One option for making compulsory licensing more palatable is to attach a fixed prize to the achievement of a goal of national importance, as in the X-Prize and the recent DARPA grand challenge. These challenges have been so successful because they work like an all pay auction--while much of the effort dedicated to achieving a goal may turn out to have been wasted, the range of strategies such an approach attracts can produce results subsidized research will never match. Having an effective vaccine for avian flu is an indisputably important goal, and whoever succeeds in producing one in volume deserves billions. If those billions are available in the form of a reward, conditional licensing at a reasonable rate might not be so bitter a pill after all.

"So we are seeing basically a repetition of the planning failures that resulted in the Hurricane Katrina debacle. The history of flu pandemics should have indicated the necessity for measures to assure an adequate response to any new pandemic, but until an unprecedented number of birds had been infected and human beings were dying from the disease, very little was done."

certainly it is true that the destruction from katrina was avoidable. this is due in part to the fact that hurricanes will attack sooner or later and flooding will occur leading to death and destruction. but as you say this virus is mutable so the response may be useful today but tomorrow is completely worthless.

There may be a issue worth clarifying in Judge Posner's statistics. If Spanish Flu killed 1% of the persons who contracted it, and 50 million died, that suggests the world's population in 1918-1919 was much larger than it actually was. Global populatuion at that time was in the neighborhood of 2 billion persons. Yet for the 1918-1919 death toll to have reached 50 million, more than twice the number of persons then alive would have to have contracted the disease for those numbers to work.

Why should the government respond to this?

If you choose to move to Florida where hurricanes seasonally smash up houses, you took the risk. Why should the taxpayer compensate you for your ill-advised risk-taking? Does the government offer refunds when people lose the lottery?

If you choose to take a vaccine and it makes you sick, hey, that's the risk of taking vaccines. If you choose not to, you took the risk of contracting avian flu -- after all, you could have taken that vaccine.

If the problem is people suing vaccine manufacturers, totally take away their right to sue; immunize the manufacturers. But why should we subsidize the production of vaccines?

The chance of contracting avian flu ex ante is like the chance of being born with Gaucher's disease. Just like we don't need the Orphan Drug Act, we don't need subsidies for vaccine manufacturers, either. Since Bill Gates has the same chance of getting avian flu as anyone else, we can always ensure that a private market for vaccines will exist, because there are rich people who will pay to have vaccines made for themselves and investors who will seek to profit from it.

I would like someone to justify why the government should do anything at all. It seems like the perfect thing to leave to the free market. Is this the socialist-commie-blog, or what?

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W

Assuming you are not being flippant, I would agree that leaving things to the market is most sensible where the market can be expected to function. But for vaccines, a problem is that producers may expect property rights to break down in an emergency and that their property will be expropriated. If they do, then they will respond with undersupply, as compared with the quantities society would be prepared to pay for.

It is this risk of breach of property rights that may justify subsidies or other government intervention in the market.

“I would like someone to justify why the government should do anything at all. It seems like the perfect thing to leave to the free market.” W

Vaccines involve positive externalities, as do other methods of preventing disease as your probability of getting a disease goes up with the number of infected people you come in contact with. The prevention of disease is essentially a public service as defined by economists (your consumption does not prevent another’s consumption, your consumption does not lower the total amount available, and it is hard to exclude you). See any economics of the public sector textbook.

See also: http://lab-frog.blogspot.com/2005/10/paternalism-and-preventive-medicine.html

W and ben,

Ben makes an excellent point. If property rights would not remain stable in a disaster then vaccine makers lack adequate incentives to invest since they could not expect the normal rewards. As Posner suggests, it seems likely that their rights would be expropriated; imagine a situation where people who cannot afford the monopoly rents (which are the normal reward for innovation) for a vaccine were dying and multiply that by a huge number of people and it seems likely that immense pressure would exist to force compulsory licensing at low rates much closer to marginal cost. That would be a market failure, in and of itself.

But there may be a deeper market failure here. That is the problem of externalities. To be maximally useful, vaccines need to be widely administered. There are network effects; if a person is vaccinated, it not only benefits him, it benefits others who no longer come in contact with the disease. This benefits even those who have been vaccinated, since sometimes vaccines fail to protect. However, the person who is vaccinated does not enjoy these externalities so presumably would not be willing to pay for them. Yet, if we wanted to provide incentives to vaccine makers which gave them the incentive to not underinvest, we would want them to capture these externalities.

There is another problem, which combines with the above problem. The probability of a vaccine being useful for a very infrequent problem, like avian flu, is an uncertain probability. Normally, new drugs face the uncertainty of successful development and regulatory approval. However, in this case, in addition that initial uncertainty faced by other drugs, vaccines, like those for avian flu face the uncertainty of whether they will ever be useful. The first kind of uncertainty, faced by all drugs, is more quantifiable. Established drug companies have experience going through the FDA approval process and performing clinical trials; they can rationally approximate the probability of success and adjust their investments accordingly. The uncertainty about whether a vaccine for a catastrophic event will ever be useful is more problematic since there is no good principled way to estimate it. It is somewhat akin to the problems that exist when you believe a government might expropriate your property. There just is no good way of quantifying such risks. As a result, investors will rationally demand higher premiums to make these sorts of investments -- premiums that more than compensate for what the expected value of the risk would be, if that was even somewhat knowable. As a result of the need to provide investors with such risk premiums, there will be underinvestment since marginal dollars which generate diminishing returns will not be spent. Of course, this problem, in principle, is not all that different from the first sort of risk. It can be managed to some degree by investing in, say, a diversified portfolio of vaccines just as the risk of expropriation can be managed, to some degree, by investing in many countries. Nonetheless, it is less manageable. While certainly the initial sorts of uncertainty also impose costs, the second sorts of costs will be of a higher magnitude.

