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Free market requires moral code

Volkswagon, hedge fund manager take advantage by Steve Brawner | September 28, 2015 at 1:00 a.m.

Life, the pope is telling us, is about more than the bottom line. This past week has given two examples of why people should listen to his big economic message even if they disagree with some of his little ones. One involves a giant automaker. The other manufactures a little pill.

The automaker, Volkswagen, doctored its diesel engines so they would temporarily meet EPA emissions regulations while they were being tested, and then they would emit much higher levels when actually driven by car buyers. As a result, those cars performed better on the highways while releasing up to 40 times more pollution than the legal amount. Volkswagen did this in 11 million vehicles sold worldwide.

Environmental considerations aside, the company lied and cheated its competitors and its customers. People thought they were buying a clean vehicle that ran great. Rule-abiding competitors were selling products that had a disadvantage against Volkswagen in the marketplace.

The pill manufacturer is Turing Pharmaceuticals, which bought the rights to Daraprim, a niche drug that fights deadly parasitic infections. The drug has been on the market for 62 years and has no generic equivalent. Shortly after buying the rights, the company raised the price – from $13.50 per tablet to $750 each.

This is not the first time a drug has been purchased and then inflated recently. But the company’s owner, a 32-year-old former hedge fund manager, seemed particularly proud of himself. He said the price needed to be raised to make the drug profitable (which would mean the previous rights holder must have been losing a ton of money at $13.50). Frankly, the drug would be cheap at $750, he said.

If your only guiding principle is the bottom line, then those arguments make sense. Guy’s just charging what the market will bear, right? Everything he’s done is legal. Under traditional laissez-faire economics, the free market’s unseen hand will correct all wrongs, and somebody eventually will produce a generic version if they can make money doing it.

But humans are more than economic beings. We’re also spiritual, moral and social ones. In fact, we must be for the free market to function.

The free market is the greatest anti-poverty mechanism ever created by humanity. It allows entrepreneurs to produce goods and services valued by the marketplace, thereby creating jobs and raising a society’s standard of living. Those who do this exceptionally well – people like Steve Jobs and Warren Buffett – are celebrated and richly rewarded, as they should be.

But the free market is only as good as the values of its practitioners. It can be perverted by those who, instead of producing goods and services, merely play games with money and take advantage of others. While Jobs created world-changing products, Turing’s hedge fund manager produced nothing new. He just bought the rights to a pill and then jacked up the price knowing people had to pay or die, and knowing there probably won’t be a generic competitor soon, if ever.

I watched a brief cable “news” segment where the host and a couple of his guests either defended the hedge fund manager or expressed ambivalence about his actions. The host said this kind of situation is preferable to having the government in charge of health care.

Which is ironic, because if the free market isn’t governed by both the unseen hand and a moral code, then bigger government is unfortunately what we’ll get. Two days after Turing Pharmaceutical’s price hike came to light, Hillary Clinton announced a plan to limit drug price gouging. Supporters of a single-payer government health system can use this episode to bolster their arguments. Meanwhile, Volkswagen’s actions likely will add to the regulatory burden faced by all automakers. They’ll have to do more to prove they’re not cheating.

In these two cases, it’s all ending as it should. Volkswagen stock has tumbled, it faces huge fines, and its CEO, who said he knew nothing about the cheating, has resigned. Meanwhile, overwhelming public condemnation wiped the smirk off the young hedge fund manager’s face, and he announced he would reduce the price hike.

That happened because humans are still spiritual, moral and social beings, instead of merely economic ones. Most of us know it’s wrong to cheat, and we know it’s wrong to take advantage of the vulnerable, or to use the vulnerable as a tool to take advantage of society.

We’re going to be governed by something. Preferably, it’s a conscience.

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