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.

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.

The simplest, most effective and efficient way to reduce harmful side-effects of energy generation is to reduce the amount of energy used. There are many ways in which energy is wasted, often due to carelessness [5].

Consider, for example, the energy consumed by an air conditioner (A/C). The power required is proportional to the difference between the outside temperature, OT, and the desired room temperature, RT. The average A/C energy consumption is proportional to OT - RT. It seems to be a common practice in restaurants to reduce the room temperature during the cooling season to a level that feels quite chilly to one entering from the outside on a warm day, probably below 75 degrees. Let's assume an average outside temperature during this season of 83 degrees. Then the required power is proportional to 83 - 75 = 8. If the target room temperature were raised to 79 degrees, the power would be proportional to 83 - 79 = 4; the A/C energy consumption rate would be halved.

Twiddling the numbers for OT and RT would, of course, change the energy savings ratio, but it is clear that, for reasonable numbers, the potential savings is considerable. I have found that restaurants are often cooled down to the point where I feel a need to wear a sweater when entering one during the summer. There is a shock effect caused by the big change in temperature experienced on both entry and exit. Excessive cooling seems quite common in many other public spaces as well. The situation during the cold weather season, is similar. Offices, and public spaces, such as restaurants, are often over-heated, another instance of expending energy to produce negative results.

My discomfort is more than an idiosyncrasy. At least one scientific study has found that it is very common for American office buildings to be overly-cooled during hot weather seasons and overly-heated during cold weather seasons, and that both of these are associated with increased symptoms of ill health, such as coughing or sneezing [6].

The application to restaurants or retail stores is interesting from the point of view of the effects of commercial competition. For some reason, restaurant operators have concluded that over-cooling and over-heating are both good for business. Else, it would make no sense for them to spend money to exacerbate the effects of summer and winter. Presumably, business owners believe that not over-cooling and over-heating would cause their customers to desert them in favor of competitors maintaining cooler (or warmer) establishments.

Now consider the effect of what free enterprise advocates would probably denounce as an outrageous violation of the rights of business people, namely a city health department ordnance requiring that, during the cooling season, establishments open to the public not be cooled below some temperature (say 79 degrees), and that, during the heating season, the target temperature not exceed 69 degrees. This would benefit customers (and employees) who would be less likely to suffer from the ill effects found during the cited study. Since it would apply to all restaurants and stores, none would lose business to competitors as a result, and all would benefit via reduced heating and A/C costs. And reduced energy dissipation would benefit our environment. A clear win-win-win situation!

The food industry

While "health" food stores purport to, and generally do, stock products that are particularly nutritious and largely free of unhealthy ingredients, they constitute only a small segment of the food industry (and also often carry a variety of quack products, such as food supplements purporting to expedite weight loss). In general, the health of customers is of minimal interest to the corporations that supply most of our food.

Almost everything that the giant food companies do to increase sales and profits is detrimental to the health of consumers. They make heavy use of sugar, artificial sweeteners, and other artificial flavorings to make their products more tempting, with the result that large numbers of people over-eat, imbibe too much sugar, and ingest all sorts of chemicals, some of which may be harmful. We don't know the extent of the harm because few artificial ingredients have been properly tested. The use of other chemicals as preservatives, emulsifiers, coloring agents, etc., further expose people to risks of unknown magnitude.

Meat and poultry products are produced under appalling conditions, with animals kept alive by antibiotics in filthy, greatly overcrowded feeding pens. Such heavy use of antibiotics reduces their effectiveness in protecting humans against infections. As excessive fishing has depleted the fish population in open waters, more and more fish are being raised on fish farms under analogous conditions. In all cases, top priority goes to minimizing costs, and making the products look attractive.

As is the case in other industries, the emphasis is on maximizing profit by minimizing costs and maximizing sales. The well being of eaters is not high on the priorities list of big food corporations. A few decades ago, after having consumed herds of cattle during my lifetime, I learned about some of the disgusting practices of the meat industry. I became a vegetarian.

The "free market" is not kind to small farmers. They face all the traditional hazards of farming: such as too much rain, drought, assaults by pests ranging from bacteria thru insects, rodents, and even deer. Help from the government, generally tailored to the needs of big corporate farm operations, is minimal. They have to compete with the big farms, who exploit cheap immigrant labor.

Other industries

There are notorious cases where private companies (often whole industries) have marketed useful products that turned out to have side effects seriously harmful to large numbers of people. Tobacco, lead, and asbestos are prominent examples [7]. For many years after the harmfulness of these substances had been clearly established, companies marketing them fought to obscure the issues, and to keep them in use. And, to this day, they continue to resist efforts to stop the use of these dangerous materials. Tobacco companies continue to thrive, with the growing number of smokers in Asia and elsewhere in the world offsetting the reduction in the number of American smokers. Efforts to ban asbestos use in the US have been fought off by the companies (tho American use has greatly declined) [8]. Leaded gasoline is still used in propellor type airplanes and in helicopters.