The end result of these effects will be invesment in vaccine development below socially optimal levels.

A final point, and this one is ideological. W is quite clearly an narrow-minded ideologue who does not understand markets and their limitations. Markets should be looked at as one extremely important tool in the toolbox. They do some things extraordinairly well. They fail to do other things entirely. Not infrequently, choosing a market mechanism to allocate resources in a particular area has a mix of costs and benefits.

So, I propose the following. Why not apply market principles to the question of whether and to what degree a market mechanism should be used in a particular situation by looking at the costs and benefits? Further, why not apply those principles to the question of what rights and duties are going to underly any particular situation involving market exchange? The optimal role of government is a very complicated question and the answer varies based on (1) what purposes you wish to accomplish and (2) the specific industry or area of human endeavor you are considering. It seems to me, W, that you prefer to have some sort of monopoly on right answers rather than face competition in the free marketplace of ideas. Not for one second did you actually address the merits of Posner's discussion.

In any case, your comment about this being a "socialist-commie-blog" is flat out ridiculous and reflects very poorly on you. Such ad hominen attacks on Becker and Posner are not only uncivil, but also reflect an underlying intellectual weakness and ignorance.

Finally, you don't even have a precise idea of what the "free market" is, this much is evident. The results which come about from "free markets" are dependent, obviously, on the rights and duties established by government in particular areas. Thus, the rights and duties in say, patent law lead to a certain set of results in the "free market" while the different rights and duties in copyright law lead to a different sets of result in the "free market." All Posner is suggesting is that the rights and duties be tweaked in the area of vaccines so that the "free market" will then lead to better results. He was not suggesting that we move to a command-and-control economy, your narrow-minded and ideologically driven drivel about this being a "socialist-commie-blog" notwithstanding.

Perhaps one of the simplest solutions would be for the federal government to subsidize vaccines for the end user to encourage vaccines and to make incentives more accurate. This would encourage greater investment in vaccines and greater consumption.
Of course this only covers one aspect of the problem, especially as viruses tend to mutate as noted before.

A final point, and this one is ideological. W is quite clearly an narrow-minded ideologue who does not understand markets and their limitations.

No, as was implicitly claimed in ben's post, W was clearly being flippant.

Vaccines involve positive externalities, as do other methods of preventing disease as your probability of getting a disease goes up with the number of infected people you come in contact with.

Then why not spend federal monies on quarantine centers? Why waste time trying to stockpile vaccines? We likely will not have enough when the pandemic hits. And then we will have to decide who deserves the antiviral. How should we decide that? You deserve to live, but you deserve to die? No, instead simply spend money on a rapid-response quarantine-construction team to wall up the place where the outbreak starts. Trapped in their own little enclaves those diseased suckers won't be able to spread their filth. Thus, the rest of us will be safe. That isn't market failure; that's risk-management.

My plan creates a public good in precisely the same way as yours does to produce vaccines -- indeed, use the military as the rapid-deploying quarantine-construction team.

W

The quality of your arguments is such that it isn't possible to tell whether you are being serious or not. Please clarify: should we assume your posts that have more than 50% of the words bolded or italicized are serious or flippant?

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W.
Frog’s above idea (and the more detailed one on his blog) is not to stockpile vaccines, but to provide more accurate incentives (prices) to consumers to get vaccinated on a regular basis. Frog’s idea is preventive rather than reactionary. It is also a market based approach, with the government simply adjusting the price to better reflect the true value.
Quarantine centers would seem to be unrealistic (razor wire and machine guns are easier to deploy to a hot zone and cheaper), but additional funding to the CDC and military units for training may also make since. As Frog said, his proposal only covered one aspect.
Only future rulers of the solar system with secret lunar bases on the far side of the moon like Frog should write in the third person :).

Frog’s above idea (and the more detailed one on his blog) is not to stockpile vaccines, but to provide more accurate incentives (prices) to consumers to get vaccinated on a regular basis. Frog’s idea is preventive rather than reactionary.

Yes, and W wrote: "We likely will not have enough when the pandemic hits." Meaning: I understand the gist of your solution, but if we start doing that tomorrow and the pandemic hits the day after that...

Ben,
The quality of your arguments is such that....

You suggested the actualization of Marxism as a response to the vaccine-problem. I suggest you not throw stones while wearing a suicide bomb jacket.

At the risk of sounding heartless, is it in our long-term interest to short circuit the natural culling of our world population? I pose the question, because one's knee jerk reaction is that all saving of human life is good; however, one has to ask, "What is the end game?" The earth's resources are under an exponentially increasing assault. Not only the expanding world population, but increasing life spans and per capita impact of a rapidly modernizing world population, make it an unsustainable proposition that all human life is equally precious (on a deserted island I much rather have a physician than a bus driver with me). The logical conclusion being that all effort and treasure should be expended to save individuals from their eventual demise. On The Charlie Rose Show last week, Judge Posner intimated the cost of health care is skewed because of the increased cost of marginally extending the lives of the elderly with expensive technologies. The vaccine industry is in the state it is in because the private sector sees no economic sense in providing them (by the time a vaccine enters the market the virus it was meant to treat might have already mutated making the vaccine developed at great cost, obsolete). Does the cost of an effort to save a few million lives in a population of 6 billion not fall into the same category?

