulations make the cost of a new drug very high, $500M last I heard. This means the drug must have a $1B/year market in order to be profitable.

    There are not that many $1B drug markets, so drug developers spend their R&D funds finding a patentable version of a competitor’s new drug or a new version of one of their old drugs for which the patent is about to expire.

    This accounts for the lack of new antibiotics, also. To reach $1B, it must be a broad-spectrum antibiotic. There aren’t many of those, although there are 100s of antibiotics effective against one or a few types of bacteria, and genetic tests which can quickly identify the type of bacteria.

    1. Hugh

      How many variations are there of the canard “If only government would get out of the way and stop regulating, corporations would behave virtuously and for the public good.” We saw how this kind of thinking led to both the housing bust and the meltdown, the biggest frauds in human history. Markets would self-regulate. Yeah, right. Yet no matter how many times reality destroys this argument, it always comes back and gets repeated like the past never happened.

    2. H. Alexander Ivey

      fred, you are flat wrong. The troubles in the health care industries do not, in big or even small ways, have to do with a too stong FDA. People of all age groups are being destroyed by the US “health” system. Your uninformed talking point diverts attention from that condition.

    3. Goin' South

      What you’ve exposed is how profit-driven Capitalism fails to provide for the social good when it comes to pharmaceuticals.

      When it’s all about profit rather than helping our fellow human beings, medicine becomes a perverse caricature of itself, just as it has in the U. S.

    4. fred

      The usual ‘you are wrong’, with no supporting facts I see here on NakedCapitalism.

      Big Pharma is a cartel. What do you suppose supports the entire medical cartel? The FDA.

      What supports every cartel we see in our once-vibrant-economy? A gov regulatory agency.

      Where did these agencies come from? The Fed was organized by the bankers themselves, so no wonder it serves their interests.

      The FDA came from muck-raking journalism, Sinclair who must have invented some of his ‘facts’ (who can believe eating meat with formaldehyde? Have you ever been around formadldehyde?), and continues to receive more power with every failure.

      The FCC was organized by the industries themselves.

      The insurance industry ? I have not read the history of that cartel, but it surely is maintained by the costs of complying with the 50 states’ laws.

      You guys are a bunch of true believers : big gov and more regulation are the answer for everything, despite all of the evidence that that a) doesn’t produce a higher level of civilizaiton and b) our economy has been trashed by the efforts.

      Crony capitalism is a feature of big governments, not of free market capitalism.

      1. fred

        Erudite and convincing replies.

        BTW: You can’t ban me any more, because I now use Tor.

        1. skippy

          @fred… humans group… this is now called government. You have two choices… personally engage for change that establishes well being for a future, all can survive or strike off on your own.

          skippy… good luck on the one man raft.

      2. A in Cali

        fred:”The FDA came from muck-raking journalism, Sinclair..”
        We in Europe remember the Thalidomide babies (Thalidomide was used to treat, in the 1950ies, morning sickness, but was soon found to lead to birth defects – children with flippers for arms and such). “In the U.S., pharmacologist Frances Oldham Kelsey M.D. withstood pressure from the Richardson-Merrell company and refused Food and Drug Administration (FDA) approval to market thalidomide, saying further studies were needed” [Wikipedia]. That alone saved probably many tens of thousands of babies in the U.S. from deformities and early death.– I wouldn’t want to rely on the market for establishing drug safety (If some drug kills you, your children won’t buy it any more and the producer goes out of business, a generation later? LOL).–

  14. Hugh

    I liked this post, but the market failures described are only failures for the 99%. For the 1% and for our elites who serve them and aspire to join them, the markets are functioning just fine. That’s how kleptocracy works. It is also why looking to an elite run government for solutions is a waste of time. Until there is an energized mass movement for and of the 99% to sweep away our elites across the board, nothing will change.

    1. psychohistorian

      Agreed !!!

      The global inherited rich decided to have a throw away society and are actively pursuing ongoing control of their class based, inheritance fueled world and private property based world.

  15. greg

    Because of the debt overhang, which is money owed to (financial) capitalists by the people who make up the market, (and this overhang can only get worse, especially with ‘austerity,’) the economy cannot expand. In a static economy, there is no longer any way for the capitalist to make money by expanding in the more traditional markets in which he is already invested, since they are not growing. It makes no sense investing into producing more private sector goods, because the market for them is fixed, and may even be contracting. The only place for the capitalist to put his money is in more marginal markets, the public goods markets which traditionally have not attracted private investment because it is difficult to make money in them. That is why we collect taxes to pay for them. That is why capitalists have not invested in them in the past.

    The capitalists now propose to collect monopoly rents from the public goods markets. In order to do so, they will have to cut services and raise prices. They will leave many people without public services. They will also economically disenfranchise the public.

