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

Capitalists are perpetuating, and making big bucks from, market failures that deliver crappy products and shoddy services.

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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.