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The Price of Free Enterprise

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The Price of Free Enterprise Stephen H. Unger February 17, 2014

From http://www.flickr.com/photos/83711730@N06/10865732704/: Our Modern Dilemma
Our Modern Dilemma
(image by andrewfhart)

A fundamental claim about our economic system is that efforts by private enterprises to maximize their profits benefit the public as a whole. The argument is that competition to increase sales of products and services leads to the development of better products, more efficient production, and lower prices.

For example, in efforts to increase sales and profits, hat manufacturers frequently modify their designs and manufacturing methods to make their hats more attractive, or more effective at protection against cold or sunlight, and also less expensive. Those whose efforts are most successful generally sell more hats at a profit, and prosper. Members of the hat-wearing public are among the beneficiaries.

Unfortunately, as will be shown below, while this approach may work fairly well in the hat industry, it breaks down in many, perhaps most, important areas of our economy. Environmental effects, non-obvious failure modes, product durability are important issues not adequately handled by this system. (This is apart from the issue of how workers are treated--a matter that I have dealt with elsewhere [1].) Another chronic problem with our competition-based private enterprise system is that monopolies and cartels, which are currently thriving, greatly weaken the competition that fuels the positive aspects. One consequence is inflated consumer prices.

Let's look at  how profit maximization affects people and our environment in a few important areas of the economy.

The health industry

How does the private enterprise approach work in providing medical and health services? Consider private practices of physicians (groups of physicians are often organized as corporations), hospitals, pharmaceutical corporations, insurance companies, and manufacturers of medical devices. How does the profit motive of such entities affect patients?

One fundamental difference between medical businesses and the hat business is that, while ordinary people are quite competent to determine whether a given hat fits them, looks OK, is likely to be warm enough, and whether the price is reasonable, very few people can effectively evaluate medical treatment. Furthermore, unlike most people who want to buy a hat, a person stricken with high fever and nausea is not in position to shop around.

Nor are there many patients capable of evaluating the likely efficacy and safety of a medication prescribed by a doctor. In fact, even the doctor writing the prescription rarely has the ability and information necessary for more than a rough evaluation. Often, nobody can do this properly, because the necessary data does not exist. The FDA (Food and Drug Administration) charged with regulating pharmaceutical products does not have the funding for evaluating their efficacy and safety. These tasks are contracted out by the pharmaceutical companies to private laboratories. They, in turn, report to the companies, who pass on the results to the FDA only if they are satisfied with them.

The profit motive does not usually inspire the companies involved to do conscientious jobs. A testing company turning out optimistic reports is far more likely to get repeat business than one that adheres to high standards and tends to find non-obvious problems with drugs. A pharmaceutical company that is reaping hundreds of millions of dollars in annual profit from the sale of a drug will go to great lengths to keep that drug on the market, regardless of strong indications that it may be far less effective or less safe than an alternative--or, sometimes, even no--medication [2].

Consider a group practice of physicians specializing in orthopedic medicine and surgery. Suppose the group spends $500,000 to buy a CT scan machine, a valuable diagnostic tool. Charges for each use of such a machine can easily run to two thousand dollars. There are clearly cases where CT scans are very valuable in detecting serious problems, or providing valuable information to a surgeon. There are also cases where it is obvious that an ordinary X-ray would do the job adequately, at a small fraction of the cost, and with orders of magnitude less exposure of patients to high energy radiation [3]. Where to draw the line between these cases may not be clear. In practice, the physicians making the choice are, often unconsciously, quite likely to be biased in favor of prescribing the CT scan because of pressure to pay off the high cost of the machine. From a business point of view, the decision-making process is quite different from what it is from a medical viewpoint. Many other medical decisions are also influenced by the profit motive.

Energy

There are certainly technological developments in the energy industry that are both profitable and generally benign. An example would be an economical method for increasing the efficiency of an electric generator that does not entail any significant drawbacks, such as a higher failure rate. But, unfortunately, many, if not most, methods used to increase the profitability of energy companies are harmful to people and to the environment.

Coal companies routinely destroy mountains, pollute streams, ruin the lungs of miners. Their product produces noxious fumes detrimental to human health, and carbon dioxide in quantities contributing significantly to global warming. On the grounds of duty to their stockholders (to pay them dividends) coal companies strenuously resist efforts to make them reduce the damage they cause. This resistance takes the form of contributions to political parties, lobbying legislators and government officials, and the use of public relations firms to influence public opinion.

In order to make possible the continued consumption, at ever-increasing rates, of gasoline to fuel our cars, and, more important, to enrich themselves, other energy companies are now beginning to exploit shale oil, which involves various environmentally harmful processes [4].

There are no significant market penalties to deter environmental abuse. In some cases, where individuals can show that they were directly harmed by operations of an identifiable individual or corporation, civil law suits can be used to punish the offender. But such cases are rare. E.g., while there is often clear statistical evidence that some number of people hundreds of miles downwind of an oil refinery are experiencing illness due to emissions from the plant, it is not possible to prove that any specific individual was harmed. The only remedy is governmental action, usually via the Environmental Protection Agency (EPA).