There are many useful applications of nanotechnology, but, here again, those manufacturing or selling nano-products cannot be relied on to determine whether they are free of hazards to individuals or the environment. Many studies have pointed out dangers associated with various nano-products [9]. But, as in so many other cases, concern over the bottom line is what governs corporate marketing decisions. Here too, there is no strong free market mechanism for protecting the public against dangerous products.

Other countries

The US is not the only country with these problems. Consider China, a nation with a socio-economic system that is a grotesque mix of elements of capitalism and communism, ruled by a dictatorial government. Industrialization seems to have run wild [10], with no more than token attention paid to protecting health and the environment. The air in China is unfit to breathe, almost every body of water is grossly polluted, and a substantial portion of farm land has been contaminated by a variety of substances of varying degrees of toxicity, to the point where it is unusable. This in a country that virtually invented civilization at a time when Europeans were little more than savages.

Most of the other industrialized nations are showing more regard for public health and the environment than is the US. For example, Germany is perhaps the leading nation in efforts to reduce energy consumption and to increase the proportion of energy from renewable sources [11]. But no nation is doing a truly adequate job in addressing the problems discussed here.

Suggestions

Rather than deterring the production of hazardous, or unhealthy, or environmentally destructive products, market forces often tend to stimulate such production. Greed is simply not effective in motivating concern for the public interest. Just as we need societal mechanisms to police stock markets so as to minimize fraud, and anti-trust laws to prevent monopolies and cartels from undermining free markets, we need government oversight to protect us from a deluge of potentially harmful products [12]. The problem is getting worse as products become more complex, and as corporations marketing them have become increasingly powerful politically, and hence more successful in weakening the oversight process.

It would be wise to encourage both consumer and producer co-ops, which are less prone to engage in harmful practices. There are some activities that are best carried out by government. One example is postal service, which has been a governmental function since the birth of the nation. Another is standard setting. NIST, the National Institute of Standards and Technology, is another venerable American institution; its predecessor dates back to 1830.

It is essential that regulatory agencies, such as the FDA, be greatly expanded, so they could carry out their missions properly. They should have research labs to enable them to keep up with advancing technology. The agencies should also be authorized to fund relevant university research projects. The primary reason for substantially expanding the governmental R&D role is to cover many important subjects not interesting to private corporations [13]. Paradoxically, another reason is to deal with matters of very wide interest to industry. It would be more efficient to have government laboratories do R&D that would help many organizations, rather than have numerous companies each doing the same work in secret. Of course individual companies should remain free to do independent research.

We need many more scientists and engineers capable of objectively evaluating the efficacy and safety of a large and growing range of products and services. It makes no sense to expect people to impartially monitor the activities of their employers' organizations. This is another reason to expand substantially government R&D laboratories. They would be able to perform the above mentioned evaluation functions, or individual member of their staffs could serve on ad hoc evaluation committees, unbiased by commercial interests.

References

[1] Stephen H. Unger, "The Demise of Unions and Why We Need to Revive Them", Ends and Means, September 11, 2013

[2] Stephen H. Unger, "Safety Last—Corporate Profits First", Ends and Means, September 29, 2010

[3] Rita F. Redberg, Rebecca Smith-Bindmanjan, "We Are Giving Ourselves Cancer", NY Times, January 30, 2014

[4] "Oil Shale and Tar Sands", The Center for Biological Diversity

[5] Dave Bartlett, "The Top Ten Ways We Waste Energy And Water In Buildings, Breaking Media, July 26, 2011

[6] M. J. Mendell, A. Mirer, "Indoor Thermal Factors and Symptoms in Office Workers: Findings from the U.S. EPA BASE Study", Lawrence Berkeley National Laboratory, 8/24/2009

[7] Stephen H. Unger, "Pioneer Killer Products: Asbestos, Lead, and Tobacco", Ends and Means, August, 14, 2010

[8] "Occupational Asbestos Exposure", Mesothelioma Guide, 10/29/13

[9] Stephen H. Unger, "Nano Particles—Giga Benefits, Giga Risks", Ends and Means, April 4, 2012

[10] Stephen H. Unger, "Regulating the Invisible Hand: A Contradiction?", Ends and Means, January 15, 2008

[11] E. N. Anderson, "Environmental Ruin: The Drag on China's Future", California Sociological Association, annual conference, Nov. 9-10, 2012

[12] Anne Power Monika Zulauf, "Cutting Carbon Costs: Learning from Germany's Energy Saving Program", What Works Collaborative, March 2011

[13] Stephen H. Unger, "The Need for People-Friendly Research & Development", Ends and Means, May 4, 2009

Comments are welcomed and can be sent to me at unger(at)cs(dot)columbia(dot)edu

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