Profiting From Market Failure: How Today's Capitalists Bring Bad Things to Life
Editor's Note: When harmful beliefs plague a population, you can bet that the 1% is benefiting. This article is part of a new AlterNet series, "Capitalism Unmasked," edited by Lynn Parramore and produced in partnership with author Douglas Smith and Econ4 to expose the myths and lies of unbridled capitalism and show the way to a better future.
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.