An Ethical Dilemma

Suppose that you are a Pharmaceutical Exec and you are in charge of some medicine that could serve to alleviate suffering in millions of people in Africa, but there were huge R&D costs to get the medicine to market. Your company naturally has the patent for the new "art". Another company comes along and rips your product off and starts selling it in Africa at a deep discount to your price. You naturally have a high price to be compensate for the huge cost of drug commercialization.

You have little recourse, internationally, as there is not one world governing body that governs international patent law. You can take sue them over the issue, or you can allow them to do this and sacrifice millions of dollars that people would normally pay to gain access to the drug. Now, you, as a manager, are an agent of the shareholders and are obligated to act in their best interests, but you have other stakeholders such as your employees, customers, your community, etc. So, do you take action against this other company, knowing that if the legal gavel falls in favor of your side, assuming that the rule of law is institutionalized in the country (this institution is weak in many poor countries), people will die as their will be a certain segment of the population who will not be able to afford, or have access to the drug that would save their lives? That is, do you put your shareholders interests ahead of the thousands of people who will die as a result of your decision?

This is just to demonstrate that ethical decisions are not so black and white. Without the human dimension, the decision would be clear: if the cost to pursue effective recourse against them is less than the monetary value at stake, then do it. Else, do not. However, this decision impacts human lives.

There is the do nothing approach, which does nothing to serve the interests of the shareholders, but allows access to the drug to people who would otherwise be priced out of the market. Another option would be to pursue the drug company with a vengeance and not discount your product to allow for more access. An option that I prefer would be to take legal action, if it makes financial sense, and offer the drug at a discounted rate to the people in that market, which would serve the interests of the community in which we operate (Africa) and the shareholders.

These ethical decisions are not so black and white. There are many options and the key is to balance the interests of the stakeholders in such a way so as to maximize the good.

Do the Gains from Trade Offset the Losses?

I recently watched a film entitled, "Is Wal Mart good for America". As I watched this film, a comment made by a CATO institute economist resonated with me. He asserted that the gains from trade offset the losses. I couldn't help but think that this was a rather simplistic viewpoint. The types of jobs created by outsourcing would determine whether or not his claim was actually true.

I understand the CATO institute is a libertarian think-tank and any economist employed by CATO would be of the free market ideology. I also understand the theory that the excess consumer surplus in the pockets of Wal-Mart shoppers is either spent in other areas of the economy, or saved.

In the case of Wal-Mart, whether the consumers spend, or save, the consumer surplus would depend on the shoppers respective “Marginal Propensity to Consume” and “Marginal Propensity to Save”, which are figures that are driven by their incomes. That is, given the income level of WM’s shoppers, do they tend to save, when they save a buck, or do they tend to save it? If they spend it, then where do they spend it (i.e. which segment of the economy)? The multiplier effect varies throughout the economy depending on the type of expenditure.

It would be interesting to know a.) Whether these shoppers tend to spend more, or save more, of the consumer surplus yielded by shopping at Wal Mart, and b.) The types of expenditures this consumer surplus is yielding, if they do tend to consume more. This analysis could be very telling about whether the gains from trade do, in fact, offset the losses from trade.

Naturally, the market segment that WM targets are value shoppers and they will tend to stretch a dollar as far as it will go. So, I suspect that they would tend to spend their excess consumer surplus on low-wage sectors of the economy. It is well known that low wage workers spend a great deal of their consumption on goods in industries that also pay low wages.

On the other hand, if this market segment tends to save the alleged consumer surplus, then this would mean that more capital would be available for industrial expansion. One would think that because there is more capital available, if WM shoppers do indeed save the consumer surplus, business would invest in capital equipment, which would create jobs. However, there is another dimension at play here.

Just because the banks have more capital to lend doesn't mean that they will necessarily loan more money out. We saw this happen in the Great Depression. The capital that is available is a function of FED policy regarding the money supply. If the unemployment that is created by the outsourcing does not put the US economy over the Natural Rate of Unemployment, then the FED might not be very inclined to take any action. However, if it did edge us over the Natural Rate, then they could use the tools of the trade (i.e. open market operations, jawboning, reserve requirement, and the discount rate) to expand the money supply; thus making more capital expenditures more attractive to private industry, who would then presumably hire workers.

I suspect that with our knowledge economy a lot of the workers were laid off will lack sufficient training to be productive in this new economy. This structural adjustment is a problem, as on the fiscal side, we would need to allocate funding to retrain these workers in "new economy" skills. However, the current administration's policy has been to siphon funding from social programs to fund foreign policy initiatives and to stimulate investment a la "Trickle Down Economics".

While it is true that higher income Americans have a higher “Marginal Propensity to Save”, than the rest of us peasants, we can treat debt as dis-savings and since Americans, are in debt at all levels, this strategy didn't work. A good deal of the realized tax savings went to pay down individual debt; the majority of it was not invested.
An exogenous factor that may affect the banks’ willingness to loan out money for people to invest is inflation. If inflation is high, they will likely pull back on the money supply lever, by raising interest rates. So, now you have less funding available for industrial expansion, less money available from the gov’t (as they have re-directed funding to foreign policy initiatives), more people are out of work, and to make matters worse: the greenback doesn’t go as far as it did before.

The types of jobs that the untrained victims of globalization are likely to get are low skilled and in the service sector such as those in Wal-Mart, which doesn't pay very well and provide benefit programs that are out of reach of many of its employees. So, we are moving toward a two speed labor force.

In Robert Reich's "The Work of Nations", he argues that the structural transformations from national economies to those that are global in scope are rewarding skilled labor while relegating low skilled service workers to lower standards of living. So, it is no longer useful to think about competitiveness on a national scale; we need to take it to the individual level and make sure that we invest heavily in the education of our citizens so that we can compete in the new globalized market. One way to do this, in the short term, is to divert funds from the gains from trade, if they do in fact exist, to structural adjustment programs that retrain people to become more productive..