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POINT/COUNTERPOINT

What exactly IS Martin Shkreli?

Lawrence A. Plummer a, J. Robert Mitchell a, Jeffery S. McMullen b,*

a Ivey Business School, Western University, London, ON N6G 0N1, CanadabKelley School of Business, Indiana University, 1309 E. Tenth Street, Bloomington, IN 47405-1701, U.S.A.

Business Horizons (2016) xxx, xxx—xxx

Available online at www.sciencedirect.com

ScienceDirectwww.elsevier.com/locate/bushor

POINTMartin Shkreli is many things, but he is not an

entrepreneur(Plummer & Mitchell)

Martin Shkreli, the founder of Retrophin and former CEOof Turing Pharmaceuticals, has been scorned byjournalists and policymakers for what widely is seen as areprehensible act of price gouging, the likes of whichhas rarely been seen in American business. For hisefforts, Mr. Shkreli has been called arrogant, brash, evil,greedy, haughty, supercilious, and. . .entrepreneur.

While he may rightly deserve most of these labels, hedoes not deserve the title of entrepreneur. In our eyes,entrepreneurs create new value, and Mr. Shkreli’sactions–—specifically, buying the rights to older drugs,adding or changing nothing, and hiking up their pricesexorbitantly–—do not qualify.

Entrepreneurs create new value through creativity,ingenuity, innovation, novelty, problem solving, andpersistence. While some of the value created byentrepreneurs takes the form of private returns theyand their investors receive, it also exists in the newproducts, services, innovations, ways of doing business,and jobs entrepreneurs create. Our view ofentrepreneurship embraces its many and varied forms,but also provides a level of clarity in the case ofMr. Shkreli. For starters, price gouging is notentrepreneurship because it does not create new value.

COUNTERPOINTMartin Shkreli is an entrepreneur, albeit an

immoral one(McMullen)

Professors Plummer and Mitchell make an interesting caseagainst the media’s depiction of Martin Shkreli as anentrepreneur. But morally despicable as his actions maybe and as much as I would like to disassociate him fromanything related to entrepreneurship, it is simply notpossible given an understanding of entrepreneurship asthe creation of new value.

Profit is not possible without the creation of new value. Torealize a profit, a voluntary exchange must occur:someone must offer a good or service to someone elsewho is willing and able to pay the offering price. Whetherthis transaction is performed once or repeatedly, isreflective of monopoly conditions or conditions closer to acompetitive market, is new to everyone in the world or toa single stakeholder, is socially desirable (e.g., productinnovation) or socially undesirable (e.g., rent-seeking,black market), or is conducted in good faith or underfraudulent circumstances–—all are qualifications of thisfundamental tenet. Thus, when initiating a transaction,one is of the genus entrepreneur, but his/her species islikely to vary in accordance with these qualifications.

Understanding this premise is essential for understandingwhy Martin Shkreli is indeed an entrepreneur, whyacknowledging this fact is fundamental to preventingmisguided public policy, and why it is important if we are

* Corresponding authorE-mail address: bushor@indiana.edu (J.S. McMullen)

0007-6813/$ — see front matter # 2016 Kelley School of Business, Indiana University. Published by Elsevier Inc. All rights reserved.http://dx.doi.org/10.1016/j.bushor.2016.09.011

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To be clear: We’re not saying that Martin Shkreli is not anentrepreneur because he is someone we cannot admireor because his avarice scales the heights. Instead, weare saying that Mr. Shkreli is not an entrepreneurbecause his actions are not entrepreneurial for at leasttwo reasons.

First: Shkreli may have started a company, but hecreated nothing, innovated nothing, offered nothingnew, and solved nothing. Instead, he repriced existingproducts to extort the value created by others–—theoriginal innovators of the drugs–—at the expense ofpatients who needed these drugs, the insurancecompanies that paid for them, and other insurancecustomers who will probably end up paying higherpremiums as a result of Mr. Shkreli’s actions. From thispoint of view, Mr. Shkreli seems to be a rent-seeker:someone who seeks to acquire personal wealth withoutcreating new wealth.

