There were a number of interesting comments. Most focus either on the merits of foreign aid or on the costs of avoiding HIV-AIDS, and I will confine my response to these two issues.
1. I agree that my statement that foreign aid is an inappropriate use of public funds requires qualification in several respects. First, it can be a way of buying allies, and from that standpoint the fact that the money is diverted to the political or economic elite of the recipient country need not be an objection. Second, it can be a way of conferring utility on Americans who have ethnic or religious or family or other ties to people in the recipient countries. Third, it can be a subsidy to U.S. industry if the aid is conditioned on the recipients’ using the money to buy U.S. goods; in such a case the net transfer to the recipient nation may be small. Fourth, as in the case of the Indian Ocean tsunami, it can be a form of social insurance. It is also possible that such aid can confer utility on the populations of the donor countries because the plight of the victims of the tsunami triggers altruistic sentiments in those populations, and that emergency assistance, being temporary, is somewhat less likely to be appropriated by the ruling elites of the recipient countries.
Perhaps most foreign aid can be assigned to one or more of these four categories, and only the third seems especially questionable from the standpoint of economic welfare. But when people criticize the wealthy nations, especially the United States, for being chintzy when it comes to foreign aid, they usually are not thinking about any of the above categories of foreign aid; rather, they want general wealth transfers to poor countries. And that is what I criticize, since the basic problem of poor countries is not that they are poor, but that they are badly managed; and being badly managed they are unlikely to benefit from handouts. Our present level of foreign aid may be adequate to satisfy the four types of demand for such aid that I have sketched.
2. Several comments raise a good question: if condoms are so cheap, why is HIV-AIDS so prevalent in Africa and certain other poor countries? The answer is that the use of condoms may involve substantial nonpecuniary costs, such as diminution of sexual satisfaction or violation of local mores. Alternatives to condoms, such as abstinence or, more realistically, reduction in the number of sexual partners or abolition of practices such as clitoridectomy and infibulation that increase susceptibility to sexually transmitted diseases, including HIV-AIDS, may also involve heavy “cultural costs.” However, these obstacles cannot be overcome or diminished by the expenditure of substantial monies on buying expensive HIV-AIDS “cocktails” for the affected population. Nor do I agree that because AIDS is at present treatable rather than curable by these “cocktails,” no rational person would increase his exposure to the risk of HIV-AIDS merely because he knew that he could obtain treatment that would prolong his life if he contracted the disease. Given that the full costs, sketched above, of avoiding risky sex may be high, it is plausible that even a slight reduction in the benefits of such avoidance could affect the amount of risky sex.
It is true that we spend a lot of public money treating people for diseases that they could have avoided by changing their behavior. These are probably not economically sensible expenditures, because they operate to externalize the costs of risky behavior. Subsidizing AIDS treatments in poor countries invites the same criticism.
Reply on Disease and Population-Becker
Some comments provide additional evidence that disease imposes a major burden on the living in poor nations of Africa and elsewhere. For example, disease interacts with nutrition, and poor nutrition causes diminished cognitive and physical capacities. The Malthusian model completely misses these harmful consequences of disease that far outweigh any beneficial effects a lower population might have on the incomes of the survivors.
I continue to be skeptical that population has been a major problem for India’s development. The last 15 years shows that with even reasonable economic reforms, per capita incomes can grow rapidly while population also does. In addition, it is well known that as nations develop economically, fertility before long begins to decline rapidly-that has already begun in India- as parents switch from having many ill-educated children to many fewer and much better educated children.
Africa and many other poor nations have a brain drain because ambitious and skilled individuals have limited opportunities in their own countries. As South Korea, Taiwan, China, and now India have shown, if a country begins to develop economically after introducing sensible policies and opportunities for the educated and entrepreneurially inclined, fewer skilled men and women leave, and many of the best begin to come back to start businesses and engage in other productive activities. Prior to the 1991 reforms, Indians were very successful business people and professionals in all countries but India!
One modern neo-Malthusian argument relates to global warming-the subject of an earlier discussion by Posner and me. A larger population may put more greenhouse gases into the atmosphere, but it also provides a larger market for new technologies that help control the output of CO2 and other gases. In addition, a larger population also increases the number of potential inventors who might help solve warming and other challenges. So whatever one’s views on the importance of global warming, a larger population is more likely to help than hurt.