Healthcare is something that should never be left to the free market, and I believe that protecting America from a potential bird flu epidemic should rest squarely on the shoulders of the government, to (hopefully) ensure that there is equitable & efficient distribution of the vaccine. Can you put a price tag on a life? Maybe, pharmaceutical companies do it, insurance companies do it, but since an epidemic has far reaching effects on the entire society this is a case where we all need to bind together and BE PREPARED. In the current situation we all know who's gonna get left at the bottom if the epidemic strikes--it'll be the poor, the people without access to healthcare, and I'm sure any disaster of that sort would disproportionally affect African-Americans as well. Haven't we learned anything from Hurricane Katrina? Oh, I guess not. Same as how nothing was learned from the Vietnam Conflict, history just keeps on repeating itself. I predict that this bird flu will re-surface in epidemic proportions in my lifetime, the odds are not so "remote" as everybody seems to think, and it amazes me how many lives the BUSH ADMINISTRATION is endangering. Doling out tax cuts to the rich when we could be subsidizing creation of more flu vaccine? Totally immoral, utterly irresponsible, thouroughly Un-American!!

and I'm sure any disaster of that sort would disproportionally affect African-Americans as well.

Why? The disease has to get here first. If an outbreak starts up in China, and we immediately dispatch a quarantine force the infected persons in, and those persons die before they can spread their disease, how does that impact poor African-Americans in the inner city in the United States? There is no connection relevant to this discussion between an outbreak of avian flu in Asia and the structural discrimination that impacts the housing conditions or employment opportunities of African-Americans in the US.

Rather than bind together, it makes more economic sense if we immediately isolate those who are infected, and incinerate their corpses once they die.

David Welker,

I wrote what I wrote to provoke a response like yours. I do not believe, for instance -- "If you choose to move to Florida where hurricanes seasonally smash up houses, you took the risk. Why should the taxpayer compensate you for your ill-advised risk-taking? Does the government offer refunds when people lose the lottery?" -- but, that is a paraphrase of what Thomas Sowell recently said in an interview with Fred Barnes on the Fox News network. I was just being provocative, but to the extent to think it is utter bunk, take it up with Thomas Sowell.

I would also note that you provide ample critique to the provocative position I adopted, which suggests it has more substance than you admit. But you fail to provide a coherent theory of why the government should "tweak" the market. I suspect the only justification you have is at root a utilitarian one. That is quite odd, given that this an economics blog. As Posner recently said, "[I]t is ... useful to distinguish between the utilitarian and economic perspectives. Economists generally measure the welfare effects of a new product by willingness to pay rather than by subjective satisfaction (pleasure, happiness, freedom from pain, etc.)." What is the economic justification for tweaking the market? Simply claiming that it has failed is not sufficient, because one iteration of a market is a failure only in comparison to a hypothetical set that satisfies the ideal criteria of "better" -- and I have a feeling that you are determing what "better" is by appealing to some utilitarian calculus.

Let's put an actual human face on all of this. Especially the 1918 Spanish flu epidemic. My grandfather was caught up in it. As he used to say, " Yeh, I enlisted in 1917 and after basic training my regiment was earmarked to go to France and the trenches, but the flu hit and instead of going off to war we were reassigned to medical duty stateside because there weren't enough doctors and nurses (must of them contracted it and either died or were incapacitated) available to deal with the problem. Most of the regiment wished we'd gone to the trenches, the probability of survival was greater." So much for an eye witness account. Some say WWI ended early because the troops were so worn out by the epidemic. Others say it wasn't the flu that was so deadly, but created a condition that allowed a preexisting condition, tuberculosis to rage through the population killing it off. As witnessed by the decline in tuberculosis cases during the following years.

What ever the solution, mother nature has its methods of population control and may be proof of Spencer's or Darwin's survival of the fittest philosophy at work. As for the Government's response, it will probably be too little to late.

> This problem can be solved in a variety of ways: by requiring proof of negligence rather than imposing strict liability for side effects of vaccination; by increasing the burden of proving causation in vaccination suits; or by the governmen's undertaking to indemnify the producers for damages attributed to the vaccine.
It's interesting

N.E. Hatfield: Some say WWI ended early because the troops were so worn out by the epidemic.

That is an interesting theory. Let me respond like this: when we distribute vaccines, we should provide them to generals and war commanders first and essential military personnel second. Then first responders to terrorist attacks. Then to everyone else on some equitable basis. That way, our national security, as it is traditional defined, will be much less likely to suffer from the pandemic.

But for vaccines, a problem is that producers may expect property rights to break down in an emergency and that their property will be expropriated.

Companies claim this even when there isn't an emergency and even when the product at issue isn't a vaccine. Ford just the other day was asking for tax breaks to make hybrid cars. It says it faces an emergency. Except the emergency is the free market rejecting its poorly made cars in favor of delectable Japanese products.

"It can be managed to some degree by investing in, say, a diversified portfolio of vaccines just as the risk of expropriation can be managed, to some degree, by investing in many countries."

It seems like an easy solution is for the government to offer a prize: 12 billion dollars, for example, to the first company to produce a vaccine for avian flu that meets the following criteria: x,y,z,a,b,v,c,d,e,f,g. The government, however, owns the patent, and after the prize is awarded, the market is immediately opened up to generics to copy the formula. (The government need not only offer one prize; it could offer multiple prizes for various strains of avian flu that have are "mutations of concern," based on lab testing.)

Sally

Vaccine producers can make this claim with credibility since a) vaccine shortages appear real, and b) there has been at least one instance of a firm exiting the market.