Second: The fact that patients paid exorbitantly higherprices for the same drugs neither implies that themarket undervalued the drugs nor suggests thatMr. Shkreli’s actions had an equilibrating effect on themarket, a key economic function often attributed toentrepreneurs. Rather, the fact that patients paid theinflated prices simply reflects Shkreli’s manipulation ofa highly inelastic demand for monopolizedpharmaceutical products. This brings up a significantalbeit theoretical point: Scholars such as Frank Knighthave long described entrepreneurs as the bearers ofuncertainty. In our interpretation, Mr. Shkreli facedlittle uncertainty because he knew that those desperatefor their treatments would certainly accept much higherprices.

While some may question why we refuse to label Mr.Shkreli’s actions as entrepreneurial, we argue that thedistinction is important because in the public sphere ithas become increasingly common to celebrate theachievements of entrepreneurs and to encourage othersto follow suit. Indeed, millennials may well be the mostentrepreneurial-minded generation ever, but whom dowe want them to emulate?

More to the point: As legal experts, policymakers,educators, and the court of public opinion struggle withwhat to do about Mr. Shkreli and others like him, thequestion of who is not an entrepreneur becomes crucial.For example, how we classify the likes of Mr. Shkreli haspolicy implications. Explicitly excluding him from theranks of entrepreneurs could help Congress enactpolicies intended to target the specific type of pricegouging Mr. Shkreli wrought, without affecting the manypaths to truly innovative and value-creatingentrepreneurship. Conversely, if we continue to identifyMr. Shkreli as an entrepreneur, any debates regarding hisactions will be misleading, raising the risk of policiesbeing enacted that impede–—albeit unintentionally–—theforms of entrepreneurship we should encourage.

going to encourage students and practitioners todiscriminate between moral and immoral entrepreneurialbehavior.

The creation of new value does not necessarily ensurethat value is created for parties beyond the transaction.Unless encouraged by legal and social institutions,entrepreneurs may chase profit through rent-seeking orcrime as opposed to product innovation. All threebehaviors break norms, are therefore innovative, andincur different social consequences for violating thestatus quo. For instance, product innovation breaks withconvention to reveal the value of new knowledge suchthat entrepreneurs are declared brilliant when successfuland foolish otherwise. Slightly more socially deviant isrent-seeking, which is often considered unethical and issocially shunned as a result. Finally, crime is the mostsocially deviant of the three; it is declared illegal andoften punished through restrictions on life, liberty, orproperty. All three behaviors break rules to seek profitthrough the provision of goods or services that others maybe willing and able to pay for. Consequently, each involvesinnovation and uncertainty bearing, but it is the normbeing violated–—as opposed to any substantive differencein the behavior itself–—that determines the socialundesirability of the new value they create.

To further confuse matters, categorization of new valuecreation can be fluid over time. What once was consideredsimply unethical can become illegal at one extreme orsocially endorsed at the other. For example, the servicesthat led to Arthur Andersen’s demise were unethical butnot illegal at the time; that has since changed. At theother extreme, marijuana sales in Colorado went fromillegal to legal almost instantaneously following asuccessful public referendum. In practice, drug dealingwas the same activity both before and after the vote. Didthe nature of this activity somehow transform with thecast of a ballot? Legally, yes. . .but behaviorally, no. Newvalue was being created for customers before and afterthe law changed, but the perceived social costs ofgoverning the industry evolved. Therefore, unless we arecomfortable with a normative definition ofentrepreneurship that is subject to continuous change inpublic opinion, it is important to recognize that all formsof new value creation are entrepreneurial, but becausethey are innovative in different ways, they are notequivalent in their social desirability. Thus, I suggest thatit is more fruitful to view entrepreneurship as new valuecreation regardless of its social desirability, whileconcurrently distinguishing socially desirable from sociallyundesirable forms as based on norms violated by theentrepreneur’s innovation.

