F. A. Hayek, “Makena,” and Corporate Sociopathy

Posted on March 14, 2011 by


I am deliberately using this blog to explore and try and provoke discussion of the “hard questions” involved in expanding the study of emergent orders, particularly Hayekian spontaneous orders. We need to do this to prevent Hayek’s insights from becoming the preserve of a narrow political agenda which automatically discredits them in the eyes of people with other intellectual, political, or ethical priorities. When this happens, research and learning is replaced by circling the wagons and subordinating insights to dogma. This brings me to my trouble-making post for today.

When F.A. Hayek wrote the Road to Serfdom he included an important but virtually ignored chapter: “Why the Worst Get on Top.”  In it he explained why totalitarian parties had such a strong propensity for the very worst people to rise to the top.  Left unexplored by Hayek, but in plain sight to any alert reader, was the insight that most of the factors Hayek observed in totalitarian parties also applied in any large instrumental organization. Hayek later returned to some of these insights about the anti-social nature of organizations when he wrote in Law, Legislation and Liberty that many anti-market values were “atavisms.”  Again, the problems Hayek described were largely universal elements in organizations.

Hayek made a basic distinction between spontaneous orders and “made” organizations, that is, organizations created to serve some purpose or hierarchy of purposes.  For the most part scholars have focused on Hayek’s concept of spontaneous order, and particularly its role in refuting claims that rational planning can better order economic production than the “anarchic” market.  Exploring the nature of instrumental organizations was left aside.

I believe this failure has hamstrung efforts to develop Hayek’s insights, and much of my recent work has been an attempt to correct this oversight.  The basic point is simple: the very spontaneous orders that enable some organizations to become successful also threaten their continued success because they enable unexpected competitors to arise.  Kodak Film never imagined it would be reduced to a relatively minor role by digital cameras.  No one has seen an adding machine recently.  And so on.

Even more traditional competition can threaten the most successful or organizations, as Japanese autos demonstrated to the Big Three of GM, Ford, and Chrysler.  What helps an organization rise to the top can also sink it.  Therefore as a rule only innovative and relatively new business organizations will genuinely like spontaneous order processes in the market. And similar insights apply to successful political organizations in democracies.

But there is still more that is very important.

The Problem of Sociopathy

I have argued in many places that corporations, are attempts to create organizations responsive only to acquiring market feedback.  That is, to value money over every other value.  Any CEO who allows other values to get in the way of share value runs the risk of being ousted in a hostile take-over by people who believe those shares are “under valued.”  Therefore, compared to private companies corporations will have a strong tendencies to act as if only money matters, and as much of it as possible.  In a pure case, everything within its world is either a means for making money, an impediment, or irrelevant.  Privately held companies reflect the character of their owners, for better or worse.  Publicly held companies have removed owners’ character entirely from their motivations, and in the present case when so many shares are owned by mutual funds, many “owners” have no idea what they “own.”

If a human being regarded everything and everyone as a means to his or her purposes, and otherwise without value, they would be classed as sociopaths. Corporations are essentially institutionalized sociopaths and the more they are subject to pure market feedback the more true this is. They may do good things, but if so they do them not because they are good, but because they are profitable.

This creates a second troubling level in large publicly held businesses.

When a person has to administer a business that is organized to act like a rational sociopath, more sociopathic people will tend to rise above less sociopathic ones of equal talent. Sociopathic individuals will feel more comfortable acting within the morally vacuous decision-making matrix than will people most of us would regard as more normal.  This is a direct extrapolation from Hayek’s “Why the worst get on top.” We are not talking an invariant law.  The Russian Communist Party eventually gave us Mikhail Gorbachev, after all, and we are much the better off for it.  But it is a tendency.

What sparked this post was an article I just encountered.

From $20 to $1500

Progesterone is a drug for preventing miscarriages and premature births in higher risk pregnancies.  It has been available for years.  The drug was made by compounding pharmacies  and has long been widely employed.   During this time it has been available for around $20 a dose, administered weekly.  “Progesterone is so cheap to make and we never had a problem with the compounding pharmacies making it.” says Dr. Jacques Moritz, director of gynecology at St. Luke’s-Roosevelt Hospital in New York.

Progesterone recently won FDA approval to be marketed in the US as  “Makena,” exclusively for seven years by KV Pharmaceutical of St. Louis. FDA laws prohibit pharmacies from making FDA-approved products.  Now doctors are legally obligated to stop using cheaper versions of the drug. KV has announced a price hike on this long-used drug: from $20 to $1500 a shot.  And no, this is not a typo.

This is completely rational behavior from the standpoint of increasing share value.  A CEO who did not do this would become vulnerable to a group seeking to take over the company, oust current management, and then impose the price increase.

For obvious political reasons KV’s people are saying they will act to make Makena available to poor mothers.  But the only reason for the price hike is to extort as much money from families as the company believes the market will bear while not provoking a political backlash.  Middle class others and insurance companies will not be so fortunate.

The usual reasons pharmaceutical companies give for high prices do not hold water.  This treatment has been around since 1956, can be and has long been made by doctors using already existing pharmaceuticals, and the FDA’s tests on effectiveness were paid for by NIH, that is, by you and I.  As Dr. Kevin Ault, associate professor of gynecology and obstetrics at Emory University School of Medicine, observed, “All the upfront development of the drug was done by the National Institute of Health. You and I paid for that with our tax dollars, it’s not like this pharmaceutical company is trying to recoup its investments in research and development, as is usually the reason for the price of new drugs.”

Only a sociopath would create such a price hike in a substance whose sole reason for existence is to save the lives of babies, a person utterly without conscience or possibly with an ability to rationalize anything.  The price increase from $20 to $1500 guarantees serious sacrifices by many young families, at best a huge increase in insurance rates for programs covering pregnancies, and almost certainly an increase in miscarriages.  Many people will do without and hope for the best.  Sometimes the best will not happen.

Here is the interesting theoretical dilemma: market forces have generated powerful sociopathic organizations that have become the strongest financial forces in American society.  Dealing with them is a serious challenge to anyone arguing the virtues of the market. And if my interpretation of Hayekian reasoning is correct, the problem will get worse the more a market develops.

This is not an argument for replacing the market.  Not only has Hayek demonstrated this cannot wisely be done, if it were done it would strengthen the power of instrumental  organizations.  Clearly replacing the market is not a viable option.  On the other hand, a theoretical paradigm that cannot examine this problem clear headedly will be unable to address the tendency for emergent orders to generate forces with a powerful stake in bringing those orders under their control and turning a framework essential for liberty into a framework harboring a new and brutal kind of oppression.  To my mind what we need to explore is strengthening the role of civil society vis-a-vis the market order.  But that is largely unexplored territory.