Company profits depend on the ‘welfare payments’ they get from society

An article by economist Ha-Joon Chang in the Guardian in which he notes that “It is time that we dispensed with the myth that the market is a force of nature that should not be meddled with. Markets are social creations that can be, and have been, modified for social purposes.” – a lesson policy makers in the Netherlands should take to hart  – or made to take to hart – in stead of destroying our social institutions one by one and bit by bit.

The free market is a myth. From drug patents to quantitative easing, businesses make money because of state help

Earlier this week, India’s supreme court ruled that the country will not grant a patent to Novartis, the Swiss pharmaceutical company, for the cancer drug, Glivec. Being a new version of an existing drug, the ruling said, it does not deliver enough innovation to warrant a patent. Novartis condemned the ruling as “a setback for patients that will hinder medical progress for diseases without effective treatment options”.

This statement is rich coming from a company from Switzerland – a country that infamously had no patent law until 1888, half a century after its introduction in most rich capitalist countries.

Even after 1888, Switzerland refused to award pharmaceutical and other chemical patents for two decades, the new patent law having stipulated that patents are granted only to “inventions that can be represented by mechanical models”. The country introduced chemical patents only in 1907 under intense pressure from Germany, whose technologies its pharmaceutical companies were liberally “borrowing”. Ciba-Geigy and Sandoz, whose merger in 1996 created Novartis, were among those companies.

What is more, until 1978, Switzerland granted patents only for chemical process (that is, how you make a chemical) and not for chemical substance (that is, the chemical itself), on the reasonable ground that the substance had always existed in nature and the “inventor” has only found a way of isolating it. This was actually a rather widely accepted view at the time. Germany and France had only just introduced chemical substance patents in the late 1960s. Canada and Spain refused to grant patents to pharmaceutical substances until 1992.

Despite all this history, the pharmaceutical industry is extremely aggressive with substance patents, as in the case of Glivec, because it knows that its profit level will fall dramatically without them. Unlike a BMW or an Airbus, chemical substances are very easy to copy. Even if the processes of manufacturing them are patented, you can relatively easily come up with alternative processes. Without the artificial monopoly conferred by the patent, the inventor of a chemical substance can make only little money (generic drugs typically cost 5% of drugs with patent monopoly).

Patent monopoly creates a lot of problems. It allows the patentee to charge the maximum to consumers. This may not be a problem if the patented product is a luxury item, like parts that go into a smartphone, but can violate basic human rights if it involves things such as life-saving drugs. Patent monopoly also blocks technological progress in the relevant fields during its duration (20 years), as other people cannot use the patented technologies in developing other technologies.

Despite all these problems, we, as society, grant patent monopoly because we believe that it brings more than compensating benefits. By giving greater incentives to invest in developing new technologies, patent monopoly can create more innovative technologies. This means that society has the right not to grant a patent for a technology when it feels that the benefits are outweighed by the costs, as in the Indian court ruling against Novartis.

The pharmaceutical industry most starkly reveals how profits are “social” creations – it makes its profit because it is granted artificial monopolies in the form of patents. But it is not alone in this respect.

Another obvious case is the banking industry. Today, many banks all over the world would not have existed but for the huge public money poured into them in the aftermath of the 2008 crisis. Even in the case of those that have not been bailed out, their profits would have been much lower (or their losses far bigger, in the case of loss-making ones) without the cheap money showered on them – without any condition, unlike in the case of state supports such as unemployment benefit – through cuts in interest rates and the quantitative easing by the Bank of England.

In other instances, the social protection of business is more roundabout. The horsemeat scandal has revealed that British supermarkets and the European meat industry have made higher profits from the relaxation of regulations regarding food standards, introduced by the coalition government in 2010 in the name of cutting government spending and, more important, “red tape”. The Poundland scandal has revealed that British retail stores would make lower profits if they were not allowed to use the claimants of unemployment benefits as unpaid workers.

I can go on, but the point is that all businesses make what profits they make only because the government, and the electorate as the ultimate sovereign (at least in theory), helps them in all sorts of ways – free money (banks), free workers (Poundland), monopoly rights (pharmaceutical companies), implicit permission for substandard products (supermarkets).

Once we accept that the amounts of profit companies make are ultimately determined by these “welfare payments” society decides to confer upon them, we begin to see the problem with the free-market view that has dominated the world for the last few decades.

For far too long we have been told by the business lobby and free-market ideologues that profit is the objective indicator of a company’s contribution to the economy, when it is really socially and politically determined. Poor people receiving government benefits have been told far too often that they are spongers, when the rich get even more government benefits.

It is time that we dispensed with the myth that the market is a force of nature that should not be meddled with. Markets are social creations that can be, and have been, modified for social purposes.

185 thoughts on “Company profits depend on the ‘welfare payments’ they get from society

  1. Or in the words of Marx, 160 years before this dude:
    ” My own contribution was 1. to show that the existence of classes [thus also our current capitalist economy] is merely bound up with certain historical phases in the development of production [….] they [bourgeois thinkers] regard the social conditions in which the bourgeoisie is dominant as the final product, the non plus ultra [highest point] of history, and that they themselves are simply the servants of the bourgeoisie, a servitude which is the more revolting, the less capable are the louts of grasping the very greatness and transient necessity of the bourgeois regime itself.”

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