Disease, Population, and Economic Progress-Becker
Premature deaths from malaria, sleeping sickness, AIDS, and other diseases are still common in most parts of sub-Sahara Africa and other very poor nations. Modern day Malthusians who believe population growth holds back economic prosperity believe that high death rates from disease, awful as that is, raise the earnings of the living by slowing the growth in population. They point to various historical episodes, especially to the economic revival in Europe following the population devastation caused by the Black Death in the 14th century.
Malthusian theory has considerable relevance in understanding economies in earlier times when traditional agriculture was the main sector. But population’s role in the modern world is very different because prosperity of families and countries depend on their investments in human capital, especially education and health, sensible government policies, and economies that are open to trade with other nations.
India provides a good illustration. India remained very poor from its independence in 1947 until the late 1980’s. Some claimed that its slow rate of growth in per capita income was largely explained by a rapid growth in population that absorbed much of the increase in aggregate income. In response to this belief, some Indian women were forcibly sterilized to cut down their birth rates.
Fortunately, a small number of economists and politicians recognized that India’s real problem was not population, but terrible economic policies that overregulated labor and product markets, blocked domestic investments by native entrepreneurs, and discouraged imports of goods and foreign investments. Reductions in tariffs and import quotas, and greater encouragement to private investments introduced in 1991 by the then Finance Minister, Dr. Manmohan Singh (who is now Prime Minister), quickly produced a take off in India’s economy. Income has since been growing by over 6% per year, “despite” an increase in its population by more than 200 million persons that raised India’s total population to over one billion people.
India’s problems prior to its economic reforms are magnified in much of Africa. In addition to misguided economic policies, widespread disease has lowered life expectancies and reduced health and energy levels, so that most young people have little incentive to become literate and continue their schooling beyond a few years. The heavy incidence of disease also has lowered productivity even in the traditional activities that engage most workers.
So I have little doubt that the rampant disease in Africa and other poor nations is a “curse to the living”, even though it helps keep population from growing faster. Greater spending on health by the governments of these nations, and international assistance from philanthropic and other groups, would reduce the incidence of malaria, AIDS, and other major diseases, and would raise per capita incomes along with the number of people. Incomes would grow because healthier persons invest more in education and other human capital, and they are more productive and energetic. Quantitative studies confirm that the heavy disease burden in Africa has reduced investments in education and lowered their rates of income growth.
Economic reforms that worked in other regions and cultures would also work in Africa. Their economic situation would be much better if they followed the examples set by India, China, and other nations, and reduced regulations and tariffs, encouraged domestic and foreign private investment, and provided a more receptive and stable economic environment. Reduced incidence of disease and better economic policies would raise population, but would raise incomes much faster, so that more people would live better lives.
My views about the effects of population in the modern world are very non-Malthusian in other ways as well. I believe that bigger populations become an asset rather than a liability to economic growth as societies become more knowledge-oriented through investments in education and training, and through new technologies. In the modern environment, a larger population raises productivity by inducing greater specialization in skills and occupations, and also by providing larger markets for different goods, including various drugs to treat diseases.
While this claim about the beneficial economic effects of larger populations may be controversial, there can be little doubt that widespread disease in Africa and other poor nations is a major drag on their economic progress, whatever the effects on the number of survivors. Malaria and other horrible diseases are a disaster for the living as well as a tragedy for those dying.
This is my response to the Becker posting on "Disease, Population, and "Wellbeing."
A recent international conference of economists (“Copenhagen Consensus 2004”) tried to determine the best uses for the monies that international organizations and wealthy nations donate to poor ones. Contributing to the eradication of HIV-AIDS came out first on the list. Becker’s posting does not rank programs but does suggest that HIV-AIDS is a worthy object of “international assistance from philanthropic and other groups.”
I disagree on two grounds. First, I do not think that foreign aid is a good use of public or private money. All the problems that foreign aid seeks to alleviate are within the power of the recipient countries to solve if they adopt sensible policies. If they do not adopt such policies, then foreign aid is likely to be stolen by the ruling elite, strengthening its hold over the country, or otherwise squandered. What we can do for poor countries is reduce tariff barriers to their exports. With money saved from eliminating foreign aid, we could compensate our industries that would be hurt by import competition from poor countries and thus reduce political opposition to tariff reform.
