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RIP, MBA Part Deux!

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RIP, MBA Part Deux! [#permalink] New post 28 Mar 2009, 09:37
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If there is any "lesson" we can learn from the past 20+ years, it's that while free markets and self-interest can and will be important foundation, they are not enough. That is the biggest fallacy of the last era -- that free markets are the ONLY thing necessary to solve everything. Free markets are important, but not enough. It's important to look after your own backyard, but you can't simply ignore your neighbors and expect to have a well functioning neighborhood over the longer term.

The biggest problems we face and will face for the next 20+ years or so are:

Sustainability and climate change -- free markets alone can't solve an energy crisis. While business can be an important player in providing innovation and distribution, they aren't the ONLY player and will have to work in concert with governments and other non-business entities on this; it'll likely have to be a combination of business/enterpreneurship, government policy, subsidies, and publicly-funded research.

Education -- the last 20+ years has seen an utter deterioration of the US public school system. Private schools can be an important player in shaping our education system (both K-12 and college), but having a strong education system that is accessible to all people requires more than just free markets to sort itself out. A strong public school system that complements the private school markets is necessary and has been neglected for way too long.

Healthcare -- in the US, we have relied too much on supposed "free markets" to provide healthcare. And the system is broken. It's clear that the *quality* of healthcare is second-to-none in the US, but the biggest problem is access/affordability and bureaucracy (you'd think that a private system would create *less* paperwork and admin headaches, but having dealt with both the US and Canadian system firsthand both as a patient as well as an employer/administrator, dealing with HMOs is a far greater bureaucratic headache than dealing with the provincial government). Whatever happens, it doesn't look like free markets alone can provide quality *and* access -- there will need to be either a complementary public system, some sort of public subsidy, or more regulation (or some combo of all 3). We've seen that you can't leave it to the HMOs to maximize shareholder value and expect that the byproduct is a strong healthcare system.

Terrorism/Extremism -- as we've seen in the past 8 years, we can't deal with terrorism and extremism simply by invading countries, bombing them, and shooting people. The real war is won in the boring process of fostering a healthy economy. This is where business can have a HUGE impact. Trade and investment isn't just a trade in goods and services -- but an exchange in ideas. Guns and bombs may be necessary and important, but so are free markets and business. But neither alone is sufficient. Either way, we can't just leave people be and expect things to simply work.

Poverty -- again, foreign aid alone isn't the solution; business and free markets can really be a huge and vital player in lifting billions around the world out of poverty. But again it's just one of many things. In any developing country, the foundation that has to be there is a functioning education system, access to affordable healthcare (prevents disease), political/social stability (factions aren't killing one another), and sensible economic policy. None of these alone are enough - and they are all interrelated and feed on one another. But again we can't just say "free markets" and "every man for himself" and expect these countries to function. In addition to free markets, there needs to be responsible government - which has nothing to do with free markets.

One other thing about free markets. The absolute biggest fallacy that so many of us fell into in the last 20+ years is the idea of free markets itself.

Markets are efficient and effective and beautiful when there is perfect competition -- what that means is that you have a market where there is no market power - either on the demand or supply side. Lots of participants, and no one person or entity can move the market. The barriers to entry are basically zero. In this kind of situation, self-regulating free markets are ideal and efficient.

But most industries don't have perfect competition, because there are huge benefits to be reaped through economies of scale and scope. Most industries naturally evolve into oligopolies, duopolies, or monopolies -- structures that are ripe for abuse of power because you have market power concentrated in the hands of the few. What you do as a market player can move the market or even ruin the market. The barriers to entry are high. Look at financial services -- you can't just "start" a bank and compete with Citibank. The barriers to entry are high. The number of "players" are relatively low. One player (i.e. AIG) can sink the market. Same with healthcare -- there are economies of scale and scope to consolidating into gigantic HMOs and pharma companies, so that market power is concentrated in the hands of the few, and barriers to entry are high. Same with oil&gas, utilities, airlines, education, etc. - so many industries aren't truly competitive in the classic "perfect competition" that you'd see in Econ 101 textbooks. In this kind of environment, letting "free markets reign" leaves room for the potential for self-destruction because what one player can do can do damage to the entire market. Oligopolies, duopolies and monopolies create externalities, asymmetric information (there isn't equal access to info - again those with market power may have privileged information that the public may not know), and can lead to the rewarding of perverse incentives. The "market" then in all these industries can't simply be accountable to themselves -- they have to be accountable to the communities they do business in; they have to be accountable to the public because what they do affects the public.

Having worked on Wall Street before, this is where I found their argument for self-regulation to be laughable.

