Just Because A Market Benefits From A Gov't Handout Doesn't Mean It's Good Overall

from the looking-at-the-bigger-picture dept

Arnold Kling rips apart a particularly silly New Yorker article by James Surowiecki which attempts (and fails) to show that libertarian economists are hypocrites. The basic reasoning from Surowiecki is that libertarian economists believe strongly in market forces -- but, at the same time, the stock market has reacted positively to news of a potential economic stimulus package. Thus, he concludes, libertarians should support the stimulus package (the market says so!) even if the concept of an economic stimulus package goes against libertarian ideals.

This is silly and wrong for a number of reasons, but it brings up a mistake that I've been seeing made around here all too frequently: the idea that if one market benefits from a certain government handout, then clearly "the market" has benefited overall. So, of course the stock market is looking forward to a government handout -- because those involved in the stock market will benefit from such a handout. However, that does not mean that it's really the best thing for the wider economy. Surowiecki's mistake is thinking that the stock market is a proxy for the overall economy. That's the sort of mistake made by someone totally unfamiliar with the stock market -- so it's a bit surprising to see Surowiecki make it.

As for the similar arguments I've been seeing around here, some of our more vociferous patent system defenders have been posting links to studies that have showed that certain industries have benefited from patent protection. Well, duh. But, of course, those industries don't represent the larger market. So, for example, there is some evidence out there that pharmaceutical companies have benefited from patent protection, but there's also even more evidence that doing so has come at a huge cost to actual healthcare, which has a huge multiplier effect on the economy (in a bad way). The fact that one single segment of an industry benefits from government handouts -- whether in the form of a stimulus package or a gov't granted monopoly -- is hardly proof that the wider market is aided by it. In fact, historical evidence suggests just the opposite. Investment is put towards these more inefficient (on purpose!) markets, rather than what would best serve the wider market.

Filed Under: economics, free market, gov't handouts, james surowiecki, libertarians, markets

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  1. identicon
    Lonnie E. Holder, 23 Jan 2009 @ 6:34am

    Re: Re: Perspectives

    1. Pharmaceutical patents do not provide benefit for society as a whole (I assume because patented drugs cost more than unpatented drugs).

    Yes, this is true, but for the wrong reason. It has nothing to do with the fact that patented drugs cost more than unpatented drugs, but with how health care would work in the absence of patents.

    I suspect the absence of patents, or the presence of patents, other than incentivizing the development of new drugs, really has little effect on the health care system. Consider that only about 15% of all health care dollars go to pharmaceuticals. Then, figure how many of those dollars are for generics versus patented drugs. Then, figure how many of those dollars would be eliminated if patents did not exist, or if the drugs that were developed because patents exist no longer existed. The amount is a few percent. About twenty five percent of all health care dollars are spent because of life style choices. Think of how the health care system would work if people ate better, exercised more, stopped smoking, etc. Goozner has a great link to where money can be saved in health care (see below).

    2. Some kind of support is required to replace the incentive provided by patents because of the amount of money it takes to develop a new drug (estimates vary, but $400 to $500 million per developed drug seems like a average that has support).

    The $400 to $500 million is totally bogus. Read Merrill Goozner's book, and you'll discover the *real* number is more like $30 to $40 million -- at best.

    I read a lot of articles on Goozner's web site. I like his quote about developing a drug to treat Alzheimer's disease. The question he asked was "How much does it cost to develop a new Alzheimer's drug?" His answer: "Infinite," because one has never been developed. We have spent $100 billion to develop treatments for Alzheimers, thus far with little success.

    In amongst Goozner's numerous articles, he agrees that the cost of developing new drugs continues to explode, and he squarely points the finger at Wall Street. After reading his articles, I see why. Pharmaceutical companies have become enamored of big profits with blockbuster drugs. The blockbuster drugs are going away (wake up people), but pharmaceutical companies continue to spend billions to find another one (kind of like a drug addict, looking for his next fix).

    Goozner says that we need to reform how medical research is incentivized to wean pharmaceutical companies off blockbuster drugs. Interestingly, patent pooling is one of his suggestions.

