New Year, New Market

For more than 70 years, the sale of marijuana for recreational use has been criminally prohibited in the United States. But the ban, as it has existed for decades, ended the first day of 2014 in Colorado.
Voters in Washington state also approved recreational marijuana but the state's recreational marijuana shops are expected to open later in the year.
Uruguay also became the first country in the world to create a legal, regulated marijuana market for adults in 2013.

Price discrimination

The virtues of disclosure

For years, pharma firms have paid doctors to speak on behalf of their products at professional conferences and meetings, in the understanding that it is potent tool to persuade doctors. For years, this practice has been criticized on the grounds that it unduly influences the information doctors give each other and the possibility of prescribing drugs inappropriately (or for the wrong reasons). But the practice was and is legal. Now, with the Obama administration’s health care law, such practices and payments by pharmaceutical companies must be made public next year. And apparently that has made Glaxo announce, this week, that by 2016, they will no longer pay health care professionals to speak on its behalf “to audiences who can prescribe or influence prescribing.” Glaxo will no longer provide direct financial support to doctors to attend medical conferences, a practice that is prohibited in the United States (through an industry-based ethics code) but still allowed in other countries. According to the NYT's report (here), a handful of drug makers are adopting similar actions for several reasons, "including concerns about the reaction to the required disclosure of such payments that will begin next fall under a provision of the health care law."
Glaxo also announced it will extend its new integrity initiatives to its global business: for example, beginning in 2015, it will no longer compensate sales representatives based on the number of prescriptions doctors write. Instead, its sales representatives worldwide would be paid based on their technical knowledge, the quality of service they provided to clients, and the company’s business performance.
These initiatives may help improving the relationships between pharma firms as physicians. Dr. Raed Dweik, the new chairman of the conflict of interest committee at the Cleveland Clinic is quoted saying that he, as a physician, often meet with the pharma firm's sales reps and that they come in armed with information about he that he does not even know, like the number of prescriptions he has written for the drug company’s product: “I feel that’s not really a comfortable interaction to have.”
My colleagues, however, are not so confident about the potential of disclosure requirements. You can check the work by Daylian Cain about how disclosure helps conflicted advisors and harms their advisees. For example, he found that advisors feel comfortable giving more biased advice, but advisees do not properly adjust for this and so fail to discount biased advice (here).

Moral virtues make the difference

Many things have been said about Mandela during the last week. One of the pieces I really liked was the one written by journalist John Carlin (here). His central thesis is that defining characteristic of Nelson Mandela, about and beyond his actions, was a crucial feature of his personality. As Carlin puts it, “The thing about Mandela,” he said, “is that you can’t see the cracks.”
Technically, we call that moral integrity. And the whole article is providing evidence in support of the claim that Mandela was a man of integrity. Those who believe that virtues do not exist, that situations rule our behavior, should read this piece and try to find a compelling explanation for why Mandela did what he did without appealing to his personality. They will have a hard time. 

Pope Francis teaches business ethics

Yesterday, Pope Francis released his “Evangelii Gaudium” (the Joy of the Gospel), an apostolic exhortation (which is less authoritative than an encyclical, but an important statement). The document is, above all, an ethics piece. And it has a lot of overlap with our course contents, especially with the justification of capitalism, the purpose of business firms, and the dangers of moral relativism. Here are some of key quotes from “Evangelii Gaudium”:

On moral relativism:
"As the bishops of the United States of America have rightly pointed out, while the Church insists on the existence of objective moral norms which are valid for everyone, ‘there are those in our culture who portray this teaching as unjust, that is, as opposed to basic human rights. Such claims usually follow from a form of moral relativism that is joined, not without inconsistency, to a belief in the absolute rights of individuals. In this view, the Church is perceived as promoting a particular prejudice and as interfering with individual freedom’. We are living in an information-driven society which bombards us indiscriminately with data – all treated as being of equal importance – and which leads to remarkable superficiality in the area of moral discernment. In response, we need to provide an education which teaches critical thinking and encourages the development of mature moral values."

On inequality:
"How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses two points? This is a case of exclusion. Can we continue to stand by when food is thrown away while people are starving? This is a case of inequality. Today everything comes under the laws of competition and the survival of the fittest, where the powerful feed upon the powerless. As a consequence, masses of people find themselves excluded and marginalized: without work, without possibilities, without any means of escape."

On libertarianism:
"In this context, some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system."

On financial markets:
"While the earnings of a minority are growing exponentially, so too is the gap separating the majority from the prosperity enjoyed by those happy few. This imbalance is the result of ideologies which defend the absolute autonomy of the marketplace and financial speculation. Consequently, they reject the right of states, charged with vigilance for the common good, to exercise any form of control. A new tyranny is thus born, invisible and often virtual, which unilaterally and relentlessly imposes its own laws and rules.

On the rule of market:
"In this system, which tends to devour everything which stands in the way of increased profits, whatever is fragile, like the environment, is defenseless before the interests of a deified market, which become the only rule."

On state regulation:
"A financial reform open to such ethical considerations would require a vigorous change of approach on the part of political leaders. I urge them to face this challenge with determination and an eye to the future, while not ignoring, of course, the specifics of each case. Money must serve, not rule! The Pope loves everyone, rich and poor alike, but he is obliged in the name of Christ to remind all that the rich must help, respect and promote the poor."

Halloween and Insider Trading

It does not fail. Each time I teach insider trading there is a piece by a libertarian intended to show why it is harmless and hence should not be made illegal. This op-ed by Tim Harford (The Undercover Economist) appeared in the Financial Times last week: What’s so scary about insider trading?

"It was Halloween on Thursday, so let’s meet a frightening ghoul who haunts our financial markets: the insider trader. The Halloween metaphor is not mine but that of economist Donald Boudreaux, who asks if the insider trader is a genuinely dangerous monster or a comical apparition in a fright mask, fit only for the scaring of children."

This is a summary of the reasons why insider trading should not be illegal according to Prof. Boudreaux:

1. despite intensive monitoring, it’s hard to detect and even harder to prove. People with inside information can profit by not taking action and that is undetectable.
2. market prices are supposed to reflect all available information, the better to allocate capital and insider trades simply accelerate the process. 
3. insider trading is a crime without a victim

Some arguments in favor of banning insider trading are more compelling, though. Take a look at Prof. Strudler's piece on the law of insider trading (click here).

Honesty and honest behavior

The Financial Times is inadvertently endorsing virtue ethics in business (at least today). The "excuse" is the failure of the Co-operative Group in the UK. The bank is announcing a restructuring. The restructured company’s articles of association will include a commitment to moral behavior. The justification, in the end, is that honesty is the best policy. But the FT reporter (here) is skeptical about it. He writes:
"The slogan that good business is profitable business is superficial – an attempt to make moral dilemmas dissolve in a warm bath of goodwill. When the right thing to do is also in your own self interest, you do not need advice from philosophers and theologians. Ethics are about what to do when good behaviour and profitable business are not necessarily the same thing."
And then he goes to make a difference between honesty and honest behavior:
"the difference between the honest man and the man for whom honesty is the best policy. When you deal with the man for whom honesty is the best policy, you never know when it might be the occasion on which honesty is no longer the best policy. Bankers, not bishops, deliver lectures extolling their own personal integrity; the man who repeatedly reminds us how honest he is rarely acquires, or deserves, our trust. The integrity we value is a personal or organisational characteristic, not a business strategy."
So, he concludes, "if honesty is the best policy then the best policy is to be honest from conviction."