Ideas ... Capitalism
Umair Haque

How (Not) To Be a Capitalist ... What you can learn from Martin Shkreli, Voldemort, and Satan

Burgess COMMENTARY

Peter Burgess

How (Not) To Be a Capitalist ... What you can learn from Martin Shkreli, Voldemort, and Satan

What makes a good capitalist? And what is capitalism, anyways? Just a system for transferring money from the poor to the wealthy, via a series of cruel swindles? Or something else entirely?

In this essay, I’ll use the example of the now infamous Martin Shkreli to explore — and explain. Martin, who appears to be the love child of Voldemort, Scrooge, and Faust, buys the rights to specialty drugs that treat serious, rare health conditions — and jacks up the prices by hundreds or even thousands of percent.

Martin’s argument for his “business model”—I put it in quotes for reasons you’ll read below — is simple. The drugs are expensive to develop, produce, and redevelop — and therefore, he has to extract every last penny from anyone unlucky enough to have to fallen ill with illnesses they might treat.

What the? How are we to resolve such a thorny dilemma — illness, on the one hand, and price, on the other?

Like many, you probably feel naturally repelled at Martin’s business model — and yet, it’s held up by many, especially pundits (who should know better), as a paragon of righteousness. So are your moral instincts correct — or are the beancounters? As Keynes once famously said, must we do foul to make fair? Is capitalism just a system that demands we screw one another over, in a kind of Darwinian contest of survival-of-the-bastardliest?

It’s a tricky, and surprisingly subtle, question. And to answer it, it turns out, we have to define what capitalism is.

Capitalism, properly put, is a system for maximizing the returns to capital. To whom? To everyone — society. Not just the capitalist’s — but yours as well. So let’s take a series of simple examples from an imaginary investor with a business model like Martin’s, called M, to illustrate what really makes a capitalist…and what doesn’t. Imagine M’s drug saves you from a month of illness. But it costs you a year’s earnings. M’s drug saves you from a year of misery. But it costs you a car, a house payment, and a college fund. M’s drug saves you from a lifetime of pain. But it costs you a kidney and a pension.

Who is truly better off in this exchange? No one. Value has merely shifted hands — from you, to M. Though you are better off, you are also worse off, in much the same amount and quality. The returns to capital have not been maximized for everyone. They have merely been added to one side of the equation…by subtracting them from the other. M is causing a net harm to society — not a benefit. In much the same way as when phone companies sneak hidden fees onto your bill, without delivering extra service. But in this case, it is not a trivial harm — to people’s wallets. It is a harm to people’s lives.

Is M a capitalist? When M extracts every last penny of profit he can from his drug, what he is really doing is minimizing the returns to capital. That money, that capital, should flow to where it is most productive: to new drugs, therapies, or treatments, that yield the greatest value (not profit, remember) for all. But if it merely stays in M’s coffers, or if he spends on designer lofts, or even if he reinvests it in super-high-tech-butler-robots no one really needs, or even if he reinvests it in drug development for the very same drug, all he is doing is reducing the efficiency and productivity of the economy.

That is what economists call rent-seeking. Let me make it crystal clear to you with a simple example. Imagine what I’ll call the Deal of Eternal Impoverishment. I, Satan, the Prince of Darkness, cleverly disguised as a merely mortal, cunning, hedge fund manager, create a drug that bestows immortality on you. But my price is this: you have to give me your future earnings, above the poverty line…forever. Would you take my deal? Probably. After all, who (apart from me) doesn’t want to live forever? Yet imagine an economy of people who took the Deal of Eternal Impoverishment. They’d never grow any wealthier. Such an economy would merely be a ponzi scheme — though it might nominally “grow”, it would never really prosper. The returns to capital would not be maximized — in fact, they would be minimized, as money piled up in the coffers of I, Satan, who, after a while, wouldn’t have anywhere to spend, invest, or lend it. Eventually, potential capital — that foregone, never created — would be destroyed. That is what looters like Martin are doing when they price gouge: minimizing returns to capital, thus destroying tomorrow’s capital, and hence making the economy less efficient, productive, and effective.