HIV-AIDS is an especially good example of a problem that is not going to be solved by foreign aid. The spread of the disease is easily prevented by the use of condoms, which are cheap; any nation can afford both to inform its population concerning the risk factors for and the consequence of the disease and to make condoms available at zero cost to its sexually active inhabitants. Treatment of the disease once it is contracted is very costly and is a poor method of fighting it, since once a disease is curable, the incidence rises because the expected cost of catching the disease is lower. So, for example, when syphilis was discovered to be easily curable by penicillin, the incidence of the disease soared.
Unlike an air- or waterborne disease, HIV-AIDS is easily avoidable by an inexpensive change of behavior, namely using condoms in sex, or by a more costly but still feasible change, namely by avoiding promiscuous sex. To the extent that these methods of avoiding the disease are infeasible in certain poor countries because of intractable social and economic problems, providing money for costly AIDS “cocktails” is a band-aid solution which, as I have just suggested, may actually make matters worse by reducing the incentive to avoid contracting the disease in the first place.
Second, I am not as optimistic as Becker is about the positive benefits of increased population in poor countries. What is true is that the growth of population in such countries will prove self-correcting if they become prosperous, because wealthier nations have lower birth rates than poor ones for a variety of reasons, such as that educated women with good job opportunities have a higher opportunity cost of having children and that reducing the role of subsistence agriculture in an economy reduces the demand for children as farm workers and old-age support for their parents. But a population increase that is due to a reduction in the death rate need not be correlated with rising prosperity; indeed, by raising the ratio of population to land and other resources, a reduction in the death rate may reduce economic growth. While Becker is correct to point out that healthier people are more productive workers, on balance HIV-AIDS may, as argued in a recent paper by Alwyn Young, "The Gift of the Dying," increase per capita incomes in poor countries by causing wage rates to rise, since the epidemic has reduced the supply of labor. Hence the disease may have both a direct and indirect negative effect on population.
Increased global population can create large negative externalities. (The present world population of about 6 billion is expected to reach between 9 and 14 billion by 2050.) Global warming has been shown in a paper by Anqing Shi to be influenced by population growth. Such growth results in increased burning of tropical forests and thus increased emissions of carbon dioxide, as well as leading to increased output of energy produced by fossil fuels, the burning of which is a major source of such emissions. Moreover, population interacts with economic growth to produce sharp increases in economic activity, resulting in heavy demand for energy. For example, at a population growth rate of 1 percent a year and a per capita income growth rate of 2 percent a year, WGP (world gross output, i.e., the total of all nations’ GNPs) will increase fourfold between now and 2050.
There is, as Becker emphasizes, a positive side to population growth. A greater population enables additional specialization of labor, with resulting cost savings. It also increases the incentive for technological innovation, by increasing the size of the market for new intellectual property without a corresponding increase in cost. The cost of producing and distributing a new software program, for example, is essentially invariant to the size of the market, so the larger the market, the greater the net revenues to the producer and so the greater the incentive to create the software in the first place. But new technology is a source of risk as well as benefit, as I emphasize in my book Catastrophe: Risk and Response (Harvard University Press, 2004), so the effects of population growth in increasing the rate of technological advance cannot be considered an unalloyed blessing.
Response on Global Warming-Becker
Several informed comments, including a few in emails directly to me. Some claim I overstate the warming problem, others that I understate it. This indicates that controversy remains about the causes and cures of any warming. I have a few additional points.
I agree there is room for doubt about whether industrial and other human activities are causing significant warming. But I have become more convinced than I was 15 years ago that it is a risk worth some effort to protect against, just as we insure against other risks that may never happen. I would oppose draconian cut backs in energy emissions, but not a modest and sensible program of the type set out in my commentary.
Enforcement is always a problem, and a quota or tax system of emission controls would need international enforcement. I believe that can be reasonably successful, although some rogue nations and companies would cheat.
I am a strong supporter of nuclear power, and believe that the opposition in the ‘70’s in the US and elsewhere was motivated more by emotion than by good analysis. So yes, let us pressure countries to reduce the excessive regulation of nuclear, so that the US (and other nations) can get far more than 20% of its power from this source.
I have used some multiple equilibrium, or “runaway”, models in my own work in economics, and have seen many such models. But at least in economics, they are far more common at the model-building stage than in any evidence yet analyzed. That may not be true in the climate area, but my admittedly cursory examination of some multiple-equilibrium climate literature does not lead me to place much weight on these models in the warming debate.
