Massachusetts Daily Collegian

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A free and responsible press serving the UMass community since 1890

Massachusetts Daily Collegian

A free and responsible press serving the UMass community since 1890

Massachusetts Daily Collegian

Five faults of capitalism: market failure

401(K) 2013/Flickr

As an economic system, capitalism is prone to market failure due to the inefficiency of the market to allocate certain goods and resources. Invariably, the freedom of individuals and firms to use any means to pursue their own self-interest leads to apocryphal results for society as a whole. Free market economic systems allow goods to be sold to the highest bidder, which results in economic inefficiency as goods are distributed on the basis of who can afford them rather than being distributed on the basis of who needs and values them most.

The result is the duality of capitalism: a “sacrosanct” economic system favored due to its simplicity, yet devoid of moral conscience or direction.

Since resources are allocated strictly on the basis of consumers’ availability and willingness to pay, free markets result in imperfect information distribution and imperfect competition. Consequently, free market capitalism leads to comparative advantages for the rich over the poor; the rich can afford better food, education, housing and transportation than the poor. Prices serve as the sole determinant of who can afford which goods and services, regardless of the ethical implications of the rich’s comparative economic advantage.

Agents in a free market can acquire market power, owning the majority of the market for a certain good or service. This allows these individuals and firms to prevent mutually beneficial trades from occurring as their high control of the market allows them to use their leverage to gain a comparative advantage. Ultimately, this leads to market inefficiency through forms of imperfect competition such as monopolies or monopolistic competition. The monopolistic power gained by these firms allows them to restrict output in order to artificially raise prices and profit.

One example of how capitalism leads to market failure can be seen by looking at the state of the health care system in the United States. As Douglas Smith noted in a recent blog post for Naked Capitalism called “Profiting From Market Failure: How Today’s Capitalists Bring Bad Things in Life: “Instead of taking Joe Wilson-style risks on innovation, too many captains of the healthcare 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.” Wilson was the founder of the Xerox Corporation.

The health care market, instead of perpetuating and supporting the development and dissipation of life-saving drugs, supports profit maximization though underhanded methods, thereby restricting access to only the wealthiest citizens.

Similar phenomena can be seen in the health insurance industry, as Smith further explains: “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.”

This phenomenon Smith speaks of is the result of a largely private insurance system whose profit-maximizing objectives are misaligned with patients’ needs. Insurance providers have a distinct financial incentive to deny services to the ill, turning away those who need medical coverage most in the name of maximizing profit.

Unfortunately, this means that the private insurance industry’s financial incentives actually entail providing coverage to those who need it least, and withholding coverage from those who need it most.

As illustrated by the health care and insurance industries in the United States, the free market, although efficient at distributing certain goods, is inefficient when it comes to distributing goods and services that are not most efficiently distributed to those who can best afford them.

This market failure exemplifies the necessity to develop alternative methods for distributing these types of goods and services, supporting the notion that although the free market can fairly and efficiently distribute most goods and services, markets are not the best means for distributing all goods and services.

Capitalism is simple; this I do not dispute. Efficient? Equitable? I respectfully disagree.

Makai McClintock is a Collegian columnist. He can be reached at [email protected].

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  • T

    Tony BartlettJun 6, 2013 at 2:09 pm

    Capitalism is not a perfect economic system, it is the best system. Healthcare and the health insurance industry is not good example because the free market is distorted by so-called health insurance and the government. These two forces disconnect the consumers of health care from the direct payers. No one would pay for a $100 aspirin but there is no immediate outcry when an insurance company or the government is being overcharged. Prices in capitalism are largely determined by the purchaser’s willingness to pay. Eliminate this disconnect and the healthcare system issues are significantly mitigated. Socialistic solutions, on the other hand, will only worsen the problem.

  • O

    ObserverMar 5, 2013 at 10:27 am

    Dr Watson, your argument contradicts itself. First you said, “Let us assume two ‘perfect’ worlds, not where everything is sunshine and rainbows, but rather a world entirely of democratic capitalist and another of democratic communist systems.” So far so good. But then you turn around and say, “Under a communist system, state control, every product is controlled by a oligarchy in a sense, including information.”

