The pandemic is showing us how capitalism is amazing, and inadequate

The bananas news cycle of November 2020 included a fascinating public spat that is essential for understanding modern capitalism.

After Pfizer announced highly successful preliminary results for its coronavirus vaccine, Trump administration officials said the good news reflected the success of their Operation Warp Speed program to accelerate vaccine development. Pfizer executives stressed the opposite, noting the company had developed the vaccine with its own resources, not government grants.

That was true, but not the whole story. Over the summer, Pfizer had reached a $1.95 billion “advance purchase” agreement with the U.S. government, ensuring it would be well compensated for eventually delivering 100 million doses of vaccine. In other words, though the government did not directly fund the drug development, it created the groundwork in which the pharmaceutical company could spend research dollars with abandon, knowing that success would be financially rewarded.

It may seem like a trivial case of a company and an administration each claiming credit for some happy news. But it speaks to a deeper reality the pandemic has revealed — both what is amazing about capitalism, and how the free market alone comes up short in solving enormous problems.

The nine months of the pandemic have shown that in a modern state, capitalism can save the day — but only when the government exercises its power to guide the economy and act as the ultimate absorber of risk. The lesson of Covid capitalism is that big business needs big government, and vice versa.

With astonishing nimbleness and speed, businesses in the United States and worldwide have accomplished remarkable feats — most notably the biotechnology and pharmaceutical companies trying to fight the virus. But the list includes other important achievements: keeping grocery store shelves stocked even as much of the capacity to process and distribute food was disrupted, and redeploying factories to make ventilators and personal protective equipment.

In many cities, when a sudden rainstorm arrives, street vendors of cheap umbrellas will appear as if out of nowhere, driven not by some central authority but responding to the invisible hand of the marketplace. If you substitute masks for umbrellas, and substitute apparel companies for street hawkers, you have a fair description of the magic of the marketplace in 2020.

But those private-sector achievements have been matched by efforts on a scale that only the public sector can manage — to channel resources to places most in need and to protect the economy from huge risk.

Operation Warp Speed has used a mix of financial incentives to coax the private sector to invest in vaccine development on a scale and at a speed it couldn’t have on its own. Congress enacted legislation to support millions of small businesses, many of which would have closed otherwise, and funneled money to ordinary Americans to help prevent a collapse in spending. The Federal Reserve announced it would stand ready to buy hundreds of billions of dollars in bonds and other assets, ensuring that large companies would have access to capital even amid a market collapse.

Big business and big government both play vital roles in making the modern economy work. The pandemic has showed how these two can’t really be disentangled — they rely on each other more than partisans may care to acknowledge.

Feeding the Country

Seven months ago, although it now seems seven years ago, Tyson Foods placed a full-page advertisement in major newspapers with a dire warning.

“The food supply chain is breaking,” the chairman, John H. Tyson, wrote. “We have a responsibility to feed our country. It is as essential as health care.”

A series of coronavirus outbreaks in meatpacking facilities was leading to shutdowns and other disruptions. With some pork processing plants closed, millions of pigs on farms grew too big to be slaughtered and processed in the equipment used to produce the nation’s supplies of pork chops and sausages. Many were euthanized instead.

But the remarkable thing is that, despite Tyson’s warnings, the food supply chain mostly remained intact. There were occasional scattered shortages of pork or other meats, but mostly the market worked.

Prices rose, as Economics 101 would predict. From March to June, the retail price of pork chops rose 21%, and the price of fresh whole chickens rose 9%. Higher prices led consumers to seek alternatives to the foods in short supply, and producers and supply chain managers worked overtime to ensure any shortages were short-lived. Restaurant suppliers reoriented their businesses to sell to home cooks at a time their normal customers were closed.

Although grocery stores had some empty shelves, there were no widespread food shortages. And while many food prices were higher than before the pandemic, they have since moderated. Pork chops are now only 7% above March levels, and fresh whole chickens are up 3%.

“People assume you press a button and things show up, that when you go to a grocery store food magically appears,” said Nada Sanders, a professor of supply chain management at Northeastern University. “It’s much more complicated. There has been a sense of absolute urgency in making sure products are there.”

People involved in the food supply chain don’t mess around; they are aware that humanity depends on them for sustenance. But the effort wasn’t confined to food.

“How many distilleries do we know that stopped producing their high-margin items like vodka, and began converting to produce hand sanitizer, which is a low-margin item?” Sanders said. “There was a reshuffling of supply chains across the economy to respond urgently to what consumers wanted and needed.”

The metaphorical umbrellas arrived when Americans needed them most. But nowhere is that more apparent than in the remarkable mobilization to find treatments and vaccines for Covid-19.

The Importance of Patents

“A billion dollars is not going to break us,” Albert Bourla, the chief executive of Pfizer, was quoted as saying in a profile published in May. The company, with its $179 billion balance sheet, could deploy that much toward trying to create a vaccine without fear that failure would doom it.

Deep pockets were one key to the rapid escalation of efforts to fight the virus, which over a mere few weeks went from unknown to a profound threat to lives worldwide and to the global economy.

“We’ve watched physicians, scientists and technologists completely step up to the charge here and promote information sharing, promote good practices, promote messaging around what’s effective, what’s safe, and what’s possible,” said Rena Conti, who studies the pharmaceutical industry at Boston University's Questrom School of Business.

But the ability of big pharmaceutical and biotechnology companies to develop new drugs and bring them to market — at possibly record speed in the case of Covid vaccines — is not just about money. These companies have deep expertise and the ability to channel the efforts of thousands of workers with specialized skills.