But what about patents? Aren’t they licences to…do whatever you want? Nope. A patent is not a license to print money by price gouging. A patent is a temporary monopoly, to be sure. So that costs which otherwise couldn’t can be paid back. But that temporary monopoly is granted precisely with the implicit condition that it not be abused. When it is abused is when the monopolist charges a price which harms people as much or more than it benefits them. And in that case, such a patent has no true social value at all. It is merely a mechanism for taking capital which should be invested in productive uses — and handing it to the monopolist. Such an abusive patent-holder may advance any number of arguments to defend his patent — legal, ethical, moral, economic. But the truth is simple. He is not a capitalist in any meaningful sense. He is merely a monopolist, who, by minimizing value, though he may maximize his own profit, is destroying capital. Thus, he is the very opposite of a capitalist: a looter.

The difficult job of the capitalist is to find a fair, just, and true price — one which doesn’t merely extract, but enhance. What does that mean? One that balances the rewards to the people that produce goods — and the people that consume them, so both sets are truly better off. Sometimes, that’s easy. We can let markets do most of the work. Prices are bid down to where people feel they will get the most value — when markets are competitive, that is. That is why proponents of capitalism make such a big deal out of choice. Not just because they want big-box stores full of a thousand flavours of toothpaste — but because choice induces producers to compete to create the most value for everyone.

But here’s the catch. In other cases, the market does not exist at all. Cases like drug patents. What do we do then? Is the job of the capitalist merely to price gouge? Emphatically not. It is to find a price that maximizes the returns to capital — for society, not just for him. That is how value is created. If all he is doing is price gouging, he is not really a capitalist at all. He is merely a monopolist. He is merely extracting value — not creating it. In my simple example, he is merely offering you with one hand what he takes away with another. A monopolist is a capitalist like a chauvinist is a feminist.

So what is a capitalist? Merely a greedy bastard, a profit-maximizer in a suit, a swaggering stock-owner in loafers? Nope, nope, and nope. All those are the opposite of true capitalists. In this essay, I’ve called them looters, but you might also call them profligates, plunderers, profiteers, or simply uncapitalists. A capitalist is that rarest of things: a risk-taker who creates value that endures, matters, and multiplies — not for himself, but for society, people, the planet, the future. By doing the hard work of building and creating goods that truly make people better off, after the books are balanced.

Though you, a good internet leftist, might condemn every capitalist as a looter, plunderer, and monopolist, your logic is backwards. Instead of throwing the baby out with the bathwater, we should do the harder work of distinguishing between people who actually make our lives better, and charge a fair price to us — and those who are merely in it to capture all they can from us — so we can hold one to the standard set by the other. When we condemn every capitalist as “the same”, looters, plunderers, villains all, we are not merely overgeneralizing — we are unable to hold anyone to account in the first place, because we have claimed that bad is bad — but good is also bad. Yes, I know examples of the former are few and far between. That’s the point. When we condemn every soul-sucking monopolist as an evil capitalist we are something like pawns of the very system that we decry, for the truth is that it is only by demanding greater social returns for capital that we are likely to hold the looters and plunderers accountable in the first place.

And if we fall into the trap of confusing capitalists with looters, it would be a great shame. For the truth is that capitalism is broken. Not because it is working too well. But because it is barely working at all. Because people like Martin Shkreli, who are merely profiteers and raiders, looters and plunderers, are slyly masquerading as capitalists. But that is like calling a tapeworm probiotic yogurt.

And the truth is that’s not OK — but there will always be Martin Shkrelis. Let there be. History’s dustbin is littered with them, the sands of time are white with their bones. No one remembers, celebrates, admires, or loves the Martins of the world. We celebrate the Steves.