These were a fine set of comments, and let me reply briefly to some of the major points made.
One interesting suggestion is that a tax limited to net emissions would create a private market (contrary to what I suggested in my post) for devices for removing carbon dioxide from the atmosphere. A power plant, say, would willingly pay a license fee for such a device if the fee were less than the tax savings from being able to offset the plant's emissions by carbon dioxide that the device removed from the atmosphere.
Another commenter points out, correctly but misleadingly, that water vapor in the atmosphere blocks more heat from the earth's surface than carbon dioxide does. That is true. But an increase in atmospheric temperatures brought about by an increased atmospheric concentration of carbon dioxide increases the amount of water vapor in the atmosphere (because warmer air holds more water), and thus has a multiplier effect. It is also true but, to me at least, not reassuring that climate has fluctuated a great deal in the course of the earth's activity quite apart from any human influences on climate. I am not reassured because a human-engendered increase in global temperatures could coincide with and reinforce a natural increase, rather than offsetting it.
In this connection, I emphasize the possibility of a runaway greenhouse effect. Becker discusses the underlying problem in terms of multiple equilibria. A less technical way to describe it is in terms of tipping, feedback, or a "vicious cycle." For example, higher atmospheric temperatures cause melting of the permafrost in Alaska and Siberia, which releases methane (stored in great abundance in permafrost), which causes a further temperature rise, which causes more melting and so more release of methane.
The fact that severe climatic effects might unfold quite rapidly is a reason not to be comforted by the argument that, after all, the earth might be better off if it were warmer--Greenland would once again be green, Siberia would support agriculture, and so on. If abrupt global warming destroyed tropical agriculture, it would take decades to relocate that agriculture to formerly frigid areas; the transition costs would be immense.
It is thus the possible rapidity of extreme climate changes that worries me; and it also makes me doubt that we can count on technology to bail us out. In the long run, yes; but we are probably decades away from the development of economical technologies for arresting human-engendered global warming. We are thus in a vulnerable period in which technology-forcing taxes (or quotas, as discussed by Becker) may be a prudent response.
Finally, the fact that abrupt global warming is less probable than gradual global warming is small comfort, because a proper cost-benefit analysis of safety measures takes into account not only the probability of a harm but also the magnitude of the harm should it occur.
On Global Warming-Becker
When climatologists construct models of global warming caused by industrial emissions of CO2 and other greenhouse gases, they are much more like economists than the typical experimental biologist or physicist. By that I mean that they can only test the implications of their models with the data thrown up by current and past actual events, not by experimental isolation of particular forces. Since many other not well-understood or readily observed forces affect climate, it has been difficult to prove that these models give accurate predictions about future warming. This helps explain the considerable skepticism about whether man-made activities explain much of the temperature build-up in recent decades, although Posner is right that consensus on this has grown considerably during the past 15 years.
So I agree with him that it is prudent to take actions to reduce the build-up of carbon gases in the atmosphere, but which ones? Despite his recognition of its many shortcomings, Posner believes the US should join the Kyoto Protocol. I disagree because this Protocol in its present form has major defects, even if one fully accepts the concern about global warming. The most fundamental problem is that some 140 developing nations are excluded, including China, India, Brazil, Mexico, and oil producers like Saudi Arabia.
As a consequence, the greater the restrictions and costs imposed on companies in developed countries to cut back their emissions, the stronger their incentive to shift production to exempt nations, like China, India, and Mexico. This is economically inefficient, and helps explain why influential unions and companies in the United States oppose these restrictions. These production shifts could even have a perverse effect on pollution because poorer nations tend to pollute more per unit of industrial output than rich nations do. For companies in the developed world are, even aside from Kyoto, subject to popular pressures and laws to reduce their output of pollutants. Such restrictions are weak or absent in most countries trying to catch up to the economic leaders.
One way to begin to overcome the opposition to Kyoto from developing nations, Congress, and the President, would be to start a system of marketable quotas, for example of CO2 emissions, that would be traded on a worldwide exchange. The total number of quota rights issued in any year would be determined by the level of worldwide emissions of CO2 allowed in that year. The EU is starting an exchange- modeled after the Chicago Climate Exchange that successfully trades sulfur dioxide emission rights- with a limited form of trading in their carbon emission quotas under the Kyoto Agreement.