    Wait, what? You said you were going to give an example of DEMOCRATIC communism, and then you started talking about an oligarchy controlling information – which is, quite obviously, non-democratic. It’s easy to maintain freedom of information under a democratic communist system, even though the state runs the whole economy. Just give everyone free internet access (a very communist idea), and you’re done. Anyone can post anything online. Furthermore, elections DO matter, because elections provide exactly that competition which you think is missing from communism: if the current administration is doing a bad job, you can vote it out of office and elect a new one – thus creating competition between candidates. A monopoly is a monopoly only when people CAN’T control its actions by voting.

  • D

    Dr WatsonFeb 26, 2013 at 7:57 pm

    Let us assume two “perfect” worlds, not where everything is sunshine and rainbows, but rather a world entirely of democratic capitalist and another of democratic communist systems. Human beings, for the sake of our cross comparisons, are the same. Two worlds, all other things Ceteris paribus bar the market structures. Now, we look to our largest human flaws, greed and jealousy. Under a communist system, state control, every product is controlled by a oligarchy in a sense, including information. Now why would an oligarchy want to evenly distribute information and goods as a benevolent dictatorship? Even with elections, the control of information undermines the democracy aspect of communism as the same individuals in government control all services. It’s a giant monopoly in a sense; an imperfect market that makes capitalism seem like paradise in comparison.

    Capitalism takes human greed and jealousy and pits it towards each other. Competition, like evolution, breeds better products. The governments job is to ensure perfect competition. Thus the problem is not the markets, but the government. Communism, the hybrid of the two, is inherently flawed until we reach the state of control over energy into matter conversion, or some other star-trekesque level of technology.

  • D

    David Hunt, 1990Feb 25, 2013 at 4:59 pm

    Might I suggest the author invest some time in reading Professor Thomas Sowell’s book “Basic Economics”?

  • M

    masonFeb 25, 2013 at 4:10 am

    “: only a small percentage of premium dollars actually going to pay for care.”

    Does he support this with factual information?

    Health insurance companies don’t make a great profit, their profit margins average 9-10 percent. If only a small percentage of premium dollars went to pay for care, their margins would be far higher.

    Health insurance in terms of an industry is not a hugely profitable one nor an appealing one which partly explains why there are few firms in this industry along with the fact they are highly regulated, constantly scrutinized, subject to future regulation(as seen with obama’s health care act), face constantly increasing costs, unlike auto insurance policies the ability to customize plans is limited and unlike auto insurance patients they can’t adjust premiums based on the risk of a customer’s behavior.(I.e. smokers, the obese, those who engage in substance abuse and those who engage in reckless behavior)

    I think the problem with health insurance in america is that it’s been allowed to exist in the private market in the first place not because insurance companies are “evil” but because it’s a type of industry that does not function well in the free-market. However unfortunately that never occurred in america and did not occur with obama’s legislation which most likely means the current problems with the high costs of insurance and deficiencies in care won’t be resolved and will exist in a hybrid system that doesn’t resolve either issue and allows them to exist in both the private and public sectors of healthcare.

    Also you state “instead of perpetuating and supporting the development and dissipation of life-saving drugs”

    What do you define as life-saving drugs, if you study public pharmaceutical companies which there are hundreds existing in the united states alone, a large portion of them focus their research and development on cancer drugs because they are highly lucrative, creating a cure or substantively improvement treatment for a deadly disease is going to make alot of money. Also there is considerable efforts devoted towards drugs that treat cardiovascular disease, the leading cause of death in america.

    That said Obama also devoted I believe 20 billion dollars in the stimulus act towards the creation of a research center to research new drugs. I think the government needs to greatly expand funding towards medical research, including pharmaceuticals, the money may be wasted on the private industry and may also similarly be wasted on the government. If you studied this issue you would see that many universities have the technology,labs and expertise to design drugs like Yale University and regularly do. Money could be devoted to those universities.

    I don’t think you are really investigating your ideas to see if they’re true or not and are more interested in finding information or reasons to confirm your ideology or belief.