So I don't think it's a big deal that the "best and brightest" will go into a more diverse array of careers. That's a great thing. Because we need more than business/free market solutions to solve the above problems that will affect ALL of us. It's not just your problem, or my problem, but OUR problem.

If there's any lesson that we can learn from the past, it's to focus on working together, rather than pointing blame on one institution or another.

And business schools would be wise to really emphasize this - that businesses aren't "masters of the universe" but instead are an important player in a multilateral environment. It's no longer "what is good for business is automatically good for the world".
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Re: RIP, MBA [#permalink] New post 28 Mar 2009, 11:07
AlexMBAApply wrote:
Look at financial services -- you can't just "start" a bank and compete with Citibank. The barriers to entry are high. The number of "players" are relatively low. One player (i.e. AIG) can sink the market. Same with healthcare -- there are economies of scale and scope to consolidating into gigantic HMOs and pharma companies, so that market power is concentrated in the hands of the few, and barriers to entry are high. Same with oil&gas, utilities, airlines, education, etc. - so many industries aren't truly competitive in the classic "perfect competition" that you'd see in Econ 101 textbooks.


Gotta disagree with you there.

Right now big pharma is in the tank. It's the small guys, the ones with nothing but an idea and VC who are calling the shots.

Speaking of Canada, you've got Air Canada who has been bailed out by the gov't numerous times and still can't seem to make a profit. Then you've got Westjet, a small start-up company who came out of nowhere and is giving Air Canada a run for it's money and rewarding its shareholder and customers like no other airline.

If there is anything we still haven't learned is that you can't have gov't involvement in an specific sector, have it fail, and blame it on the "free market" when it was never free to begin with.

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Re: RIP, MBA [#permalink] New post 28 Mar 2009, 11:16
So will these VCs and small startups ALONE allow for affordable prescriptions to the millions of Americans who need them and, just as importantly, available to the billions around the world? Will the free market alone allow for enough money to fund cancer research? Will the free market alone allow for the funding of research to cure diseases that may not be "profitable" where such diseases are primarily clustered in developing countries? In any case, the major players aren't static (they will change over time -- look at the Dow components - the only one remaining that was around 50+ years ago to this day is GE). But barriers to entry are still high - yes, these startups may revolutionize the industry, but they aren't putting Pfizer or Merck out of business overnight. Maybe over a few years or a decade, but not overnight. And that time lag is enough for there to be oligopolistic behavior.

refurb, free markets are IMPORTANT, but not sufficient. If you truly believe that your own self-interest and the "market" will solve everything for you, I hope the property value of your house will not be affected by a nuclear power plant moving into your neighborhood. Because the only thing that matters is your own little house on the hill, right?

I wasn't saying that a public system or government intervention is all good -- but to categorically assume all of it is bad to fulfill some religious belief in the free markets as the solution to ALL your problems is precisely the kind of mentality that underpinned the crisis we're in in the first place.

My point about not throwing out the baby with the bath water applied to both free markets as well as public/government involvement. But it seems like you only agree with half of that so long as we cheerlead the free markets and poo poo anything that involves government.
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Re: RIP, MBA [#permalink] New post 28 Mar 2009, 12:10
AlexMBAApply wrote:
So will these VCs and small startups ALONE allow for affordable prescriptions to the millions of Americans who need them and, just as importantly, available to the billions around the world?


I guess my bone to pick is when people say "the market has failed". The free market does one thing, it allocates resources most efficiently. It does that better than any other system out there. It takes the dispersed knowledge that exists and, in the end, rewards the most efficient way of doing things.

So when someone says "the market failed to provide equal access to health care for all Americans" it sounds as silly to me as if someone said "my toaster failed to make me a good cup of coffee this morning."

So is gov't involvement necessary if we wish to achieve a certain social ideal? Yes. However, the gov't has time and time again treated the free market as the goose that lays the golden egg. The gov't sees the wealth the markets create and thinks "lets cut this thing open and use the gold eggs to pay for health care!!".

The result? An even worse situation than if the gov't had just left things alone.

So my argument is not that the market has failed, but that people have failed to understand the market.

For example, the big push to have every American buy a home could have been handled much better by just providing grants to people to help them buy a home, rather than providing incentives for riskier and riskier lending.

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Re: RIP, MBA Part Deux! [#permalink] New post 29 Mar 2009, 02:55
Refurb, if kudos still existed that post deserves a bunch of them.

