I have a friend, who, while claims to support free-markets, doesn’t like firms profiting from cancer and other medical treatments. He claims firms (primarily big pharma) should not reap billions while ordinary folks suffer from such a horrid disease. He conjures up images of the CEO of Ely-Lily making millions in salary and bonus and self-righteously decries this to be morally reprehensible. I must say the media has also done a good job of promoting this same mindset, that the profiteering of medicine can somehow be wrong. I disagree.
Profits are signals. [i]Profits tell us where our resources are used most effectively. If Merck is reaping economic profits in the pharmaceutical industry, it’s a signal that society values this activity, and other firms will seek to enter this market. (Note that government regulations and other barriers to entry can restrict access, but imagine for a moment these restrictions are minimal.) As more firms enter (competition) and additional products are brought to market (additional supply), economic profit will decline. In truth, government intervention can cloud profit signals, thus allowing firms to earn economic profit beyond what they would normally earn. The pharmaceutical industry may reside in such a marketplace.
What my dear friend falsely believes is that if government reduces big pharma’s profits through taxes or regulations, that human suffering would decline. This just isn’t so. Profits allow for the development of new drugs. Profits allow big pharma to hire researchers, scientist, and chemists to develop medications to extend our lives and to ease our suffering. Reducing Merck’s profits would have the opposite effect, and society would be worse off, not better.
Profits are not evil. They are incentives to firms and individuals to keep doing what they do best. As Adam Smith said in Wealth of Nations, “It is not out of the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self interest.”