Ex-hedge funder turned pharma CEO Martin Shkreli made headlines last month when his fledgling company, Turing Pharmaceuticals, purchased the rights to AIDS drug Daraprim and hiked its price over 5000%. Shkreli defended his move among outcries of price gouging and exploitation, concerns that even garnered a tweet from Hillary Clinton. He’s even recently been outed on Tinder when one of his matches conducted an impromptu interview with him about his thoughts on the evils of capitalism. Attempting to manage public opinion, Shkreli stated publicly that Turing would lower the drug price. Weeks later, such promises appear unfulfilled.
A heated exchange between CNBC’s Brian Sullivan and Shkreli gives us insights into Turing’s approach. It also reveals a basic truth about markets that Shkreli lets slip, almost as an aside. Watch the exchange here:
Sullivan begins by asking whether Shkreli is a “free markets gentleman,” to which Shkreli chuckles in response, “Sure, whatever that means.” We sense that Sullivan's broad and vague category here is going to lead to some equally vague claim to universal truth, and Shkreli is understandably uncomfortable. Sullivan goes on to inquire about the dynamics of drug pricing and what the market "said" was the "right" price. Shkreli retorts, while Sullivan talks over him, “markets aren’t that rational.”
Shkreli unintentionally reveals a true statement about the constructed nature of markets. By this I mean that humans make markets (in conjunction with other forces like money and states, of course). Markets don’t pop up in nature like cloud formations or function according to a stable, linear logic.
This simplistic belief is revealed in the silliness of Sullivan’s question to Shkreli about pricing the drug. The assumption is that if a previous owner of the drug priced it at around $13.50, this reveals some inherent law of markets that this is the “true” or “real” cost of the drug.
The implication is that a simple formula of supply and demand, and calculation of production costs, should yield a fixed truth. Shkreli, as a “free markets gentleman,” should apparently abide by this truth. That Shkreli didn’t and that he scoffs at the idea reveals his insights into the operation of markets, operations that “aren’t that rational.”
In reality, pricing is influenced by a variety of factors called “real life” that economics tries to filter out. These issues include emotional attachment and desire, future hope and expectation, and simple opportunity. Prices are influenced by practical material factors like cost of production, to be sure. But, at the end of the day, prices are set by humans with a host of very real human needs, desires, and dreams.
The public outcry and demand for a price change of the drug shows that markets include a broad scope of human wishes and longings. Economics would have us believe these claims are somehow illegitimate: the sense of injustice and demand for a better price is seen as something external to the truth of markets.
Thus, exploring the so-called irrational exuberance in markets has been framed as making sense of the surprising (from economics’ perspective) persistence of humanity in markets. Such human forces or “animal spirits” appear to challenge the simplistic assumption of fixed rationality in markets.
At best, for economics, calls to reduce Turing's drug price need to be defended with “real” economic arguments about the “true” price of the drug. In reality, however, public demands and desires for a better price are central factors for making this exchange happen. Much economic blindness to these human factors leads to absurdities like thinking a “true” price of a commodity magically and spontaneously emerges in a market.
If Shkreli changes the price of the drug, this will show that markets are made by more than simple economic factors. Public opinion, i.e., the desires of the exchanging community, matters greatly in the economy. Calls for fair and compassionate pricing are perfectly legitimate considerations for determining price, and have as much place in market considerations as material factors like production costs.
Again, markets are created by humans for humans, with all the messiness and complexity that this entails. If Shkreli keeps the price the same, this will merely show that his will and desires trump and override the desires of the community, not that some inherent law or rationality of the market has won out. In other words, it won’t be some victory for “pure” economics.