As perhaps the greatest inventor the world has ever known, T.A.Edison, once observed based on his own experiences, "Never invent anything, until you have your money firmly in hand." It does appear that the Pharmaceutical Industry is following Edison's dictum to the letter.

Unlike Edison though, who was talking about the Banks and Financiers of his time, the Pharma Industry, through it's Lobbies and Lobbyists is guaranteeing its financial success by getting the government involved to ensure its profitablity through the manipulation and control of intellectual property law and the establishment and protection of product, markets, costs, etc.. I guess it all goes back to the basic business equation. A business and business person exist for two things and two things only. That is, to realize a profit and too maximize that profit by any means necessary.

N.E. Hatfield

That is, to realize a profit and too maximize that profit by any means necessary.

Absolutely, and rightly so. You might have noticed that a by-product of this pursuit of profit has been the production of a range of drugs that have produced extraordinary improvements in quality of life and longevity for millions. Since the expectation of financial reward is demonstrably integral to these tremendous innovations, why begrudge it?

BECKER: The answer is not obviously yes, although as Tomas Philipson has argued, government coverage might be justified if taxpayers are concerned about the welfare of persons who are unfortunate to have these diseases, or as a way to provide insurance protection against the risk of being born with rare genetic defects.

The government, thinking long-term, could simply provide to its citizens insurance protection against the risk of being born with rare genetic defects. Any child born with such defects would benefit. The problem with this, of course, is that fetuses do not pay taxes. Taxpayers are generally workers; workers, due to child labor laws and compulsory schooling, are usually 18 and up. In other words, the persons who pay into the insurance scheme for protection already know that they are not genetically defective, so they have no interest in continuing to pay. Why pay to avoid a risk that will never materialize? It's like playing yesterday's lottery. And government does not exist independent of the interests that is serves; government is largely responsive to political realities, including the desires and limits of taxpaying voters. To plenty of able-bodied taxpayers the Oprhan Drug Act probably sounds like "government waste." (Nevermind that if the government is setting up insurance schemes for fetuses prior to birth, it calls into question any legal justification for abortion.)

On the other hand, it is true that if citizens care about it, they may be inclined to pay for inefficient laws to provide relief to the ailing. That, of course, will last only so long as their compassion is of greater value to them than the prospect of putting those federal monies to other uses. If it is justified to provide government succor of this kind so long as the majority wants it, then it should be justified to deny it so long as the majority wants it. That is a problematic argument. Since when is it justified to renounce care once it is extended to those who depend on it to exist? Isn't that the definition of cruelty?

ben, Who says I'm begrudging it? I'm just pointing out that there needs to be a balance between "profit" and social benefit. Otherwise, life becomes cheap and degrading. Besides, the "sharks" need to have a close eye on them at all times. ;)

N.E. Hatfield

That balance between profit and social benefit is pretty simple for pharmaceuticals: social benefit is highest when pharmaceuticals are free to earn a profit on their inventions. Where governments step in with constraints on profit seeking, such as with price caps, those companies stop innovating and exit.

This is precisely what happened with Wyeth when it discontinued its vaccine against diphtheria-tetanus-pertussis in 2000 following the introduction of government constraints on price. Result: US was short of vaccines, and social benefit, as you put it, was almost certainly reduced.

Who says I'm begrudging it?

ben, In terms of the Wyeth example, there is more going on than meets the eye in terms of price controls. If it was, why is Aventis still producing the stuff along with Glaxo-Smith. It may have something to do with lawsuits involving side effects of its vaccines over the years and the resultant reduction in profit margins for these types of products. As opposed to a meddling government.

N.E.

The Wyeth story comes from Wall Street Journal, via Cafe Hayek

http://cafehayek.typepad.com/hayek/2005/11/the_myth_of_mar.html

True, other drugs companies are still in the market, and Wyeth an extreme case in which government intervention actually caused a firm to exit. But just because companies stay in the market is not the end of the story.

Even if a profit constraint doesn't force a firm's exit, low prospective profits can still delay or entirely stop investment in new and better drugs and vaccines. These costs are both hard to see (you need to know what would have been invented but for the cap) and potentially extremely costly.

The basic point is uncontroversial: firms exit markets, or do not enter, when they cannot expect a competitive return. In pharmaceuticals this means less innovation or in extreme cases ? Wyeth ? exit from existing markets.

