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