    The private moneyed sector is simply too rich and powerful, simply has too much money, to have any fruitful place to put their investments. The economy simply cannot grow fast enough for them to have a ‘creative’ place to put their investments. See for example: http://anamecon.blogspot.com/2010/06/that-bloated-financial-sector.html
    Since there is not sufficient legitimate investment opportunities for the capitalist, there are only illegitimate schemes, if he is to make his money. Part of the problem, of course, is the financial capitalist mistakes money for power.

    Anyway, after they have destroyed the common wealth, they will have the same problem, where to put their investments.

    They are too powerful. The wealthy are simply too wealthy and numerous for the economy to support. If we, and they, for that matter, are to survive, they must be cut down to size.

  16. vlade

    It’s rather easy (hey, even Mr. Adam Smith of the “invisible hand” fame knew it and talked about it more in his book than about the invisible hand….). In economy (and most growth-based systems, if not all) the positive-feedback cycle is prominent, even if you start with an equilibria. It’s relatively easy to show with a simulation – you start with pool of players who are initially exactly the same, and have only few rules – players spend their money to increase their position, there’s randomness in their income (albeit with some drift for their “strenght”), and there’s a finite pool of income (albeit increasing with time).

    The stable state of this is a single player having everything, although that can take very long time to get there. The almost-stable state is oligopoly.

    The “invisible hand” people make implicit assumption that the competitors will try to increase their share by direct economic competition, while in fact they will do anything and everything they can (while not getting caught, unless they subverted the “catching” system, which they almost certainly will at least try).

  17. i

    In capitalism, as in any other ecological system, many strategies work to assure continued survival. Parasitism is a common strategy in both capitalism and in nature. In nature, parasites can often kill their hosts, and then go searching for new ones. I expect that the ruling oligarchs of the world, after having successfully harvested the wealth of the USA, will then turn their attention to the rich fields of China, India, Russia and so on.

  18. Johnny Clamboat

    “No.”Corporate fascism” IS the state, the only “state” you have ever known. It is an appendage of private wealth and power. We need to greatly restrict Private wealth power and all the evil that flows from it.”

    You appear to be missing a step or two. How will “we” restrict private wealth power through the fascist State? Expanding that power is why the State exists and private wealth has no power without it.

  19. PauW

    Why don’t we focus on the over reliance on NPV (Net Present Value), and the overarching importance it places on “Money.Now!” ?
    Because at the end of the day the hyper capitalists need the money to flow as fast as possible in order to accelerate the profit creation as well. Try talking these folks in slowing the speed of money – they’ll go for the jugular.

    This piece could / should have been written years ago, though. These destructive forces have been at play for the last 20 maybe 30 years (at least?). They have laid the foundations for innumerable economic classroom lessons and examination discussions. Millions of young minds have been indoctrinated to these facts/faiths. This System has been successfully (and how…!) exported to the developing countries, where it has caught the fancy of other members of the business élites.

    Still want to talk about a clean slate? Just *how many* destructive capitalists should we send to re-education camps to have their brains and consciences reset and reprogrammed?… This would be just another abhorrent form of fascism, at the end of the day.

    Sadly I don’t see a way out, barring some kind of fantastically unforeseeable mass-conversion (or alien takeover, etc, etc)….

  20. Susan the other

    Everything civilized is done by law and regulation and custom and agreement. Mr. Smith is saying this. Capitalism itself is a product of civilization. Not the other way around as the pontificating free-marketeers would have us believe. Without civilization capitalism is nothing, as we are now witnessing. The capitalism we now have is equivalent to an amputated arm. And the “capital markets” are a joke. “Capital markets” have been allowed to be ransacked by the very credit creators who bypasses anything remotely concrete and merely serve to line the pockets of the keepers of modern nothing-capitalism. It was probably always at least a little this way, but now that it is exposed for the irrational practice that it is, something must be done. Don’t look to Obama or Romney to do it. If the horses only knew that they could simply leave the gate and not come back, what would the free-riders do?

  21. Procopius

    I dunno. This Smith person wrote a book on Economics? I don’t think I’d want to buy it. He doesn’t seem to know what “market failure” is commonly understood to mean. The slow adoption of seat belts was not a market failure. It was a case of the market solution not being what the writer hoped for. Not the same. We have failure in the “health care market” because there is not a market there. A market requires an undifferentiated product, many suppliers so that no one supplier can affect the price, no barriers to entry for new suppliers, complete information for all participants in the market, and several other assumptions. If anyone can show me a place where any of these conditions prevail I’ll go there. Even if you change the subject to “health insurance market” you founder on the lack of information. The insurance companies can arbitrarily change the rules and refuse to pay for reasons the customers did not know about when they started buying. Also, the way economists talk about markets completely ignores the evvects of power differentials.

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