It's all very well say there needs to be a balance, but it is unlikely that some kind of price or profit cap beyond the constraints already imposed by competition, if that is what you have in mind, would be helpful.

Ben: The basic point is uncontroversial: firms exit markets, or do not enter, when they cannot expect a competitive return.

The problem, Ben, seems to be that you are stuck on the basics. You remind me of one of my friends who earned his bachelor's in economics and does not subscribe to any econ journals. When you approach him with new information, resulting from recent studies in economics (which is a science, by the way), he rejects it all and repeats what he learned years ago at Carnegie-Mellon.

N.E. Hatfield has made a good point that you have ignored. In particular, "It may have something to do with lawsuits involving side effects of its vaccines over the years and the resultant reduction in profit margins for these types of products." I know it is troublesome to assert facts these days, but it is a fact that firms in cartleized markets engage in non-price competition by, for example, advertising. Advertising leads to false advertising claims. I know it is dangerous to assert something is obvious, but it obvious that a dollar spent on litigating a false advertising claim is a dollar that could have been spent elsewhere. It is also obvious that the easier it is to succeed in a false advertising claim against a competitor, the higher the barrier to entry for potential market entrants (they need either more cash on hand to respond to false advertising claims or superior efficiency to enter and start price-cutting). There is no reason why, N.E. seems to imply, that susceptibility to liability would not work the same way. All other things being equal, the more likely you are to be liable for tort claims, the more cash you need on hand to pay off successful claims. This too will function as a barrier to entry. That's often the argument for providing certain industries with tort liability: the barrier to entry for potential entrants comes down; the end result is more competition. Except in a cartelized market that isn't necessarily true, because encouraging lawsuits against your competitors, e.g., through false advertising, is a part of non-price competition.

N.E Hatfield seems to be arguing that a price control, to the extent it disgorges the cartel of its suprecompetitive profit, will reverse the lack of innovation that is an effect of the sham competition. It is true that there is no way to know what the competitive price actually is, but a price control that lowers the supracompetitive price to a smidgen above the competitive price shouldn't cause the disastrous effects that one would expect if one dropped the price below the optimal one. N.E. Hatfield could easily argue that the pharmaceutical industry -- Big Pharma -- is an oilgopoly and that gradual and slight mandatory price reductions are a solution.

You also seem to ignore that patent is a price control -- in the sense that it regulates the length of time an innovator gets a monopoly. But it is even more complex than that, because how strictly claims in a patent are construed impacts whether generics can enter the market with feasible substitutes without infringing the patent or how likely a given patent is to be invalidated (which may increase the legal costs of innovators). All of this is fairly implied by N.E. Hatfield's succinct paragraph, even if not specifically intended, yet is left unaddressed by your response.

That's a shame.

"tort immunity", not tort liability

When the Orphan Drug Act was passed into law in 1983 the U.S. health delivery system was substantially different than it is now. Prescription drug benefits were much more limited. The intent of the sponsors of the Act, chiefly Rep. Henry Waxman and Sen. Orrin Hatch, were more altruistic than economic. Indeed, as a staffer to Hatch's Labor and Human Resources Committee, I and my colleagues found it refreshing to find an issue where Waxman and Hatch could agree and work together, and where the interests of the drug companies tended to parallel the interests of a target population. The economics of orphan drugs has worked out much as we thought it would at the time.

The issue of what government should do to create incentives for the creation of new drugs is still with us -- have we got it right? It might be interesting to compare government actions with regard to orphan diseases with another health issue where creation of new drugs was a priority, but where the population to be treated was significantly larger; and in fact exactly that comparison was done between HIV and orphan diseases. Frank R. Lichtenberg of Columbia did the work, published in NBER (abstract here: http://www.nber.org/papers/w8677).

HHS's inspector general reported on the success of ODA in 2001: http://www.oig.hhs.gov/oei/reports/oei-09-00-00380.pdf

In terms of lives extended with reasonably good health, I think ODA has been quite a success. The Act has been a great success socially, and in the improvement of health. In any analysis of the efficacy of the legislation, I hope that the patients who are helped can be factored in.

N.E. Hatfield has made a good point that you have ignored. In particular, "It may have something to do with lawsuits...

Yes, or it might not. You could at least cite the evidence before giving me chapter and verse on "the facts" and what you think N.E. might have been thinking. The two quotes you offer are entirely consistent with each other, so much of your analysis is grounded in a flawed premise.