A most important modification of the Protocol would be to allocate to the major developing nations a greater share of the quotas than their share of emissions. This would make developing nations net sellers of quotas on the proposed climate exchange, and so they would collect payments (or “taxes”) from companies in the richer nations who on balance would buy quota rights to reach their production goals. Russia recently agreed to the Kyoto Protocol after much indecision probably because they expect to be net quota sellers in the foreseeable future.
A favorable system of quota allocation might overcome the resistance of China and other developing nations to abide by the Protocol while they are industrially so far behind Europe, Japan, and the United States. It could also reduce the opposition in America-depending of course on how many quotas it receives- because companies in developing countries would have no artificial cost advantage in production, as long as they had to pay the market price for any quotas they receive.
A tradable quota system is equivalent in its effects on production to a unit tax on emissions that leads to the same total quantity of emissions as the quota system. Indeed, the market price of a quota for say a ton a unit of carbon pollution would exactly equal the equivalent tax on that ton. So tradable quotas and taxes have the same beneficial effects on incentives to discover ways to reduce emissions.
Posner is worried about the effects of abrupt, catastrophic, and irreversible changes in climate that could produce enormous damage to the world. Apparently, a catastrophic climate change occurred naturally about 11,000 years ago, and maybe at a few other times. These effects are possible in multiple equilibrium climate models- multiple equilibrium models are also used in economics- whereby a sufficient deviation from one climate equilibrium position can set in motion forces that lead to large and rapid movement to a wholly different, and possibly much worse, position.
But a few naturally induced rapid climate changes in the course of thousands of years does not mean that the man-made risk of such a dramatic change should receive much weight. Given all the risks the world faces, such as terrorist control of nuclear and biological weapons, or runaway nanotechnology, genetically modified crops, and cloning-all very well discussed in Posner’s new book Catastrophe- I believe he is excessively concerned about climatic catastrophes. A sympathetic and informative review of such abrupt climate changes by Stephen Schneider of Stanford published in 2003 by the OECD’s Workshop on “Benefits of Climate Policy” reaches the modest conclusion that “My own personal value position, given the vast uncertainties in both climate science and impacts estimations, is to enact (and act on) policies to slow down the rate at which we disturb the climate system. This can buy us time to better understand what may happen-a process that will take many more decades- and lead to lower cost decarbonisation options.”
I should add that throughout history, there has been a tendency to underestimate the potential for technological developments that greatly reduce the predicted doom from various natural and manmade disasters, such as claims during the past several centuries that the world is running out of wood, coal, or oil. One glaring and instructive example is the 1865 book The Coal Question by the great economist, W. Stanley Jevons, which predicted disastrous coal shortages by the end of that century. The lesson for warming is that new technologies may arrive much sooner than expected, technologies that not only effectively reduce the emission of greenhouse gases, but also help take them out of the atmosphere.
Still, I agree with Posner that we might want to give financial and other incentives to speed up the development of ways to remove carbon dioxide from the atmosphere. He may be right that governments should subsidize research on this topic, although he would agree that the subsidies to ethanol and the Synfuels corporation, and the hype about the potential of hydrogen to replace oil and coal, are not reassuring about government subsidies of other climate-improving technologies. It may be better to convince rich philanthropists to establish lucrative prizes for technologies that can remove carbons from the atmosphere. Perhaps even we should allow patents on these technologies, which would be purchased by signatories to the Kyoto Protocol through auctions of the type described skeptically in my previous commentary on patents.
This week I am posting first.
The term “global warming” refers to increased global temperatures caused by increased concentrations of “greenhouse gases” in the atmosphere. A greenhouse gas is a gas that tends to block heat reflected from the earth’s surface while letting the heat of the sun through to heat up that surface; so the higher the concentration of such gases in the atmosphere, the hotter the surface becomes. The most important greenhouse gas is carbon dioxide, which is emitted into the atmosphere by a variety of human activities, mainly the burning of fossil fuels (oil, coal, and natural gas) and of forests; those fuels, and of course wood, are made out of carbon and burning them liberates carbon in the form of carbon dioxide.