Ford's argument for tax breaks is fundamentally different, and unrelated to the risk of property rights breach and externalities that may justify vaccine subsidies. Skepticism of business calls for government support is healthy. However, the case for govt support of vaccines beats Ford's argument, and by some margin.

interesting post. the psychology of policymaking is especially interesting. daniel kahneman or amos tversky identified an especially relevant heuristic (sadly, the name of which i'm forgetting) - but, in essence, people have an extremely difficult time distinguishing between very small probabilities and a 0 probability. this is so even when the risk associated with a low probability-event is extremely salient (as may be the case with bird flu, though it sometimes seems surprisingly unable to capture attention despite our experience with flu pandemics.)

Item 3 in this link reveals information worthy of further scrutiny.

I was told that Abbott Labs became the company they are, in part, because they did not have to honor German patents during WW II. Clearly, new events often change old relationships.

Any company that makes a flu virus must understand that if a true pandemic starts, countries will ignore international patents. The price they charge must reflect this reality.
Judge Posner, perhaps correctly, argues that we are not dealing with the pandemic threat - for a variety of reasons - but we must take steps in the long run and short run to fix the problem.

First, Judge Posner wants to create a market incentive for vaccine creation and production. He argues that if we lower a cost of doing business, the risk of lawsuits, we will encourage firms to enter or increase production. Perhaps, but Judge Posner doesn't sound convinced that legal reforms will encourage major structural changes in the industry. You might see some firms taking greater risks to get products to market faster, but most firms will assume, I think correctly, that class action lawsuits would still be a cost of business. Still, if you think that the vaccine companies are competitive firms that just need higher profits to increase output, then perhaps lowering costs will increase output.

Perhaps greater government funding, even international funding, for basic research is the answer. It would be expensive and seem wasteful, most of the time, but every thirty years or so we might be thankful. Perhaps in the long run we will find ways to quickly make vaccines, and find ways to quickly ramp up production. Private firms may not have enough incentive to do this type of research, and we should give grants to research universities. Of course that is a long run approach.

Judge Posner then writes of compulsory licensing.

I assume that the marginal cost of additional vaccine is small - a question of capacity rather then research. So firms should be willing to license for a rather small per dose fee. I assume that firms are reluctant to license technology because if other companies gain the knowledge to mass produce vaccines, they may use that knowledge to become competitors. (backwards integration) I would assume that flu shots would be a big business for years following a pandemic.

So what would a monopolist do? Price discriminate across countries. Contract with subcontractors for regional monopolies and concentrate on the source of their monopoly - basic research. Create non-compete clauses with strong international sactions for subcontractors who violate. Sign long term contracts with countries to produce vaccines - perhaps with the ability to market vaccines that government supported labs produce - to sustain their monopoly into the future.

Monopolies charge higher prices and produce less output then competitive firms. We want the monopolist to increase production. Lowering his MC curve will increase production and lower prices. So how do we do that?

I have seen the opinion a few times regarding the economic perspective of this site. In relation to issues of health care, I think it's important to consider all perspectives, because it's all well and good to be cavalier about statistics related to a deadly flu until you are the one hacking up a lung and facing death head-on. I don't believe even the most disciplined economist will be comforted by the truisms of Darwinian theory while they are choking for their last diseased breaths.

interesting post. the psychology of policymaking is especially interesting. daniel kahneman or amos tversky identified an especially relevant heuristic (sadly, the name of which i'm forgetting) - but, in essence, people have an extremely difficult time distinguishing between very small probabilities and a 0 probability. this is so even when the risk associated with a low probability-event is extremely salient

The term Framing is used by Kahneman and Tversky to describe this bias. Camerer mentioned in a recent lecture that this effect tends to be more serious in men than women.

I'd just like to point out that vaccination is in the public interest, not just the interest of those people vaccinated. Think of polio.

Mike Petrik: If a company invests billions of dollars with the hope of creating a marketable vaccine that it can sell for more billions of dollars, it will be pretty unhappy if the government decides that the vaccine's chemistry is not property that is owned by the company and instead may be copied by others who did not spend the billions on r&d. Indeed, any company that anticipates this treatment will likely refrain from making the necessary r&d investments.

That is only true if the government doesn't offer a large enough award, which is a bold and unfounded presumption to make! So long as the prize-award for a cure to a particular strain of avian flu is on cent more than the cost to produce it, a company has an incentive to research and develop. (I would note that the prize-model has been proven to work with private space flight.)

The italicized critique also ignores that universities have an interest in government money, and they have research facilities as well. As well as endowments. And, a prize is also an award and scientists like recognition and fame in addition to cash.

One could easily make the argument that my solution is less wasteful than two companies racing to be first to get a patent, a situation in which the expenses of the second-runner up are not recouped. My way, anyone who has invested in producing a cure for one strain of avian flu can, at minimal cost, simply convert those dollars into a cure for another, somewhat similar strain, and claim a prize that way (as I said there can be multiple prizes). By contrast, if you had a privately owned patent, similar strains would not be individually patentable: lawsuits over whether the second-runner up has infringed the patent-winner's patent and whether the patent is valid would clog the Federal Circuit; research and devlopment costs would skyrocket because of defensive takes on construing such research in patent specifications during patent prosecutions, all in an effort to game the claim construction review by the courts. My way eliminates such wasteful litigation and R&D work and reduces the taxpayer burden by removing the issue from the tax-funded courts and out of the grasp of value-depleting attorneys.

