Even When the Market “Doesn’t work,” it Still Does

The free market works wonders. Adam Smith’s invisible hand steers people and organizations to make efficient decisions. Sometimes, this means that certain items go out of style (remember that awful green or almond color of appliances in the 1970s?) Sometimes, entire businesses go under because people no longer want the products these companies are selling (think buggy whips or 8-track tape players).  In a market, as in a democracy, the people rule.

What Could Go Wrong?

Hedge-fund manager and entrepreneur, Martin Shkreli, purchased the rights to Daraprim for 55 Million dollars. He then raised the price of an anti-infection drug used by HIV and Cancer patients from $13.50 per pill to $750 per pill, adding no value in the process. He realized that the company was selling it below cost, and he was going to correct this. At $13.50 per pill, needing only 100 doses, the drug could save your life for only $1,000. Shkreli thinks that is far too low.

He correctly understood that since those who need the drug could not easily obtain it elsewhere. They were a captive audience. This is the problem with the market—at least under monopoly conditions. A monopoly means that there are no substitutes, a condition that free markets naturally undermine unless government regulations interfere. So Shkreli who is widely viewed as taking advantage of those who need life-saving medication, sits on a pot of gold, right? Not so fast.

The Free Market Works

As it turns out, the market worked.  We recognize that companies need to turn a profit, but at the same time, the market responds to consumer demands. When Shkreli decided to prey on those most vulnerable, the market responded with moral outrage. In turn, the Pharmaceutical Research and Manufacturers of America (PhRMA) condemned him, and the Biotech Industry association (BIO) kicked him out of the association, according to the Washington Post. This was a remarkable turn of events for these organizations and guess what, he is now planning to lower the price.

Have your say:

Feel free to continue to speak. After all, that is how the market works.

His twitter: @martinShkreli

His LinkedIn: https://www.linkedin.com/pub/martin-shkreli/21/587/4a8

-Darin Gerdes

P.S. For years, I taught from Henry Hazlett’s Economics in One Lesson. This book was written roughly 60 years ago, and it is one of the best books on the subject of free-market economics.

 

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Dr. Darin Gerdes is an Associate Professor and Director of Graduate Programs in the School of Business at Charleston Southern University. All ideas expressed on www.daringerdes.com are his own.