Recent decades have seen large, and accelerating, increases in annual emissions of carbon dioxide, because of growth of population and of economic activity. The increases in emissions have been accompanied by substantial increases in the atmospheric concentration of carbon dioxide, and by increases in global temperatures as well. It is now the scientific consensus that these developments are linked: the emissions increase the atmospheric concentration of carbon dioxide and the increase in that concentration causes global temperatures to rise. Not all scientists agree, but the ranks of the dissenters are shrinking as new evidence of global warming emerges, such as the recent recession of glaciers in Alaska and elsewhere.
What if anything is being done, or should be done, about global warming? The Kyoto Protocol, which recently came into effect by its terms when Russia signed it, though the United States has not, requires the signatory nations to reduce their carbon dioxide emissions to 7 to 10 percent below what they were five years ago, but exempts developing countries, such as China, a larger and growing emitter, and Brazil, which is destroying large reaches of the Amazon rain forest, much of it by burning. The effect of carbon dioxide emissions on the atmospheric concentration of the gas is cumulative, because carbon dioxide leaves the atmosphere (by being absorbed into the oceans) at a much lower rate than it enters it, and therefore the concentration will continue to grow even if the annual rate of emission is cut down substantially. Between this phenomenon and the exemptions, there is a widespread belief that the Kyoto Protocol will have only a slight effect in arresting global warming; yet the tax or other regulatory measures required to reduce emissions below their level of five years ago will be very costly.
The Kyoto Protocol could certainly be improved, but on balance I think it is a step in the right direction—if the United States ratifies it, which it has thus far refused to do. But my reasoning is different from that of most of the Protocol’s supporters. They are content to slow the rate of global warming by encouraging, through heavy taxes (for example on gasoline or coal) or other measures (such as quotas) that will make fossil fuels more expensive to consumers, conservation measures, such as driving less or driving more fuel-efficient cars, that will reduce the consumption of these fuels. This is either too much or too little. It is too much if, as most scientists believe, global warming will continue to be a gradual process, producing really serious effects—the destruction of tropical agriculture, the spread of tropical diseases such as malaria to currently temperate zones, dramatic increases in violent storm activity (increased atmospheric temperatures, by increasing the amount of water vapor in the atmosphere, increase precipitation), and a rise in sea levels (eventually to the point of inundating most coastal cities)—only toward the end of the century. For by that time science, without prodding by governments, is likely to have developed economical “clean” substitutes for fossil fuels (we already have a clean substitute—nuclear power) and even economic technology for either preventing carbon dioxide from being emitted into the atmosphere by the burning of fossil fuels or for removing it from the atmosphere. But the Protocol, at least without the participation of the United States, is too limited a response to global warming if the focus is changed from gradual to abrupt global warming.
At various times in the earth’s history, drastic temperature changes have occurred in the course of just a few years. The most recent of these periods, called the “Younger Dryas” (Dryas if a flower that flourished then), took place about 11,000 years ago, shortly after the end of the last ice age. In a period of no more than a decade, temperatures soared by about 14 degrees Fahrenheit. Because the earth was still cool from the ice age, the effect of the increased warmth on the human population was positive. But a similar increase in a modern decade would have devastating effects on agriculture and on coastal cities, and might even cause a shift in the Gulf Stream that would result in giving all of Europe a Siberian climate.
Because of the enormous complexity of the forces that determine climate, and the historically unprecedented magnitude of human effects on the concentration of greenhouse gases, the possibility that continued growth in that concentration could precipitate—and within the near rather than the distant future—a sudden warming similar to that of the Younger Dryas cannot be excluded. Indeed, no probability, high or low, can be assigned to such a catastrophe. It may be prudent, therefore, to try to stimulate the rate at which economical substitutes for fossil fuels, and technology both for limiting the emission of carbon dioxide by those fuels when they are burned in internal-combustion engines or electrical generating plants, and for removing carbon dioxide from the atmosphere, are developed. This can be done, in part anyway, by stiff taxes on carbon dioxide emissions. Such taxes give the energy industries, along with business customers of them such as airlines and manufacturers of motor vehicles, a strong incentive to finance R&D designed to create economical clean substitutes for such fuels and devices to “trap” emissions at the source, before they enter the atmosphere. Given the technological predominance of the United States, it is important that these taxes be imposed on U.S. firms, which they would be if we ratified the Kyoto Protocol and by doing so became bound by it.