My solution is not a suggestion to permit the government to steal property without warning, but changing the system of how patents work in the case of vaccines. There would be fair warning for the market to adapt to it. I would also note that you don't have an inalienable right to a patent; just read the Constitution!

One cent not "on cent".

W, On an equitable basis? How? When the worlds population is around six billion souls. By the time an epidemic is recognized it's already to late. You can't ramp up the production and distribution to cover them all. It becomes an exercise in "Life boat ethics" and the survival of the fittest.

W,

I will respond to your comments, though I am uncertain they deserve response. You make the point that sometimes by responding to an argument, you give it an undue legitimacy. I disagree with that position. Merely responding to an argument does not change its legitimacy; however, even poor arguments that are at their core narrowly ideological can have negative consequences in the real world - thus the rationale for responding to them. Me responding to an argument may imply that I think it has merit; however it also may imply that I think it is sufficiently plausible to some (like yourself) while nonetheless being clearly wrong such that a response is useful. By responding, I am not in any way implying that your ideas should be taken seriously.

Now, to move to substance, which is more interesting. You wrote:

"I suspect the only justification you have is at root a utilitarian one. That is quite odd, given that this an economics blog. As Posner recently said, '[I]t is ... useful to distinguish between the utilitarian and economic perspectives. Economists generally measure the welfare effects of a new product by willingness to pay rather than by subjective satisfaction (pleasure, happiness, freedom from pain, etc.).' What is the economic justification for tweaking the market?"

First of all, economics alone is a justification for precisely nothing. There must be some sort of normative theory which justifies the results arrived at by market mechanisms under a given set of rules. It is not enough to say that a market, which only exists under certain frameworks provided by government in the first place, is itself inherently self-justifying. That is what you are blindly assuming away and which Posner does not.

Economic models are predictive tools. They are meant to be descriptive, not normative. They are tools used to predict outcomes; they employ questionable assumptions. But that is okay, as long as you know what those assumptions are and understand their significance to the outcomes predicted. The reason questionable assumptions are employed is entirely pragmatic. Economic models would be excessively unwieldy and would obscure more than they clarify without some simplifying assumptions. Economic models don't tell you what assumptions to use and which not to use. It is possible to have models with different assumptions. Models are just there as a tool, waiting for you to use them for your purposes. They don't provide answers to hard normative questions. Anyone who has a firm grasp on economics understands this; it is clear that you do not have a firm grasp on economics, since you clearly do not understand this. You think that the idea of "economic justification" is in any meaningful way sensible. It is not. Notice, that what Posner said is that it is useful to seperate economic perspectives from utilitarian perspectives. He did say it is useful to seperate economic justifications from utilitarian justifications. He knows that the ecnomic perspective is descriptive, not normative. That the use of economic models provides a perspective, not a justification.

I do not think that one can read much Posner and come to any other conclusion that that he has strong utilitarian tendencies and furthermore that he understand that underlying rules have big impacts on outcomes that result from market mechanisms under those rules and must be evaluated based on their normative attractiveness. Having a massive flu epidemic which kills millions of people is not normatively good, therefore, the free market mechanisms which lead to these results and come into play under the current rules should be replaced by free market mechanisms that lead to different results under different rules. At the end of the day, Posner is a pragmatist and is concerned primarily about results. He is not you, who seem more inclined to blind ideology that instinctively reaches for the same tired tool to respond to every single policy problem, regardless of the important differences presented by different problems.

I think that your initial comment was ideologically driven and reflective of ignorance about how markets work is best illustrated by what you say next: "What is the economic justification for tweaking the market?"

This is quite imprecise. Who said anything about "tweaking the market." What we are talking about tweaking are the rules which exist in the status quo. That may have an effect on the market, but you can't be opposed to changing the rules when they lead to better results. Any rule change will have SOME effect on the existing markets. That doesn't mean your "tweaking the market," does it?

If it does, then ironically, you have suggested doing the very same thing yourself in a later post: "It seems like an easy solution is for the government to offer a prize: 12 billion dollars, for example, to the first company to produce a vaccine for avian flu that meets the following criteria..."

What are you suggesting here is that the RULES be changed to reach better results. You are tweaking the rules and changing "free market" outcomes. Either your a hypocrite or you haven't fully considered your arguments. I think most likely, using the principle of charity in interpretation, that you have not fully considered your arguments. (By the way, I happen to think that the particular policy proposal here is a good one, with some modification it may lead to better results.)

So in conclusion, I think your an ideologue, but not a hopeless one. The reason I say your not hopeless is because you have suggested changing the rules to lead to better results. All things considered that is a good thing.

W - why have you posted the same lengthy comment under both Becker's and Posner's posts?

Ben,
because Mike T did not criticize my post under both. The length of my reply is irrelevant, and the tone of your question incivil.

What are you suggesting here is that the RULES be changed to reach better results. You are tweaking the rules and changing "free market" outcomes. Either your a hypocrite or you haven't fully considered your arguments.

No. At one level I asked for a justification as to why we should "tweak the market" at all. "Tweak the market" was not my language; if it wasn't originally yours, well, it was somebody's on here who shared your view. You in particular tried to defend the economic perspective, but without fully justifying it. I probed that.

Without asserting that it is justified for the government to intervene in this situation (I obviously think it is notin this case), I offered a solution that would work. The two are not inconsistent.

Let's say a woman 5 feet away from us is choking. I do not think any of us have an obligation to save the woman from choking, but that doesn't mean I cannot demonstrate the proper way to administer the Heimlich manuever to an audience while she is choking 5 feet away. If you asked me why, if I can perform the manuever, did I not help the woman who was choking, I would say, "I didn't have an obligation to." Where is the inconsistency in that?