A lone genius or a handful of medical researchers working in a lab can come up with an idea for a molecule that might form the basis of a helpful drug. But it takes a cast of thousands — typically employees or contractors of a large pharmaceutical company — to get that drug through multiple rounds of clinical trials, to crunch the data to prove it will work and be safe to the satisfaction of regulators, and to manufacture the product and distribute it onto pharmacists’ shelves.

“The standards are so high by design,” said Stacie Dusetzina, a professor of health policy at Vanderbilt University Medical Center. “Redundancies are built into the system that require an incredibly high level of oversight and making sure everything is absolutely as clean as possible so that when you get the final answer about whether or not the drug has met safety and efficacy goals, you feel rock solid about that.”

The achievements of such industries at combating the virus make it easy to forget all the ways that their efforts rely on work by a powerful government.

The bedrock of the pharmaceutical industry, for example, is patent protection. Companies are willing to invest billions developing a drug because the federal government will grant them 20 years of exclusive ownership. (The actual length of the company’s monopoly on the drug varies depending on the time lags for FDA approval.)

The FDA also grants periods of exclusivity to companies that develop a new drug. While its approval process can be onerous, it helps the pharmaceutical industry as well — by assuring doctors and ordinary Americans that an approved drug is safe.

Moreover, innovation itself rests heavily on basic research in biology and chemistry, for which there is not a similar profit incentive. Pfizer’s vaccine is based on insights into chemistry and molecular biology developed in government and university labs worldwide over a long period of time.

“No pharmaceutical company would have the incentive to do the basic scientific discovery, because it’s not patentable,” said Amitabh Chandra, a health economist at Harvard. “A lot of basic science is not profitable. It’s just knowledge. At some point basic science becomes useful, and then the private sector can come in. But who’s going to unlock the fact that there is a 3D printer in the cell called a ribosome, or a naturally occurring messenger RNA that is read by the ribosome to produce another protein?” he said, describing the mechanism by which the Pfizer vaccine works.

He estimates that the coronavirus crisis has cost the United States at least $16 trillion in terms of lost lives, lost quality of life, and lost economic activity. If a pandemic happens even once a century, spending something like $160 billion a year in basic research to prevent it could be justified. The National Institutes of Health budget, devoted to medical research of all types, is about a quarter of that.

The private sector’s capacity to develop innovative drugs is not necessarily something that happens because bold executives manage their companies better than the less commercially minded public sector.

Rather, in the United States and Europe, the progress toward virus treatment and prevention reflects an interlocking set of institutions: from the state, funding for basic research, patent enforcement and safety regulation; and from industry, the ability to turn raw ideas into a marketable product.

To get safe and effective drugs, it takes both.

Government Intervention

Supply chain managers in the auto industry take their responsibilities seriously. One supplier’s inability to deliver a crucial part can stop an entire assembly line and cause millions of dollars in losses to the “original equipment” manufacturers, as industry insiders call carmakers.

“It is a mortal sin to shut down an OE, and the supply base has been hardened to that,” said Jeoff Burris, an auto industry supply chain consultant based in Plymouth, Michigan. “No expense is spared to keep that from happening.”

Once when a hurricane prevented trucks from getting to a supplier's factory, he said, his clients rented helicopters to ferry workers in — and auto parts out — rather than risk a shutdown of the main assembly line. But helicopters can’t help if the suppliers go out of business entirely. And for a few scary months this year, that appeared possible in the automobile supply chain.

Sales of cars and trucks plunged in March and April, as Americans stayed home. Automakers slowed or ceased production. There was a real risk, Burris said, that some of their suppliers — smaller companies without big cushions of cash — would shutter permanently and blow a hole in auto production. That’s what happened in the 2008-09 recession.

It didn’t happen this time. A big part of why: the Paycheck Protection Program, included in the huge Covid aid package passed by Congress and the Trump administration in March, which provided forgivable loans to companies that kept their doors open.

“In 2008 and 2009, parts stopped showing up at the plant, and it turned out the factory was padlocked,” Burris said. “Those stories have not existed this time, and to me a big reason for that is the government intervention. And I’m not a fan of government intervention, so I don’t like to say that.”

Ultimately, there are profound society-wide risks for which only the collective action of the state can provide a form of insurance. After the Sept. 11 terrorist attacks, for example, private insurers would not write terrorism insurance policies to owners of commercial buildings for practically any price; the government stepped in and provided it. In the 2008 financial crisis, the collapse of the banking system created the risk of a broader economic collapse, and so the government stepped in.

That is the role the government has played in the pandemic as well. It’s certainly true of public health: Federal power and money are being used to ensure that vaccines are widely available. It is true in the PPP small-business program, and in programs for ordinary Americans.

“We say private people can make provisions, but a lot of risks are too big to insure against privately,” said J.W. Mason, an economist with John Jay College and the Roosevelt Institute. “There are risks in the world we can’t adapt to, make some transaction to insulate ourselves from, and that is where the state steps in.”

He has written about the economics of World War II, when a huge mobilization of private industry created a formidable war machine that defeated the Axis powers. One can celebrate the work of private companies that achieved new heights of innovation and productivity to supply the military in that era. But industry succeeded only because the government deployed its power and resources to, in effect, provide Americans with insurance against a world dominated by Nazis.

When big risks appear on the horizon, whether it is a pandemic or a global security threat, it can bring out the best in private industry, worthy of celebration and applause. But the history, both distant and contemporary, shows that business can’t do it alone.