Bill Black: Free Markets Mean Zero Economic Profit – or a 99% Profit Markup

[marmar]

By William K. Black
May 3, 2016


Open up a conventional economics text and you will be taught that high among the glories of “free markets” is the “fact” that they lead to firms earning “zero economic profits.” Economic profits are not the same as accounting profits. An economic profit occurs when a firm receives greater profits than the minimum required to be able to raise capital in their industry. A firm that receives a profit greater than that minimum requirement is receiving monopoly “rents” due to its market power. Conventional economists used to believe that was a bad thing, but many conventional economists from the right are now openly hostile to antitrust concerns.

One of the paradoxical arguments of conventional economists is that the “free markets” are so effective and speedy in eliminating economic profits that they create powerful incentives not to engage in expensive research and development (R&D), particularly where the success of the project is highly uncertain. The patent laws, therefore, grant a government-awarded monopoly to inventers. That patent is limited in duration, but it has no restrictions on pricing.

The development of new “ethical” drugs, particularly novel ones, is often cited as a prime example of the benefits of the patent system. What Wall Street has realized in recent years is that the patent-holders that develop these drugs present unique profit opportunities for those with a Wall Street mentality. It turns out that those who develop ethical drugs commonly act less than perfectly rapaciously. The pharmacy industry is not composed of saints, but it is composed largely of scientists and doctors who often care about the patient. This allows Wall Street types, who often define the concept “perfectly rapacious,” and a lack of empathy for the suffering of other people the best of all worlds.

1. They can buy the patent rights at prices that are dirt cheap (from their perspective)
2. They face zero risks that the R&D project will fail, because it has already succeeded
3. They face greatly reduced marketing risks because the drug is already being successfully sold and is typically authorized for reimbursement by public and private health insurance
4. The risk of undiscovered adverse side effects is greatly reduced because they wait to buy the patent rights until after the drug has been sold for several years
5. They can – immediately and dramatically – increase the price of the drug

This five-point strategy would seem, from a Wall Streeters’ perspective, to present the perfect opportunity for Wall Streeters to get even richer even quicker through a “sure thing.” The paradox is that it is precisely Wall Streeters’ lack of empathy – their inability to understand how the public would respond to such a “sewer” strategy and their tone deafness in responding to the public outrage that their strategy was sure to provoke – that has been their undoing. ..............(more)

http://neweconomicperspectives.org/2016/05/free-markets-mean-zero-economic-profit-99-profit-markup.html

[elleng]

1. Thanks for the info, marmar.

Gotta study this.