Incentives and Greed, Villains and Systems

Greed

Pharmabro. Epipen. Price on medicine that’s important to lots of folks has caught the attention of the country; it’s followed by massive public outcry and, of course, lots of rage. The CEOs are evil, the pharmaceutical companies are evil, possessing some powerful evil recruitment system that many other industries lack. Maybe corporations are evil or just the love of money is evil. However expressed, greed is the problem.

Then there’s people looking for handouts. They want to tax hard-working people and take their money to get free stuff, like college and healthcare and, well, just not working at all. They’re entitled, they’re lazy, and they’re greedy, too--they’d rather steal someone else’s money than make it themselves.

Nah, colleges and insurance companies are greedy, and we need to deal with that greed.

And let’s not even get started on Congress. They’re corrupt, they don’t care what The People think. We should vote the bums out again, because this time it’ll work. If Congresspeople were less greedy, they wouldn’t let themselves into the pockets of big donors and big corporations.

So let’s get mad at all these folks, let’s shame them, post on Facebook about them. Maybe that’ll fix things.

Incentives

I want to take a moment to step back and think critically about why any of this stuff is happening.

Prices of many drugs, including the EpiPen, are going up far faster than the consumer price index--so what is it that makes drugs different from almost every other product? Is it somehow that drug companies have just applied a few thousand times more greed to their business models than other companies?

Probably not--every CEO of a publicly-traded corporation (with the exception of weird corporate structures like B-Corps) has a legal fiduciary duty to maximize return to shareholders… in essence, federal law mandates that every industry be greedy. So that’s one incentive. What makes things different for EpiPen?

Well, it has a government-enforced monopoly. Whether more of that regulatory structure is due to corporate lobbying or good intentions is an interesting question, but it may well be both (as a friend says about consumer regulation: “prohibitionists and bootleggers agreed on the 19th Amendment). Either way, many drug companies lack the competitive incentives that other industries have.

What of those looking for free college or healthcare? They, too, may be responding to prices rising much faster than the consumer price index.

Are health insurance companies driven by incentives? You betcha: they need to maintain their margins--averaging only 3%, significantly lower than the average publicly-traded company.

And Congress? Well, they ned to get elected. Think about what they need for that (hint: it’s donations and volunteers that ultimately drive votes), and consider that it’s a zero-sum game: if you don’t get the most votes, you just don’t win. How likely is a candidate to win if they don’t take the big donations that their opponent takes?

Villains or Systems

Talking at length about the complex structural incentives for each of these concerns people have gets beyond the scope of this post. It can get complicated, as making structural changes to a system--especially legal changes--is also its own battle with incentives for everyone to act a certain way.

It feels good to have a monster, a villain, to point to. Pharmabro seems a good villain because he has an unlikable personality. Congress is a classic villain. The rich are villains, welfare recipients are villains.

But how much energy are you putting into denouncing your pet villain, and how much into understanding the incentives that get them to act in a way you don’t want? Will public shame or boring systems analysis be your key to driving change?

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Erik Fogg

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