Corporations want to profit from the world’s problems – here’s how they can solve them instead
There’s a good chance that you would like to see COVID disappear for good. And you may also wish for an end to the war in Ukraine – or any other war for that matter.
But would you feel the same way if you were the head of a big pharmaceutical corporation which has seen a massive surge in profits over the last couple of years? Or if you ran a company which manufactures weapons?
For these industries, a pandemic or a war might be considered a time of clear economic opportunity, when it would make no sense for them to work towards ending a particular illness or conflict. They have no motivation or incentive to do so.
But this creates a serious problem. How does society as a whole tackle major issues when the people with the power to do something are economically motivated to do nothing?
Take COVID for example, and the massive profits made by the pharmaceutical firms which succeeded in coming up with effective vaccines. Arguably the best economic scenario for them is to keep selling booster shots for billions of people around the world for years to come.
Of course, that doesn’t really work for the rest of us. But our research shows why many industries thrive on the fact that problems are more profitable than solutions.
The idea that corporations are not always motivated to seek solutions which are in wider society’s best interests is something we call the “paradox of incentives”. This refers to when corporate structures are more favourably aligned with the world’s biggest problems than with finding answers.
In fact, think of any serious issue facing the world, and there is likely to be a corporation, or a group of powerful people, who benefit from its existence. The paradox of incentives can be seen in everything from the staggering profits of the oil sector as climate change accelerates, to gun lobbies preventing reforms restricting access to weapons, and increasing house prices benefiting property investors and developers over buyers.
Another example is weapon manufacturers, which make astronomical profits during a conflict. Increased demand allows these firms to charge high prices and make more money.
The Russian invasion of Ukraine, which has had a negative economic impact on millions around the world, has led to record profits for some of the biggest corporations in the defence and energy sectors. One of the world’s biggest problems has led to some major profits being made.
The case of COVID
Our research into the actions of big pharma during the pandemic, highlights the negative effects of this approach on society. But it also gave us some hints on how things might be improved.
To begin with, we found that there should be a limit to the rewards given to CEOs and executives who often receive large salaries and bonuses directly tied to a firm’s profits. Such financial incentives motivate leaders to make decisions that generate greater profits for their firms rather than advancing public interest.
There also needs to be much greater transparency when it comes to how governments subsidise research that leads to new medicines and vaccines, and making this kind of taxpayer-funded knowledge more accessible and available.
If pharmaceutical companies became more open in this way, firms in developing countries would be able to manufacture similar products at significantly lower cost for some of the poorest populations in the world.
At a global level, there should be efforts towards an international agreement (it does occasionally happen) to offer significant rewards to firms which fast-track innovations for a more enduring treatment for COVID.
For while there may be significant benefits for the company which finds a cure (or a one-off vaccine), the overwhelming effect of the paradox of incentives in the pharmaceutical industry means more needs to be done to counter it.
More broadly, to resolve the universal and detrimental impact of this paradox of incentives, an even bigger shake up of capitalism is required. The arms trade needs to be deescalated through global treaties to the point that it no longer exists, while the world’s natural resources should be widely shared and treated as common global assets.
For the time being though, we should at least try and become more aware of how the paradox of incentives affects all of our lives. The next time you test positive for COVID, or despair at the missiles being launched in Ukraine, or worry about your next gas bill, remember that not everyone sees these incidents as problems that need to be fixed. Your problem equals someone else’s profit – and until that changes, the world’s biggest challenges will remain unresolved.
Jagannadha Pawan Tamvada is affiliated with the Council for Inclusive Capitalism and the India Centre for Inclusive Growth and Sustainable Development at the University of Southampton.
Rashedur Chowdhury does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.