One other point I'd like to make about affordable prescription drugs: there are plenty of affordable prescription drugs. I even saw that my local grocery's pharmacy dept is giving away antibiotics (obviously you need a prescription :wink: ). It doesn't get more affordable than that. However, innovation is expensive. The newest biotech drugs are incredibly complex and difficult to manufacture. Even for traditional pharmaceuticals the R&D and approval process is time consuming and extraordinarily expensive. On average, it costs about $1 billion these days to bring a drug to market. So yes, the latest and greatest therapies are very expensive, and rightfully so to encourage companies to take the risk of bringing new therapies to market. Just saying that 'we need more affordable prescription drugs' misses this complexity. It's like saying we need more affordable cars because Ferraris and Lamborghinis are too expensive for most people to afford.

Of course, prescription drugs are a bit more important to people's wellbeing than a new Ferrari (although I wouldn't mind evaluating exactly how a Ferrari could improve my well being), and I agree that the government should do what it can to make sure that people who can't afford these new therapies have access to the treatment they need without it bankrupting them. However, any approach that government takes to do this must not destroy the financial reward for creating new therapies - as price controls would do. Otherwise we run a huge risk of stifling innovation, which in the long run would make us all worse off.
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Re: RIP, MBA [#permalink] New post 29 Mar 2009, 21:25
Here in Australia, the government did provide grants - the result ? House prices artificially inflated. Having said that I fully agree with your post refurb. +1


refurb wrote:
For example, the big push to have every American buy a home could have been handled much better by just providing grants to people to help them buy a home, rather than providing incentives for riskier and riskier lending.

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Re: RIP, MBA Part Deux! [#permalink] New post 30 Mar 2009, 09:14
Alex,

I'm going to have to disagree with a lot of what you said in your post, especially as it relates to each of the policy/industry areas you mentioned. Although, I have to first ask one question, what is the one thing each of the areas you mentioned have in common? Answer: heavy government intervention through either regulation or supervision. I would argue that the free market would do a much better job of allocating the resources necessary for those industries to thrive, but the problem is they most likely will not achieve the social goals that politicians have set for them. I mean lets be honest, government and business have very conflicting ideas in each of the areas you mentioned.

Let's first look at the monoply that is public education: government doesn't aim to provide the best education possible to its population, it serves to provide a base level of education that serves the basic needs of everyone. It competes with no one and therefore is less innovative and more expensive than if education were left to the free market. In the instance of public schools, I believe allowing private and charter schools to compete for parents' tax dollars would be a much better system for holding schools and teachers accountable, especially for schools in high minority neighborhoods that need help the most. That's what the free market does, it produces a better product by weeding out the weakest schools and teachers. Giving children vouchers to attend private schools is just one way this is being done, but we need much, much more if we ever want to make a difference. But, at the same time the teachers unions' and other government beauracracies fight ANY challenges to the status quo, and are by far the main obstacle to any sort of functional education system in this country.

How about healthcare? How much does government interfere in free markets to advance social policies? Why do I have to buy mental health coverage and maternity coverage if I want a simple medical plan? Why do I need Substance Abuse coverage? I don't want to pay for these coverages because I will never use them, but state mandates require them in any healthplan. How much cheaper might health insurance be if I could only pay for the coverages that I feel are necessary for my situation? What if I could buy coverage across state lines, much like I can a 529 plan? Also, the other problem with healthcare is that government wants to make it free to accomplish its social goals, which further complicates things and makes a free market solution impossible. The free market, if left alone, would gladly allocate the resources in such a way that health insurance could be affordable to everyone, but unfortunately for us, this solution would conflict with political goals and therefore will never be a realty.

Finally, let's talk about poverty. There are two things that any society requires to become a major economy, 1. political stability/enforcement of private property rights and 2. a market based economy for allocating goods and services. If there needed to be a 2b, I would say that an abundance of natural resources would also help. I would argue that an education system and affordable healthcare are by products and not necessary for a country to grow economicaly. I mean look at the US up until the 1960s...we didn't have what you might call 'affordable healthcare' and we were growing just fine (I would argue that public health costs are actually stunting our growth). What is much more important is the rule of law and enforcement of private contracts that will allow outside capital to be invested in your country and will do more to raise your people out of poverty than any social program the government can produce. This might result in the so-called rich getting richer, but it is also that a rising tide raises all ships.

Anyway, to sum up it up, I would argue that government disrupts markets much more than it helps and skews incentives and rewards in an inefficient manner. There is also the law of unintended consequences when government begins to change the carrots and the sticks, which more often than not costs ALL OF US more money.
Re: RIP, MBA Part Deux!   [#permalink] 30 Mar 2009, 09:14
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