The fact that Retrophin has realized profits proves thecompany has created value for buyers: those who survivedanother day by taking Daraprim. The fact that it hasrealized monopoly rents is testament to the company’screation of new value for investors. Customers are not theonly stakeholder group capable of determining the noveltyof value creation. No one ever wants to pay more for the

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Although congressional action related to companies likeRetrophin or, more recently, Mylan seems unlikely, ourpoint is hardly moot. Mr. Shkreli should not be called anentrepreneur, and knowing why he should not isessential to the decisions and public discourse we oughtto be having about the business activity we want toencourage, champion, and reward.

same good or service, but prices are determined bycurrent market demand, not historical prices or the cost ofproduction. Clearly, Daraprim was priced below what themarket would bear; otherwise, profit could not have beenearned through price gouging–—an increase of over 5000%per tablet. Rather insensitively and foolishly, MartinShkreli tried to defend his actions through metaphor: ‘‘Ifthere was a company that was selling an Aston Martin atthe price of a bicycle, and we buy that company and weask to charge Toyota prices, I don’t think that should be acrime’’ (Ramsey, 2015). The real issue is not whether Mr.Shkreli’s decision to charge Toyota prices for a bicycle-priced Aston Martin was or was not entrepreneurial. Hisactions created new value for investors, if no one else,which begs a number of questions: Why was an AstonMartin priced like a bicycle in the first place? How couldRetrophin ever price an Aston Martin like a Toyota andmake a profit? And if by some miracle it could, how could itcontinue to do so without fear of competitors entering themarket to do the same? Either something is wrong withMartin Shkreli’s metaphor or with the institutions in whichRetrophin’s market is embedded.

Despite Mr. Shkreli’s price gouging, demand still existedfor Daraprim. This suggests that the drug was already inshort supply or that Retrophin made it so through itsactions. Either way, scarcity is the culprit. But whatcaused this scarcity and what causes it to persist? If theshortage is independent of Shkreli’s actions, thenRetrophin’s profits demonstrate that some buyers arewilling to pay a lot more than others to acquire the drugsthey need to survive. Perhaps they were, indeed, gettingan Aston Martin for the price of a bicycle. This could implythat individuals not desperate for Daraprim werenonetheless consuming it because it was priced below truemarket value. For example, government can enforce rulesto ensure that all individuals, regardless of income,receive equal access to life-saving drugs–—whether or notthose meds are truly needed for survival. Situations likethis are notorious for the moral dilemmas they pose, asthey pit need against ability to pay and test society’sperceptions of the market as a just mechanism of resourcedistribution.

Does it change the argument if Mr. Shkreli created thisdrug shortage? Morally, yes. It makes Retrophin’s profit-seeking behavior that much more deplorable. But contraryto arguments by Professors Plummer and Mitchell, itmakes Mr. Shkreli’s behavior more, not less,entrepreneurial. To capture new value, new entrants mustexploit or create barriers to entry that prevent othersfrom instantly competing those profits away. InRetrophin’s case, that barrier appears to have been moralin nature. Martin Shkreli saw a market with inelasticdemand and, owing to patent law, a statutorily limitablesupply. Retrophin captured the right to that supply at aknown price, only to sell at a price much higher than theextant market rate. Although an accounting profit wasbasically guaranteed, an economic profit (i.e., accountingprofit minus opportunity costs) was not. Mr. Shkreliwas willing to bear the social costs of immoral behavior

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(e.g., public scorn) that others were not; the uncertaintyof whether the government would honor patent lawdespite public outcry; and/or the uncertainty of forgoingother promising opportunities that could have proven topay even better than the antiparasitic drug, Daraprim.

Whether Retrophin created scarcity or merely exploitedit, Shkreli’s actions were innovative; otherwise, he wouldnot have realized the profits this debate is centered on.Martin Shkreli’s innovation involved challenging society’smoral norms of behavior. Innovation in moral norms is byno means unique to Shkreli, Retrophin, or thepharmaceutical industry. The insurance industry, forexample, was considered an abomination–—a moral affrontto the will of God, even–—when it was first proposed.Customers and investors initially reacted to the notionwith a similar measure of hostility that is difficult for manynow to understand, much less endorse. Doubtless, fewwould line up to defend Mr. Shkreli on ethical or moralgrounds. His actions are, however, presumably legal forthe time being. They are also likely to change the rules ofthe game, precisely because Shkreli has now revealed aneconomic opportunity for anyone who lacks moralscruples.