Instead of trying to find an inconsistency in my arguments that is non-existent, or attacking me personally as an ideologue because I think Thomas Sowell can make a valid argument, try justifying your position instead. Ah, but you do not justify your position, you all but concede that my criticism is absolutely correct:

First of all, economics alone is a justification for precisely nothing. There must be some sort of normative theory which justifies the results arrived at by market mechanisms under a given set of rules.

Having a massive flu epidemic which kills millions of people is not normatively good, therefore, the free market mechanisms which lead to these results and come into play under the current rules should be replaced by free market mechanisms that lead to different results under different rules.

Then you go on to "paraphrase" Posner:

He did say it is useful to seperate economic justifications from utilitarian justifications.

In fact, he does not say that. What he says is this: "[I]t is ... useful to distinguish between the utilitarian and economic perspectives." He could mean:
1. It is useful to distinguish between ... utiliarian [perspectives] and economic perspectives.
or;
2. It is useful to distinguish between the utilitarian and economic perspectives.

In the first interpretation it is more natural to take out the "the" for it to make sense, because Posner is comparing apples and apples, i.e., two kinds of theories. In the second interpretation, the "the" remains, but the meaning is different. Posner there would be comparing a utilitarian person with an economic perspective, i.e., he is comparing sense organs with a theory. One is independent of the mind, i.e., economics is objective, the other is subjective, i.e., rooted in the sense organs, or in a person.

If the second interpretation is right, Posner is sort of making your point, except it is untrue that "He did say it is useful to seperate economic justifications from utilitarian justifications." He in fact did not. He seems to be claiming that what justifies the consideration of economic questions is that they are objective or, as you put it, descriptive.

But that does not justify your argument, which is that we should be utilitarian in how we apply economic theory. That is the exact opposite of what Posner is saying; he is saying we should consider economic questions even if the consideration offends utiliarian norms.

On what basis do you justify the claim that "Having a massive flu epidemic which kills millions of people is not normatively good, therefore, the free market mechanisms which lead to these results and come into play under the current rules should be replaced by free market mechanisms that lead to different results under different rules." And where exactly does Posner in his post give support to such a claim? I am sure someone as well-versed in economic theory as you, Mr. Welker, could quite easily imagine many scenarios in which economic theory would demonstrate that the world would be better off if millions of people died from a pandemic.

It becomes an exercise in "Life boat ethics" and the survival of the fittest.

I know, N.E. Free market!

While it seems clear that capitalism is good at providing individuals with strong incentives to work, it is less clear that capitalism is good at allocating scarce resources.

Certainly there are lots of hand waving explanations about why capitalism might be able to allocate scarce resources in a desirable way. Many people even define the best allocation to be whatever allocation evolves under a capitalist system.

There is not, however, a single clear definition of what the best allocation is and clear experimental evidence showing that capitalism achieves this allocation better than other economic systems.

Along these lines, it is not at all clear that scientific research is best supported by the "free market". It is quite likely that scientific research is best supported by public (government) funding so whether there are market incentives for pharmaceutical companies to develop vaccines may very well be irrelevant.

As to the specific question of what should be done about the possibility of a flu pandemic, flu vaccines are only effective against the specific strains they are designed for. Even if enough vaccine was stockpiled for the entire planet, it would be worthless in a year or so when the next flu strain came onto the scene.

Furthermore, even if the emphasis was only on developing the facilities to produce enough vaccine quickly should the need arise, the facilities would be obsoleted in a matter of a few years by new developments in flu vaccine technology.

Now, the current president, George "Mr. Deficit" Bush, seems intent on leaving a mess for future generations, however, for those of us who like to leave the planet a bit better than we found it, an attractive endeavor is basic science research.

While it certainly makes sense to keep an eye on the current flu strains making the rounds and while I certainly hope that somewhere in the vast underbelly of the United States government someone is making contingency plans in case of a flu pandemic in the next couple years, the real focus should be on understanding the basic science of how the flu spreads and how it can be stopped.

The government should focus on understanding in detail how the flu is transmitted from person to person and it should educate the public not just in a vague "you all might die" sense but in the sense of actual details of how disease transmission occurs. Furthermore, there should be research into how the flu can be cured - either with the help of the immune system (for example, vaccines) or with other approaches entirely.

Such an approach would involve a short term risk but substantial long term benefits.

>

Free markets are the best way to allocate scarce resources. Certainly you don't want a command economy allocating resources, or do you think we should all vote on every allocation issue?

When I talk about giving public money to research centers to do basic research it is with the full understanding that waste will occur. The same type of waste we see with defense spending. We spend, perhaps overspend, to assure a hard to define margin of safety. We buy very expensive insurance, with wasteful incentives built into the system - but if we don't spend enough, we risk disaster.

Vaccines against a pandemic flu that may occur every 30-50 years hardly creates an incentive for a private firm. The private sector will underinvest (in the view of risk averse people). The public sector will overspend (in the view of people with more risk tolerence.)

If the collective wisdom of the marketplace discounts the risk of a pandemic striking, we should not be surprised that private firms - who react to market incentives - react by limiting resources dedicated to vaccine research and production.

W,

You did correctly catch a typo. I wrote, in the last post, "[h]e did say it is useful to seperate economic justifications from utilitarian justifications." I of course meant did NOT say it. I was of course contrasting perspectives with justifications; it wouldn't really make sense for me to contrast them and then write two sentences which imply they are exactly the same. Anyway, it seems you understood the point perfectly well despite my typo, which is nice.

