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Profits Are Not the Problem

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August 19, 2009 – Comments (6) | RELATED TICKERS: GSK

In recent years profits have gotten a bad name from many people and politicians. Profits are said to take advantage of others, encourage greed, among a variety of other allegations. These concerns can be legitimate but often miss a crucial point.

Profit represents the reward for taking a risk. You wouldn’t start a business if you knew you weren’t going to make more than you would spend creating that business, would you? But if you can increase your income more than your expenditures through that business, you’ll feel much more inclined to continue with the operation. Obviously, people cannot survive operating a business at a loss.

Profits do not come without work and risk. It is only possible to make a profit if you can offer a product or a service, that people want, in an efficient manner. No matter how greedy you may be, in a free market you cannot survive without efficiently producing a product that has market demand. You cannot force people to work for you, you cannot force people to invest in your business, and you cannot force people to purchase your product. Your greed is limited to free and voluntary exchange.

Profits have been especially dissed when it comes to health care. It is easy to blame the insurance corporations and many missteps that the current system carries, but people fail to realize that it has been government intervention into the market that has increased prices and decreased accessibility. The more that government regulates, controls, and manipulates health care, the less access individuals will have to health care because of the higher costs.

The Kefauver Harris Amendment of 1962 was added on to the Federal Food, Drug and Cosmetic Act of 1938, providing the FDA with greatly expanded regulatory powers, including the ability to deny approval of drugs that they felt weren’t fully effective. The FDA’s regulatory process to bring new drugs into the market is very costly in terms of money and time, making it exceedingly difficult for businesses other than large pharmaceutical corporations to survive in the drug market. Dr. Mary J. Ruwart estimates that no less than 50% of new drugs have been blocked from the market due to this process.

Because of the 1962 amendments, the FDA can determine and change the requirements to bring new drugs from the laboratory and into the marketplace. In 1962, the development phase of drugs took approximately 4.5 years. A good amount of time for a business to invest money in a product that might never get the chance to sell on the market, right? Today the development time is 15 years. With such brutal development and marketing procedures for drugs, it should be no surprise that drug prices are rising. These regulatory proceedings limit the supply of new drugs, raise the price of existing drugs, and limit patient access overall to drugs. In other words, the demand for these drugs does not disappear, but the supply is often heavily limited. Thus, prices go up.

With the drug market essentially limited to the few businesses who can afford to comply with the expensive FDA regulations, competition has taken a beating. Drugs often represent a more affordable method for prevention, treatment, and a general tool to lower medical costs. However, the FDA has so greatly limited potentially life-saving drugs that medical costs continue to rapidly expand.

If it was the patients, not central bureaucrats, who worked with their doctors to decide whether or not certain drugs were logical for their own situation, competition in the drug industry would flourish, prices would fall, and accessibility would increase. We need to understand that government intervention comes with a price by benefiting larger corporations and limiting the competitive ability of smaller businesses.

I am not discounting the effects of greed and the want/need for profits that is inherent in some individuals. But the answer to these problems is not more government intervention or centralization of the markets. The trouble that we face in health care and many other industries is precisely too little competition, a trend that government has consistently worsened. Just look at the drug market: it has become such a bureaucratized process that it ends up helping the larger corporations, hurting small businesses, and pinching the consumer in terms of choice and cost.

The power of the individual is the power of choice: the ability to choose your own insurance plan (without being forced into an employer or government option), and to choose which drugs and medical treatment make sense to you, not to federal bureaucrats. The more power that you transfer from the individual to the government, the more you will see lobbyist activity, corporatism, and inefficiency increase. We are constantly trying to force a one-size-fits-all system on the country (whether it be HMOs or “public options”), neglecting the fact that we are all very unique as individuals and might have better ideas for ourselves, even if politicians turn “bipartisan” to force legislation on the people.

The key point is that demonizing profits in support of a government plan completely misses the underlying problem: limited competition. You do not need government to encourage competition, you need freedom of the individual, freedom of choice, and freedom of competition to create a prosperous, healthy, and accessible market.

It is amusing that so many people are hopping on the bandwagon that government operating at a loss is somehow more noble than for-profit businesses. The whole reason that government can operate at a loss is because they borrow from foreign nations, print and devalue the currency, and forcefully tax private productivity. As much as people would like to believe it, government cannot defy the laws of economics and common sense over the long run. They may be able to operate Medicare, Medicaid, and countless other programs with trillion dollar deficits for a time, but it will come crashing down just as it would for any irresponsible business that chooses to spend more money on unprofitable activities.

We need not look any further than the drug industry to see how disastrous a powerful, unelected, and centralized bureaucracy can be. The FDA has powers intended to help the people, but its very policies to help people have likely caused far more deaths and suffering by preventing and limiting new drugs, raising the price of current drugs, and decreasing accessibility to drugs because of the higher prices.