Nothing you have written has anything to do with N.E.'s main point, or my response. N.E.'s point is that social benefit may not be maximized when pharmaceuticals maximize profits. N.E.'s claim can be reasonably inferred to be that softening that objective, or even abandoning it (he is unclear), might raise social benefits.

You take his claim to a new and, as far as I can tell, unintended level. So let's look at your argument: there are barriers to entry, and prices are supracompetitive; price caps will raise innovation by simulating competition. This is incorrect: price caps don't do anything to address the entry barriers, and they weaken incentives for entry, and therefore innovation, by reducing or removing any chance of high returns to entry. Competition is harmed by price control, at least in the regulated market. A fundamental error you and N.E. are making is to not recognize that economic profits have a function in dynamic markets.

You complain about oligopoly, but this too is misplaced. In The Free-Market Innovation Machine, Baumol argues oligopoly is the ideal market structure for innovation, and even cites capitalism's unique propensity to produce oligopoly as its main advantage over all other economic systems. Oligopoly is the structure you want in the pharmaceutical industry because that structure is most conducive to innovation.

Undoubtedly the potential downsides of market-based innovation you cite occur at some time or another, but the success of market-based, profit-seeking innovation in pharmaceuticals and in other fields shows these costs are not nearly sufficient to negate the enormous benefits that approach.

Monopoly on production is not a price control.

Ben:Monopoly on production is not a price control.

That's rhetoric! A patent is more than "a monopoly on production." It's a "market power" card. One can certainly set the price by granting or revoking market power to one company or distributing it amongst many competitors. This is what I mean by your inability to engage with others' arguments.

Ben: Oligopoly is the structure you want in the pharmaceutical industry because that structure is most conducive to innovation.

This is an incoherent reply. First, I never said oligopoly is bad. Nor did I say that oligopoly stems the tide of innovation. What I said was this: "N.E Hatfield seems to be arguing that a price control, to the extent it disgorges the cartel of its suprecompetitive profit, will reverse the lack of innovation that is an effect of the sham competition." I never claimed that this was true; what I claimed was that N.E. Hatfield's apparent argument that price controls could spur innovation in oligopolies deserved more attention that you gave it. Indeed, once I pointed this out to you, you ran to an economic journal and cited an article to refute his argument!

You still haven't dealt with my argument, other than to pretend that your original argument and N.E. Hatfield's argument "are entirely consistent with each other, so much of your analysis is grounded in a flawed premise." If that were the case, would you have scampered off to an econ journal to refute his argument? And if they were consistent, would you have said: "A fundamental error you and N.E. are making is to not recognize that economic profits have a function in dynamic markets." I think not.

Now, I never claimed that economic profits have no function in dynamic markets. The point is that the function has a different dynamism in an oligopoly than in a competitive market. In a cartelized market, many of the standard economic claims do not apply, e.g., claiming that tort immunity for the industry will reduce barriers to entry and spur competition. I quite clearly say: "[I]n a cartelized market that isn't necessarily true, because encouraging lawsuits against your competitors, e.g., through false advertising, is a part of non-price competition."

Let's look at what N.E. Hatfield originally said:
"It may have something to do with lawsuits involving side effects of its vaccines over the years and the resultant reduction in profit margins for these types of products." Vaccines. Hmm. There's been much talk about providing tort immunity for vaccine manufacturers over the years, based on the claim that no one will enter the market because of the high potential for liability. In fact, this canard is exactly what your first post states: "The basic point is uncontroversial: firms exit markets, or do not enter, when they cannot expect a competitive return. In pharmaceuticals this means less innovation or in extreme cases -- Wyeth -- exit from existing markets." What you fail to address is that in a cartelized market, which you now assert Big Pharma is, tort liability is a function of false advertising and false advertising is a function of advertising, which is a part of the non-price competition in an oligopoly. By providing Big Pharma with tort immunity on the premise that "The basic point is uncontroversial: firms exit markets, or do not enter, when they cannot expect a competitive return. In pharmaceuticals this means less innovation or in extreme cases -- Wyeth -- exit from existing markets," you drive down competition in the pharamceutical industry.

W

Perhaps you could re-state your argument. The line between your argument and your interpretation of N.E. has become unclear.

Ben,

Perhaps you should admit you had no idea what you were saying in the first place. That has become very clear.

W,

I have no idea. I admit it.

But I do know the difference between an oligopoly and a cartel.

Ben,

So: your argument is that a cartelized market is one where no oligopoly is present.