Robber Barons

Unregulated capitalism developed a strategy in the 19th century, if not earlier, of the big players putting the small players out of business, either by acquiring them or cutting prices below which the smaller players could not survive. Vanderbilt, Rockefeller, and Carnegie excelled at this, often financed by JP Morgan. Once the small, possible innovators, were gone, the monopolists raised prices and accrued enormous wealth.

This resulted in the Progressive Era and the Sherman Antitrust Act of 1890, Pure Food and Drug Act of 1906 and other laws and regulations. Monopolists do not seem to be able to avoid trying to maximize personal wealth. Citizens and politicians of the Progressive Era eventually rebelled and changed the rules of the game to thwart the robber barons.

The Progressive Era did not eliminate the acquisitive tendencies of entrepreneurs. General Motors, through National City Lines, bought the Los Angeles streetcar system in the 1960s.  The system was dismantled. LA then had to buy GM buses. People bought cars, gasoline and tires. As Charlie Wilson, CEO of GM, had said in 1953, “What is good for the country is good for General Motors.”

This brings us to today. Why don’t we have enough ventilators, masks, etc.? We knew in 2007 that these items would likely be needed — see my recent post. CDC knew this and tried to create needed inventories.  At that time, a group of U.S. public health officials came up with a plan to address what they regarded as one of the medical system’s crucial vulnerabilities: a shortage of ventilators.

The breathing-assistance machines tended to be bulky, expensive and limited in number. The plan was to build a large fleet of inexpensive portable devices to deploy in a flu pandemic or another crisis.  Money was budgeted to develop $3,000 ventilators. A federal contract was signed with Newport Medical Instruments, a small outfit in Costa Mesa, Calif.

Newport, which was owned by a Japanese medical device company, only made ventilators.  Work got underway, but suddenly veered off course. A large medical device manufacturer, Covidien, bought Newport for just over $100 million.  Covidien — a publicly traded company with sales of $12 billion that year — already sold traditional ventilators for $10,000.

Government officials and competitors suspected that Covidien had acquired Newport to prevent it from building a cheaper product that would undermine profits from its existing ventilator business.  Developing inexpensive portable ventilators was no longer a top priority.  The government was forced to start from scratch. The development of an affordable ventilator was delayed by at least half a decade.

Capitalism yields major benefits.  For example, smart phones replaced flip phones and became our prized digital devices.  There are many examples like this.  Capitalism works well until new robber barons emerge and distort processes of innovation for maximal personal gain.  Then citizens and their elected representatives need to intervene and change the rules, particularly when the nation’s health and security are at risk.  Perhaps we need a renewed Progressive Era.

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