It might be argued that, since our way of life is heavily dependent on the availability of low cost energy, the companies supplying that energy are meeting an important societal need, and we should be willing to accept the cost, which necessarily includes some detrimental effects on health and the environment. Even if that argument were valid, it would still be important to minimize harm to humans and the environment. E.g., coal could be mined under conditions that did not require miners to breath air contaminated by coal dust, and emissions from coal burning power plants could be filtered to virtually eliminate sulfur compounds. But such measures would detract from profits. They are implemented only to the limited extent mandated by weak laws and regulations that are under continuous assault by supporters of corporate interests.

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http://www1.cs.columbia.edu/~unger/myBlog/endsandmeansblog.h

I am an engineer. My degrees are in electrical engineering and my work has been in the digital systems area, mainly digital logic, but also computer organization, software and theory. I am a Professor, Emeritus, Computer Science and Electrical (more...)
 

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In this article I advocate government regulation t... by Stephen Unger on Friday, Feb 21, 2014 at 9:01:22 AM
This is a great article, beautifully presented and... by Charles Roll on Friday, Feb 21, 2014 at 5:25:35 PM
I would add that a major effect, probably the rea... by Stephen Unger on Saturday, Feb 22, 2014 at 10:13:51 AM
Free enterprise and the invisible hand of AdamSmit... by jean labrek on Friday, Feb 21, 2014 at 7:18:42 PM
"So democratizing  government must be a top ... by Daniel Penisten on Saturday, Feb 22, 2014 at 4:03:10 PM
Another major example, not cited by the author, ar... by Richard Pietrasz on Friday, Feb 21, 2014 at 9:07:57 PM
Richard Pietrasz points out an important area. It... by Stephen Unger on Saturday, Feb 22, 2014 at 10:18:54 AM
"The main reason markets usually don't work corre... by Daniel Penisten on Saturday, Feb 22, 2014 at 4:31:32 PM
Deliberately causing that rock slide is the Shock ... by Richard Pietrasz on Monday, Feb 24, 2014 at 7:11:38 PM
A very important article, this. Helpful in the loo... by Daniel Penisten on Saturday, Feb 22, 2014 at 4:08:13 PM
"A fundamental claim about our economic system is ... by Daniel Penisten on Saturday, Feb 22, 2014 at 4:45:11 PM
Lenin believed that in a capitalist state, the s... by Ethan Hollow on Saturday, Feb 22, 2014 at 5:24:17 PM
I can't rate this article with the usual list of ... by Keith Brilhart on Monday, Feb 24, 2014 at 5:42:54 PM
Well said Keith. The author doesn't seem to get th... by Darren Wolfe on Monday, Feb 24, 2014 at 6:38:51 PM
TANSTAAFM.  There Ain't No Such Thing As A Fr... by Richard Pietrasz on Monday, Feb 24, 2014 at 7:21:58 PM
Nope.  All that's needed is to remove the po... by June Genis on Monday, Feb 24, 2014 at 7:42:38 PM
Brilhart & Wolfe argue that a government cont... by Stephen Unger on Monday, Feb 24, 2014 at 7:47:10 PM
No, Unger, it is govt intervention that creates &a... by Darren Wolfe on Monday, Feb 24, 2014 at 8:43:24 PM
"No, Unger, it is govt intervention that creates ... by Daniel Penisten on Monday, Feb 24, 2014 at 10:50:59 PM
"...it is govt intervention that creates &/or... by Daniel Penisten on Wednesday, Feb 26, 2014 at 9:36:36 PM
"Advocating more regulation is advocating more po... by Daniel Penisten on Monday, Feb 24, 2014 at 10:20:28 PM
"...corporate powers opposes "regulation" because... by Darren Wolfe on Tuesday, Feb 25, 2014 at 5:31:57 AM
You are bringing me to a possible important turnin... by Daniel Penisten on Tuesday, Feb 25, 2014 at 11:58:31 AM
Good evening Darren. The possible turning point, i... by Daniel Penisten on Tuesday, Feb 25, 2014 at 9:14:35 PM
From the "Boston Magazine" article link shared by ... by Daniel Penisten on Tuesday, Feb 25, 2014 at 10:58:32 PM
But this still doesn't answer my question about th... by Daniel Penisten on Tuesday, Feb 25, 2014 at 11:00:38 PM
Good morning Darren and All.I went to "Wikipedia"... by Daniel Penisten on Wednesday, Feb 26, 2014 at 12:38:52 PM
So far. I have discovered the following, when sea... by Daniel Penisten on Wednesday, Feb 26, 2014 at 1:58:00 PM
Guess I have to go to a certain library to find th... by Daniel Penisten on Wednesday, Feb 26, 2014 at 2:02:09 PM
Daniel, the railroads are the perfect example of g... by Darren Wolfe on Thursday, Feb 27, 2014 at 6:52:14 AM
Darren Wolfe shows how corporations can, and do, ... by Stephen Unger on Thursday, Feb 27, 2014 at 9:25:07 AM
We should stop "them" from being a cartel. Preside... by Daniel Penisten on Thursday, Feb 27, 2014 at 12:29:54 PM