    Goozner also pointed to an independent study performed by the Commonwealth Fund on how to save billions on our health care system. Predictably, the key begins with better life style choice (surprise!). The savings related to pharmaceuticals is, as one familiar with health care costs might suspect, relatively tiny.


    What these studies have never addressed satisfactorily is whether society would have received the same benefit from the pharmaceutical industry without patents that it has with patents; i.e., would the pharmaceutical industry have developed the same drugs without patents that it did with.

    You're asking the wrong question. It's not whether the same drugs would be developed, but if more people would be healthier. That's the key issue here, right. It's about healthcare -- not having more drugs.

    You are correct, and I was wrong, on this point. Goozner (I like his articles - lots of insight) says that because pharmaceuticals are so enamored with big profits, and blockbuster drugs generate big profits, the pharmaceutical companies have ignored drugs that might generate profits, but smaller profits.

    Goozner's example was antibiotics. There is a need for antibiotics to treat antibiotic resistant strains of bacteria. However, because there are lots of cheap antibiotics, such a drug would not garner a huge market share, being saved for only those cases that really need it, thus limiting profit. This new drug might well be patentable, but the patent alone is insufficient incentive to develop the drug; i.e., patents are irrelevant for any drug that is a non-blockbuster drug, which also implies that patents incentivize blockbuster drugs.

    I suppose that means that the pharmaceutical industry has been crying crocodile tears over their blockbuster patents. Time for a new business model.

    Question: Is society better off without new life-saving drugs, or is it better off with expensive life-saving drugs?

    Wrong assumptions. Woefully wrong assumptions. Redesign a healthcare system such that there are incentives to keep people alive, and there will be every incentive in the world to create new life-saving drugs *as well* as invest in preventative healthcare programs. The problem, right now, is that the patent system pushes most R&D money into monopoly efforts -- not into keeping people healthy. The incentives are misaligned.

    Your statement is sort of close, based on Goozner's comments. If it was the patent system only, then in theory all sorts of drugs would be developed. Of course, we know that is not true. Wall Street pushes pharmaceutical companies to develop blockbuster drugs in order to keep profits at a level they have come to expect. Patents are merely the tools that grant companies the monopoly for the blockbuster drugs. Of course, when the blockbuster drugs go away, then what do they do?

    What I wonder is what Wall Street will do when pharmaceutical companies are no longer able to generate the kind of profits they have in the past, which is coming very soon. As I have said before, I think pharmaceutical patents will resolve themselves, but it may cause a virtual collapse in the pharmaceutical industry. However, after that happens, the industry will reorganize and become stronger, and those companies whose fortunes did not hinge on a few blockbuster drugs will become the winners.

    What I wonder is why haven't smaller pharmaceutical companies tackled the lower margin drug needs? Sure, the profits are lower, but the opportunities and need are greater.

    Anti-patent studies have yet to provide an option to the support patents currently provide, other than, if there is a need, the market will find a way. Maybe it will, and maybe it won't. Maybe the market will be so busy supporting innovative software developments that there will be no money for new AIDs drugs. Faith is a good thing when it comes to God and the church, but with investment intensive pharmaceutical research it is a dicey thing.

    Ok. As I said, all you need to do is align incentives -- and if you don't think that there's tremendous money to be made in saving people from AIDS, you're wrong. The incentives are there. It's just that the patent system has distorted them.

    I was prepared to come in a disagree with your comments vociferously, until I read Goozner. Until I read Goozner, I admit that I did not understand your perspective. Yes, I agree that the patent system has distorted incentives. However, I am unsure of the solution. I am convinced that eliminating patents is not the solution, because I think that will cause unintended, disastrous consequences. In fairness, neither did you say we should eliminate patents without having an alternative incentive.

    I think there is an opportunity to prove an alternative system will work without doing anything to patents at all. We have hundreds of diseases (per Goozner) that need addressed. Experimental incentive programs could easily be focused on those diseases and conditions so that we can see just how well those incentives work. Once proven, the incentives could easily be expanded, and there would be a natural transition from patent based incentives to non-patent based incentives.

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