One advantage of the technology-forcing tax approach over public subsidies for R&D is that the government wouldn’t be in the business of picking winners—the affected industries would decide what R&D to support—and another is that the brunt of the taxes could be partly offset by reducing other taxes, since emission taxes would raise revenue as well as inducing greater R&D expenditures. However, subsidies would be necessary for technologies that would have no market, such as technologies for removing carbon dioxide from the atmosphere. There would be no private demand for such technologies because, in contrast to ones that reduce emissions, technologies that remove already emitted carbon dioxide from the atmosphere would not reduce any emitter’s tax burden.
This analysis completes the circle from our patent postings of last week. Private investment in technologies for reducing global warming by developing clear fuels or reducing emissions from the burning of the dirty ones could probably not be financed by the market, because of the cost and risk involved, unless inventors were allowed to obtain patents on these new technologies.
These are very fine comments, which I cannot respond to adequately in the time I have.
Let me begin with a qualification and an amplification. I said that a drug company can get, on top of the normal 20-year patent term, up to five more years for the time during which the FDA is deciding whether to approve the drug for sale. This is true, but it is also true that there is another limit--14 years from the date of approval. So if approval came 10 years after the drug was patented, the patentee would be entitled to a total patent term of only 24 years.
The amplification has to do with the opening paragraph of my posting, in which I noted too quickly that the basic economic objection to monopoly is that it deflects consumers to inefficient substitutes. This is an important point that is not intuitive, so let me explain a bit further. Suppose there are two products which are very close substitutes for one another, but one of them costs $3 to produce and the other costs $4. Then society can satisfy consumers' demand at least cost by supplying the first rather than the second product, and this will be the market outcome if each product is priced at cost (including a profit adequate to attract and retain necessary capital and compensate for risk--and such a profit, a competitive or normal profit, is in fact just another cost). But now suppose that while the second, the more costly, product is priced at cost ($4), the first, the cheaper to produce, is monopolized and its price is as a result $5. Now consumers (not all of course, or the monopoly price would not be profitable) will switch to the second product, and this will involve a social waste becase their demand could be satisfied at a lower cost by the seller of the first product.
The intuitive objection to monopoly is that it gouges consumers, but insofar as consumers stick with the monopolized product even when its price goes up, their higher cost is offset by the seller's higher profit; there is merely a transfer payment. (There may be an ethical objection, but that is beyond economics.) In a second round of analysis, however, and this is relevant to the discussion in my posting, the prospect of the higher profit induces additional investments (e.g., in obtaining a patent, which is a right to exclude close substitutes), which may be wasteful.
Now to the comments. One commenter pointed out correctly that my "first past the post" hypothetical example was oversimplified. The reason is that since each different molecular entity can be patented, the firm that loses the race to be first may still have a valuable product to patent. The principal SSRI antidepressant drugs, for example, such as Prozac, Paxil, and Zoloft, are all different molecules, separately patented; and because they have different therapeutic properties for different patients, each was able to command a significant segment of the market.
Another commenter asked, if the 20-year patent term is too long, as it probably is, how can the copyright term, which is now the life of the author plus 70 years, possibly be justified? It can't be justified in traditional terms, that is, as necessary to induce people to write books, make movies, and engage in other creative expression, because the discounted present value of uncertain receipts 70 years after one dies (which might easily be a century after the work in question had been written) is negligible at any realistic interest rate, especially given the likely depreciation in the market value of the work. William Landes and I, however, in our recent book "The Economic Structure of Intellectual Property Law," argue that there are two possible justifications for indefinitely long copyright terms: to prevent congestion (overuse of a copyrighted work might reduce its value to nothing), which is a traditional economic argument for property rights; and to induce investment in maintaining the value of the copyrighted work, for example by producing frequent revised editions (only the revisions could be copyrighted independently). These arguments are applicable, however, only to the tiny fraction of copyrighted works that retain a substantial market value beyond a few years. The serious problem with long copyright terms concerns not those works, but the multitude of less valuable (but not valueless) works that ought to be in the public domain so that they can be published without the publisher having to engage in costly negotiations to obtain a copyright license and also so that they can be used (again without need for cumbersome negotiations) as raw material for new creative works, almost all of which build on previous works rather than being created ex nihilo. That problem could be solved even within the framework of the very long copyright term if the courts would say that it is okay ("fair use") to republish an old work if the copyright owner has failed to provide notice of his whereabouts and as a result it is infeasible to negotiate a license from him. Such a rule would give rise to private copyright registries that publishers could consult when they wanted to publish an old work, and if there was no copyright listed in the registry the work could be published without copyright permission. This argument is developed in a forthcoming article by William Patry and me in the California Law Review.