Historically, why were so many people willing to forgo thisopportunity? The likeliest answer is that lives lie in thebalance and most members of society still believe thereshould be limits to markets. For example, markets forhuman organs and child pornography are against the law,regardless of demand. Martin Shkreli’s violation of ethicalnorms tested the moral limits of markets and elicitedpublic outcry. It should be noted, though, that governmentstatutes–—not markets or avarice–—created theopportunity that Shkreli exploited. If a statutory monopolyhad not been granted in the form of a patent on Daraprim,no opportunity would have existed for the violation ofmoral norms. Retrophin now enjoys monopoly rents at thepublic’s–—or at least, their customers’–—expense in thename of potentially questionable intellectual propertyrights policy. Moral decency simply prevented it fromhappening sooner.

What now? Should we outlaw behavior like Mr. Shkreli’s?Should we denounce it as unethical or immoral? Or, mightit be worthwhile to ask what characteristic of the U.S.healthcare system created the opportunity to exploit themost desperate among us? Somewhat counter-intuitively,the solution might be the same as the problem. Tocontradict Shkreli’s rent-seeking, we need more profit-seeking behavior–—but of the productive nature outlinedby Professors Plummer and Mitchell. Policy makers maywant to begin by asking whether and how to removeobstacles that prevent entrepreneurs in new or existingfirms from producing equivalent generic drugs that wouldloosen Mr. Shkreli’s hold on the market, or creating newdrugs that could cure protozoal infections and renderRetrophin’s Daraprim inventory valueless. Undoubtedly,Retrophin’s profits have already encouraged competitorsto begin considering both of these responses. In this case,the problem does not seem to be with profit seeking or the

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market per se. Instead, it appears to be with theinstitutions in which that market is embedded. Social andmoral institutions may once have been sufficient todiscourage socially undesirable behavior that legalinstitutions alone could not; that no longer appears to bethe case, given Mr. Shkreli’s violation of moral norms.

There will always be opportunities to exploit others forprofit, and some entrepreneurs will seize these. The key isnot to blame the profit seeking that is inherent in all formsof entrepreneurship, but rather determine the nature ofthis exploitation and whether a market obstruction hasbeen created by public policy, and consider whether suchexploitation would cease if the market obstruction wereeliminated or reformed. In so doing, other entrepreneursbecome empowered to innovate, compete away theprofits of rent-seekers, and liberate customers fromexploitation. This process is by no means instantaneous.Rent-seekers like Martin Shkreli will enjoy rewards fortesting society’s limits, but unless protected bygovernment statute, this exploitation is likely to betemporary. Outlawing socially undesirable behavior mayappeal to many, especially when shunning such behaviorno longer appears to be effective; however, force is rarelyefficient over time. Instead, might we look to theinnovation that Professors Plummer and Mitchellchampion as the hallmark of true entrepreneurship andseek to eliminate the institutional barriers responsible forthe exploitation by reforming public policy or incentivizingcompetition?

If we recognize that there will always be potential forentrepreneurial behavior to take unethical or evenimmoral forms, it becomes that much more important toemphasize the power of choice and responsibility. And ifour students as future practitioners are likely to have thepower to exploit the poor/disenfranchised or takeadvantage of the uninformed through entrepreneurialbehavior, we must discuss how universal values shouldinform entrepreneurs’ decision making under conditionsof uncertainty. This needs to extend beyond superficialdebates about the relative merits of corporate socialresponsibility versus the cost-benefit analysis of economicconsequentialism. In a world of moral relativism vs.religious fundamentalism, and laws that do not necessarilykeep up with the social changes and resulting professionalpractices that stem from technological advancement, howcan we help our students not only choose to actresponsibly but also hold others accountable whootherwise would act immorally in order to profitunscrupulously? We need to do more than merely teachstudents how to profit without going to prison. Few woulddisagree that Martin Shkreli’s despicable actions, coupledwith his shamelessly self-righteous defense of thoseactions–—whether entrepreneurial or not–—are evidence ofthat.

Copyright permission for artworks included herein was obtained from Khalil Bendib, Dave Granlund, and Clayton Jones. The artists retaincopyright.

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Reference

Ramsey, L. (2015, September 22). A pharma CEO tried to defend his decision to jack up the price of a critical drug by 5,000% - and itbackfired. Business Insider. Available at http://www.businessinsider.com/martin-shkreli-defends-daraprim-price-9

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