It seems that you have caught on. You acknowledge that economic theory does not justify. Kind of. Except you say the following.

"I am sure someone as well-versed in economic theory as you, Mr. Welker, could quite easily imagine many scenarios in which economic theory would demonstrate that the world would be better off if millions of people died from a pandemic."

This is of course NOT something that economic theory would show. Economic theory might make more or less accurate predictions about something, but then it is up to you to evaluate the normative attractiveness of the results. I have explained this before, so I apologize for the redundancy. You seem like you get it, then you say something like above which makes me wonder. Frankly, no normative theory that I would subscribe to would accept the deaths of millions of people from flu epidemic as making the world better off. Economic theory just does not go there.

Still, I have to give you credit overall. You are definitely intellectually agile. Nonetheless, I do think I was perfectly justified in attacking you personally. Your first comment was reckless. I still think, all things considered, that you are probably an ideologue, but, I a may be wrong.

Finally, to respond to one last thing you write:

"But that does not justify your argument, which is that we should be utilitarian in how we apply economic theory. That is the exact opposite of what Posner is saying; he is saying we should consider economic questions even if the consideration offends utiliarian norms."

First, I am convinced based on reading way too much Posner, that he does have strong utilitarian tendencies. I am not saying that he is a pure utilitarian; you would have to ask him. Finally, whatever Posner's normative philosophy, I don't suppose it is particularly relevant in and itself. What is relevant is that you have and defend a normative philosophy and not suppose that economic theory is such a philosophy in and of itself.

Second, I don't think Posner is saying that we should consider economic theory even if it offends utilitarian norms. Why? Because if economic theory is descriptive, it will NEVER offend utilitarian norms or any other sorts of norms for that matter. Here is my economic theory, this is what it predicts. There is nothing to be offended by normatively by a prediction. All one would be concerned about is accuracy. One might and should normatively judge the predicted results, but not the model itself. Except in strange situations where the assumptions themselves are normatively offensive. This should not be the case except in very unusual circumstances. This is not really the case with standard economic theory; the assumptions themselves are not normatively offensive, at least not under what I would think are reasonable normative philosophies. The degree to which the assumptions underlying an economic model lack of accuracy undermines the predictions of the model is more of a technical than normative question. Thus, there really is no clash between descriptive and normative. (As a side note, I would not go so far as to say that economic theory is objective, at least in anything more than a loose sense. After all, economists have to choose assumptions and those sorts of choices are not exactly objective. That is why I would call economic theory descriptive but would avoid objective...)

Third, utilitarianism is the normative theory which best fits economic theory. Not that use of economic theory requires one to subscrive to utilitarianism. It just seems that the sort of information and predictions provided by economics are most relevant to utilitarianism and perhaps less relevant to other standard normative philosophies.

Fourth, so far, you have avoided articulating and defending your own normative theory. So, do you think the rules should not be changed even if doing so would save many lives? If not, why not?

Fifth, you wrote, "without asserting that it is justified for the government to intervene in this situation (I obviously think it is not in this case), I offered a solution that would work. The two are not inconsistent." Of course they are inconsistent! Your solution requires the government to change the rules and the results that would have occured under the old rules. That is called government intervention! Your solution is NOT consistent with the view that the government should not intervene. If that is your view, there is an inconsistency between your proposed solution and your view.

In calculating lethality, bear in mind two things - first that an airborne disease transmitted from person to person will tend to decrease slightly in lethality as it spreads, since airborne diseases tend to evolved towards benign coexistance with their hosts. If you're so sick that you can't move, you can't spread an airborne disease. The exception is situations like WWI where people were packed into boxcars, in which case the disease would seek to 'use up' their host's resources as quickly as possible.

Second, lethality tends to be overestimated in cases like this since those people who die off are counted, but those people who get the disease and fight it off or only suffer minor symptoms may not be.

W, True "Free Markets" are only the pipedreams of anarchists. ;)

David Welker: If that is your view, there is an inconsistency between your proposed solution and your view.

If you need to reframe my proposal and mischaracterize my view, that's a sign that your argument is spurious. Aside from that obvious point, what you call an "inconsistency" is an such an irrelevant "inconsistency" that calling it an "inconsistency" is an abuse of the English language. What you mean is that I am a hypocrite, which is why you called me a "hypocrite". I would be a hypocrite if there was an inconsistency between the fact that I was proposing a solution and the fact that I hold a view that one should not propose solutions. I hold no such view. My view is that it is perfectly fine to propose solutions on blogs all day long -- and certain solutions will likely work, whereas other solutions will likely not -- but that government should not intervene in this particular case. I think you need to separate the person from the theory, much as Posner suggested we separate "the utiliarian [person] from economic perspectives". He never says "utilitarianism". You, frsnkly, make this up.

Second, I don't think Posner is saying that we should consider economic theory even if it offends utilitarian norms.

Really? Because he does just that! Here:

POSNER: "Another comment asks whether the alternative uses to which resoiurces would be put if there were no Orphan Drug Act would contribute as much as or more than to social welfare; the commenter says that "it does not seem that a drug like Viagra is nearly as useful as say, one treating cancer." This proposition has great intuitive appeal, but it is (speaking of useful) useful to distinguish between the utilitarian and economic perspectives. Economists generally measure the welfare effects of a new product by willingness to pay rather than by subjective satisfaction (pleasure, happiness, freedom from pain, etc.). From that standpoint, a drug like Viagra that has a huge potential market might be more "valuable" than a drug that treated a cancer from which only a tiny number of people suffer. I am not suggesting that the economic criterion of welfare should be the only one employed by government. But I insist on the relevance of the economic perspective--and here I quote the commenter who said "It is in fact appropriate to ask--ad absurdum--whether an Act resulting in pharmaceutical companies spending billions to find a cure for a disease whose only victim were Bill Gates, instead of spending them on research that might benefit thousands of even millions of Americans, would in fact have negative benefits [for] the rest of us." No offense intended to Mr. Gates; it is nevertheless a worthwhile question."