True, revolutionary, and sustainable change can only come through the individual. Profits themselves are not the problem; discouraging competition for those profits is the problem. Government provides a de facto monopoly to large corporations when it gets as involved as the FDA in private affairs, laying the foundation for a system that can never fully serve the individual. For full individual service, the individual must be in full control.

DavidKretzmann.com

6 Comments – Post Your Own

#1) On August 19, 2009 at 2:46 AM, QualityPicks (22.57) wrote:

Amen. Profits are like a feedback system. If you are profitable you are doing a good thing. You are providing value and you are being efficient. The government does not need to make a profit and thus has little motivation for being efficient, or providing the best product or value.

As you said it is important that you keep competition fair though.

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#2) On August 19, 2009 at 6:51 AM, devoish (96.28) wrote:

If you are profitable you are doing a good thing.

Profit rarely has to do with whether or not "you are doing a goood thing". profit is certainly no measure of whether a"a good thing" is being done.

AIG was profitable dumping its risks onto others. And in Pencils example with the FDA there was certainly a lot of profit for "quacks" and "charalatans" passing off worhtless cure-alls in the late 1800s as medicine before the FDA existed.

Perhaps the best way to "keep competition fair" is to have an FDA that is well enough funded to do its own drug testing quickly, rather than risk relying on the possibly manipulated test results of drug manufacturers who cannot afford to have a drug fail because of the financial guarantee of poverty that results.

Perhaps there are additional reasons for the time it takes, Perhaps the adverse effects of a drug do not show up for twenty years, similar to cigarettes and lung cancer.

Perhaps the adverse effects of a drug might not show up until the second generation of pigs are born all female, because of endocrine disruptors.

Perhaps your 15yr average is skewed by drugs that should have been abandoned more quickly, but cute marketing could sell to investors to keep a company alive.

 

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#3) On August 19, 2009 at 2:23 PM, QualityPicks (22.57) wrote:

:Profit rarely has to do with whether or not "you are doing a goood thing". profit is certainly no measure of whether a"a good thing" is being done.

I have to agree and disagree at the same time. Profit is certainly no "guarantee" that you are doing a good thing. The main reason why it may not be is fraud. The other reason is when rules or regulations or government interference make competition unfair.

So I would substitute your "rarely" word with "not always" and then I would agree with you. 

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#4) On August 19, 2009 at 3:25 PM, TMFPencils (99.81) wrote:

AIG was profitable dumping its risks onto others.

And yet the government has still given billions of dollars to AIG and the other businesses that politicians claim were "greedy". Rather than let the "greedy" businesses fail, politicians forcefully took taxpayer dollars and gave it to the "greedy" businesses. AIG didn't face near the amount of consequences that they would in a free market because government bailed them out. 

Perhaps there are additional reasons for the time it takes, Perhaps the adverse effects of a drug do not show up for twenty years, similar to cigarettes and lung cancer.

You really think people need a government agency to tell them that smoking might cause damage? It is ridiculous to assume that government can solve all of our health problems, know all of the risks and rewards of different medications, and use a one-size-fits-all approach. There is evidence that the long development time has resulted in far more deaths than was experienced with the several faulty medications. 

And in Pencils example with the FDA there was certainly a lot of profit for "quacks" and "charalatans" passing off worhtless cure-alls in the late 1800s as medicine before the FDA existed.

I am not talking about free-for-all anarchy. Fraud absolutely should be punished. Before government got involved with excessive licensing, regualtions, and other interventions in health care, we also had home visits from doctors, free local clinics or church hospitals, midwives, etc. 

Government intervention has good intentions, all I am saying is that we must understand the consequences of those interventions. Supply of medical care has been concentrated and limited, demand and cost continues to rise, and we are brought to today's situation. 

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#5) On August 20, 2009 at 12:22 AM, devoish (96.28) wrote:

I am not talking about free-for-all anarchy. Fraud absolutely should be punished. Before government got involved with excessive licensing, regualtions, and other interventions in health care, we also had home visits from doctors, free local clinics or church hospitals, midwives, etc. 

So what are we asking  for here? Small enough Gov't to be ineffective. Big enough to be effective. Not too big to be overbearing?

Invariably uncorruptable? Perfect?

How about supporting a Representative Democracy by applying the visible hand of Gov't where private interests get corrupt, and the electoral process where Gov't fails.

The second happened in the last two elections. Now we can try the first.

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#6) On August 20, 2009 at 1:21 AM, UltraContrarian (31.77) wrote:

"AIG was profitable dumping its risks onto others."

Actually this is backwards.  Other companies paid AIG to take on their risks (particularly the I-banks).

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