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Basic Problems of Capitalism — Perverse Incentives

A fundamental problem of Capitalism that cannot be solved by market forces

Male patient having a medical visit and bribing a greedy doctor with a lot of money.
How many American doctors are responsible for the opioid epidemic? Shutterstock ID 276522386, by Stokkete.

Has the Left lost its way?

The workers and the farmers that used to form the core of the Left are increasingly voting conservative. In the United States, they support Donald Trump and his acolytes in the Republican Party. In Europe, they vote for the National Rally in France, Vox in Spain and Fratelli d’Italia in Italy.

We cannot afford to lose any more elections. There is too much at stake.

Perhaps the solution is for progressives to stop emphasizing identity politics, which are divisive and turn off a large part of the voters. We need to go back to the core issues that concern the poor and the middle class.

The main issues are capitalism and wealth inequality.

Modern thinkers like Steven Pinker and Yuval Noah Harari argue that capitalism and democracy are intrinsically linked. To a certain extent, I think they are correct. Owning property, choosing your job and creating enterprises are important aspects of individual freedom.

However, capitalism has a number of fundamental problems that cause it to work against the common interests of society.

This is the first in a series of articles listing these fundamental problems. I will show that these problems are intrinsic to the nature of capitalism, so they cannot be solved by market forces alone.

These problems are:

  • Perverse incentives.

  • The tragedy of the commons.

  • Unequal wealth distribution.

  • Exploitation of workers.

  • Exploitation of consumers.

  • The merging of corporations leading to monopolies.

  • The political influence of the corporations.

In the final articles, I will argue that solving these problems needs the intervention of the State, which should be democratically controlled, independent of the wealthy and strong enough to reign in the corporations.

I will also present historic evidence that European-style socialism is the best formula to achieve this.

Perverse Incentives

A perverse incentive is when a company can make money by doing something that is against the common good.

Wikipedia gives some great examples of perverse incentives:

  • The British government in colonial India offered a reward for death cobras in Delhi. Some enterprising people started breeding cobras to sell them to the government.

  • Similarly, in Hanoi, Vietnam, a reward was offered for rat tails to eliminate these pests. People cut the tails of rats and released them into the sewers to make sure that they had more rats to continue their business.

However, most of the perverse incentives listed by Wikipedia involve well-intended government rules backfiring one way

But not all perverse incentives are created by governments making stupid decisions.

The Opioid Epidemic in the United States

Purdue Pharma rewarded its sales people when they convinced doctors to prescribe their new pain medication, OxyContin. OxyContin is a pill that releases the potent opioid oxycodone slowly to lengthen its analgesic effects. Although OxyContin was advertised as a non-addictive alternative to morphine, it is, in fact, highly addictive. Moreover, opioids taken regularly increase chronic pain, a phenomenon known as opioid-induced hyperalgesia.

The result was that hundreds of thousands of Americans got addicted to opioids by following their doctor’s prescriptions. Soon, they started to die. Driven by their endless pain and their addiction, they overdosed on OxyContin or turned to street drugs like heroin or fentanyl when their doctor refused to prescribe them more opioids.

Drug overdose deaths among all ages involving opioids, from 1999 to 2021.
Source: National Institute of Drug Abuse. Public domain.

This is known as the Opioid Epidemic in the United States, which started in the 1990s and is still ongoing. The Sackler family, owner of Purdue Pharma, made millions of dollars selling OxyContin. Protected by an army of lawyers, they were able to avoid jail and kept most of their fortune.

[Source: Empire of Pain, by Patrick Radden Keefe.]

Looking for alternatives to opioids to cure chronic pain

To solve this problem, the National Institutes of Health created the HEAL Initiative, which provides funding for researchers who look for alternatives to opioids as analgesics. I participated in the HEAL Initiative as a grant reviewer.

Also, my work as a scientist was directed towards finding alternatives to opioids to alleviate pain. My ambitious goal was to find a cure for chronic pain. I dreamed about a pill that, once taken, would make chronic pain go away, so that people with this disease wouldn’t need to take any drugs anymore. Of course, my small lab would not be able to achieve this hefty objective, but it would be possible with the joint work of pain neuroscientists like me.

In my last two papers, we identified two classes of compounds that show promise in an animal model of chronic pain: neurokinin 1 receptor antagonists (Chen and Marvizon, 2020a, BioRxiv) and Src kinase inhibitors (Chen and Marvizon, 2020b, BioRxiv). Unfortunately, I had trouble getting grants to continue this project. Then Covid-19 hit, and I had to close my lab and retire.

The perverse incentive not to find cures for chronic pain

But also came to the realization that, even if scientists achieved the goal of finding a cure for chronic pain, it would not be passed on to patients. Because of a perverse incentive.

The only way to get new medication to the public is to have a pharmaceutical company develop it, test it in animals, and take it through expensive clinical trials. But pharmaceutical companies make billions of dollars selling analgesic drugs to people with chronic pain. Not just opioids like OxyContin and Tramadol, and opioid combinations like Vicodin, but also NSAIDs (nonsteroidal anti-inflammatory) like ibuprofen and calcium channel blockers like pregabalin and gabapentin.

If somebody were to develop a medicament to cure chronic pain, it would wipe out this immense profit. No matter how high a price you put on that cure, it couldn’t possibly make up for lost revenue on pain palliatives.

Since pharmaceutical companies control the development of any new drug, they can easily prevent these cures from being found, just by doing nothing.

I wrote a more in-depth explanation of this problem in my article Big Pharma Will Not Cure Your Pain.

Cures for other chronic diseases are also compromised

It’s not just pain. The same thing can be said about other chronic diseases like anxiety and depression. They generate millions of dollars in palliatives that patients have to take every day, for the rest of their lives. Curing these diseases would represent a tremendous financial loss for big pharmaceutical corporations.

As the scandal with Purdue Pharma and the American opioid epidemic shows, turning the development of new medication to for-profit pharmaceutical companies could prove to be a gigantic mistake. Perhaps drug development should be entrusted to the government and non-profit organizations, instead.

Conclusion

Perverse incentives are not limited to case in which government enacts the wrong kind of reward without considering unwanted consequences. They are embedded in many of the problems faced by society, like developing safe and efficacious new medication.

The market forces of supply and demand often work contrary to the common good. For example, selling medicaments that get people addicted increases demand. And so is selling medication that alleviate the symptoms of a disease instead of curing it. In fact, cures are not good for business because they eliminate customers by turning patients into healthy people.

The market operate in a Darwinian way. Suppose that a pharmaceutical company wants to do the right thing and develop a cure for a disease, even when it is not profitable. That company would make less profit than other companies that are guided solely by their self-interest. It would be outcompeted and eventually swallowed by the other companies.

The problem is not bad companies like Purdue Pharma. The problem is the capitalist system itself because it is based on greed and not the common good.

Only public vigilance and the strict control by the State can ensure that corporations work for the common good.

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