Similar concerns about licensing costs are increasingly voiced by academic researchers who use patented "research tools" (such as Harvard's "oncomouse") in their work and understandably don't want to have to conduct patent searches and negotiate for patent licenses, especially if they are using multiple such tools.
I am intrigued but unconvinced by the suggestion that once a drug patent expires, generic manufacturers should be allowed to use the trademark of the patented brand; in other words, the trademark would lapse with the patent. I do not favor this because the consumer and physician are entitled to know who the producer is, and the trademark is the economical identifier of the producer. But I note that a trademark will lapse once it has become generic in the sense that people are using the brand name to designate the product, not just the brand. Many trademarks have become generic in this way, such as yo-yo and brassiere--and, in this country, aspirin. The same fate may befall some of the currently popular patented drugs.
One commenter works for a small biotech company and emphasizes the need for patent protection for the company's products because he expects it may take 10-12 years from patent to market. I agree that the smaller the company and therefore in all likelihood the riskier its prospects, and the less the effective length of patent protection, the stronger the case for long patent terms. I do not know whether it would be feasible or appropriate to try to differentiate patent lengths by size of firm, nature of industry, etc. The advantage of having the patent, copyright, etc. term independent (or largely so) of a particular industry is to reduce political pressure for special-deal legislation, whereby for example powerful industries would obtain longer terms for their patents and copyrights to the disadvantage of the weaker industries, which might need such terms more.
Several commenters debate the significance of the fact that the big drug companies spend more on advertising and other forms of marketing than they do on research. That in itself is untroubling. Indeed, such ratios are meaningless. It is both important and costly to get information about new drugs to physicians and patients; and there is only so much that can be spent on research before the returns from further research begin to plummet. So no inference of inadequate investment in research can be drawn from the fact that companies spend less on research than on promotion. The difficult questions are the accuracy and utility of the promotional information distributed by the drug companies.
I agree with the commenters who express profound skepticism about software patents (and copyrights). But that is a topic for another day.
Response on Drug Patents-Becker.
Again, many more comments than I can possibly respond to. I will just make a few points.
Yes, drug companies spend a lot on marketing, but much of that is valuable to patients in terms of finding out about new drugs that might be helpful. What disturbs me more are the scary and exaggerated warnings that sometimes accompany these ads, presumably to protect against lawsuits in the present highly litigious legal environment.
Some of you were surprised that a free trader like myself would not be enthusiastic about re-importing from countries like Canada that keep prices low through price controls and bloc buying of drugs. But drug companies, as well as other companies, should have the right to have legal contracts enforced. And the contracts with Canadian health organizations that buy drugs presume that Canadians, not Americans, will use the drugs sold to them. Still, as I pointed out, and some of you reinforced by your comments, if such re-importation did occur on a large scale, the result would be fewer drugs sold to Canada and higher prices there. That would then induce the Canadian health service to crack down on re-importation to the USA, as they are already doing.
Many, but certainly not all, of the comments distrusted patients to know when drugs might help, and like the FDA’s requirements of efficacy. I oppose this requirement in my commentary because that greatly slows down the approval process, and can mean the difference between life and death for seriously sick individuals. I believe that the growth in access to the internet and other sources of information has made patients much better informed than they were when the efficacy standard was introduced in 1962. No doubt, consumers will make mistakes in the health area as well as in others, but I much prefer that very sick people control their own treatment rather than it being controlled by government officials.
Some of you like Michael Kramer’s proposal for prizes, and I agree it is worth greater examination. But I do believe that it would be politically difficult to implement efficiently, and probably is not a good idea.
Drug companies clearly cater to the larger and richer markets, so they work on diseases in advanced economies rather than those found in Africa and other poor nations, and work on more common diseases, not the rare ones. The Orphan Drug Act tries to encourage research on diseases that are less common. And a forthcoming study by Tomas Phillipson, Rodrigo Soares, and myself shows that poorer nations do benefit, with a lag, from medical advances in rich countries. Yet it could be important for some private philanthropic organizations-like the Gates Foundation- and perhaps international bodies to encourage research on diseases found among poor nations, and help pay for drugs that help these populations.