when what’s profitable doesn’t mean what’s right, and what we’re wired to do about it…
Almost 200 years ago, British economist William Forster Lloyd was writing about the overuse of common goods and coined the term tragedy of the commons. When people act solely in a very self-interested way with no regard for others, certain scenarios end up making the public worse off and scrambling to figure out why a little selfishness or greed got them in such trouble. Over this past week, one such scenario was perfectly illustrated by the hedge fund manager with an exceedingly colorful history of caring about only what’s best for him at an exact moment, and at the expense of anyone in the way of him making another dollar, as he tried to profiteer from an obscure generic drug with a predatory rate hike. And while Shkreli’s attitude and a social media presence that exudes the vibe of a stereotypical entitled bro who thinks he’s beyond all criticism because he has money made him a poster boy for small pharma profiteering, he is far from the only one doing it. In fact, mini-monopolies are hiking up the price of many rare drugs.
From a cold, logical, game theory standpoint, what these executives are doing makes sense. If you own a monopoly on something necessary, you should try and find the maximum price it will garner because your job is to maximize profits and company valuations. Should the market get upset and push back, you lower the price, as Shkreli was forced to do. Eventually, you’ll find the price point at which you’re making more money while your customers are content. It’s really the same approach as in ultimatum games studied by psychologists. Your best bet is to accept any amount greater than zero when offered to split a fixed sum of cash because no matter how the money is split, you still left the experiment with more than you started. It’s the cornerstone of all game theory variants employed to explain and drive stock and commodities markets. The idea that something should be fair is irrelevant, the only things that matter are numbers, supply, and demand. Small pharma execs were using this logic when deciding on their price hikes, seeing a price increase as simply an opening salvo in a negotiations process with the market.
But humans don’t work that way. Even our closest evolutionary cousins will rebel when they find themselves unfairly treated and reject overly generous rewards not to seem too greedy. We act no differently is similar experiments adapted for our minds, and close to three in four of us don’t only reject unfair deals, but will use the rules of the experiment to make sure those who tried to slight us won’t get anything either. In other words, game theory is for machines, not us. We will much rather undermine those unfair to us than settle for whatever crumbs they leave us, even though in theory, those crumbs are more than we had. From an evolutionary standpoint, it’s all perfectly logical. Just like apes, we’re social creatures and so we evolved knowing how to keep our tribes together and in order. Even newborns and little children seem to be wired to be both cooperative and friendly, though of course, this varies from child to child. We don’t like extreme inequality or tolerate being treated unfairly, and by rebelling against those who we feel are just pilfering our resources and mistreating us we keep some sense of societal balance. Unlike that tired, old creationist talking point, for us, evolution favored an innate desire to get along.
When pundits on financial news channels grouse that people are unfairly attacking businesses just trying to make a profit in a capitalistic system, they profoundly misunderstand that it’s not a matter of whether the business is making a lot of money or not, it’s how the business does it. If the main source of income is the best and most popular smartphone ever made, we won’t care how much it makes and what its profit margin is because it’s a product that’s needed, improves our lives, and can be foregone if it’s too expensive. If someone makes millions with a pet sitting company, we also won’t care because it’s a service that helps people and their companions in times of need. But if your main source of profit is off the backs of the sick and the poor, then no argument is good enough to defend your practice. We don’t care about your market share and your need to make a return on an investment. You are gouging a common resource and as far as millions of years of evolution tell our brains, you are an awful person who must be somehow punished. It’s a healthy biological imperative for us, and in fact, those who lack it are diagnosed with a pathology called sociopathy whose only natural social order results in kleptocracies.
Really then, it’s little wonder that the world’s failed states would also have the highest inequality and the most violence. Look who gets to be in charge in those places. In Africa, that’s dictators who live in wealth and luxury, protected by armed guards paid for by aid money they steal and proceeds from illegal trade. In Central Asia, it’s warlords who may or may not wear uniforms of their nations’ armed forces along with an official rank, and who are often famous for corruption, keeping sex slaves, and systematically embezzling their subordinates’ already meager pay. It’s what happens when no one even tries to mitigate the tragedy of the commons and a wealthy or violent enough sociopath gets his way enough times. Not letting someone have a monopoly on life saving drugs, or make billions from gouging the sick and the elderly is not “socialism,” or the complaints of “moochers,” but our brains rebelling at the unfairness they see and trying to bring the inequalities down to something more fair. The markets assume we’re horrible people with a very flexible moral compass, an to an extent, we certainly can be. But we also do have a built-in sense of fairness, and thankfully, we use it against those whose greed shut down theirs.