You also claim to understand that economic theory cannot justify your personal belief in utiliarianism, but then you dismiss that "someone as well-versed in economic theory as you, Mr. Welker, could quite easily imagine many scenarios in which economic theory would demonstrate that the world would be better off if millions of people died from a pandemic," by noting that "This is of course NOT something that economic theory would show." Really?

According to BECKER: "Economists have estimated from people's decisions about various life-threatening risks the amounts they would be willing to pay to reduce their risk of dying from an accident or from a disease. A young person in the United States is estimated to be willing to pay about $500 for a 1/10,000 decline in the probability of dying at each age. This means that 10,000 such young persons would be willing to pay in the aggregate about $5 million for such a decline in their risk of dying. The $5 million figure in this example is what economists call "the value of life" (to young persons for such risks)."

If you simply change some of the numbers, what public policy outcome is optimal changes. One can very easily graph a relationship between how many people are expected to die and optimality; so economic theory could, very easily, show that the optimal solution is iteration where the greatest number of people die. Posner is saying that if economic theory can show it, what's wrong with considering the question? Let's scrutinize the data!

But you refuse to do so, and that is where you part ways with Posner. You say: "Frankly, no normative theory that I would subscribe to would accept the deaths of millions of people from flu epidemic as making the world better off. Economic theory just does not go there." But economic theory is not a normative theory. You are treating economic theory as normative because you believe that "utilitarianism is the normative theory which best fits economic theory." That is inconsistent to what Posner recommends is most useful: "[Though] this proposition has great intuitive appeal, ... it is (speaking of useful) useful to distinguish between the utilitarian and economic perspectives." Posner is literally asserting that economic theory is not utilitarianism.

I caught no "typo". You are trying to turn apples into oranges. But you cannot derive an ought from an is or an is from an ought.

You, David Welker, are the utilitarian. Economic perspectives are not you.

I meant figuratively by literally, by the way. Sorry!

W,

First, you say that you did not catch a typo. Which implies that I am lying about what I meant to write. Fine. You can cling to this silly assertion, but I would note that it doesn't make sense to contrast descriptive with justification and then write two sentences which imply they are the same thing. Frankly, your willfully trying to exploit a typo in an un-editable comment into construing my meaning as being contradictory and implying that I really am either so simple-minded as two thoughtlessly switch between normative and descriptive.

Second, I can understand why you would seek to exploit this typo. Frankly, I think I have dispatched your "arguments" in a rather devastating manner. The evidence of this is your failure to respond to those arguments.

Third, once again, you demonstrate your incapicity to understand the difference between normative and descriptive: "If you simply change some of the numbers, what public policy outcome is optimal changes."

What is optimal, is based on what you are trying to maximize. What you are trying to maximize is based on what you think is best. What you think is best is based on your normative philosophy. It really is that simply, I don't understand why you don't get it. Economics does not say what is optimal by itself, it must be combined with a normative philosophy which allows one to evaluate the results predicted. Period.

Fourth, the last thing you say, not suprisingly, makes no sense. "You ... are the utilitarian. Economic perspectives are not you." You have earlier agreed that economic perspective are not normative. Thus, you must concede that economic perspective do not clash with utilitarianism or, for that matter, any other normative philosophy. However, by suggesting that economic perspective are not me, because I am supposedly a utilitarian, you suggest these things are somehow in conflict. Which shows that you still are fundamentally confused.

Fifth, I am not a pure utilitarian. You should avoid reckless inferences. But, overall, I am not suprised that you, once again, display recklessness. It is like earlier when you assserted that "Would also note that you don't have an inalienable right to a patent; just read the Constitution!" How much work would it have really been for you to have actually looked at the Constitution before saying something that is so clearly wrong?? Not much.

Sixth, while Posner does mention the "economic criterion of welfare," I don't interpret that to say that he thinks that economic models are normative rather than descriptive. What he means, of course, is that in economic models both producer and consumer surplus are created by employing market mechanisms. Surplus is the difference between either the price that a consumer or producer would accept, and the amount they actually pay. Posner's point is actually quite simple. Consumer surplus does not necessarily accurately capture utility, although for consumers with similar incomes, willingness to pay probably is a good approximation of utility in most situations. Thus, the information produced by economic models is imperfect from the perspective of utilitarianism. We don't really know if the resulting allocations really produce the greatest good for the greatest many. To that extent, what economists say is optimal in terms of maximizing welfare will vary from utilitarian social welfare to the extent that economic welfare fails to capture utility.

This does somehow transform economic theory into a normative theory. Only someone who did not really understand what they are doing would fail to realize that economic models fail to produce information relevant to many normatively significant consequences. It is quite clear that Posner is not someone who fails to appreciate this; otherwise, he would not have said "I am not suggesting that the economic criterion of welfare should be the only one employed by government." If Posner thought that economic models captured all normatively significant consequences, he would not think government should ever consider anything else.

I agree with Posner that the economic perspective is relevant. I also agree with him that there are limitations to that perspective in terms of capturing all normatively significant consequences.

I am not sure where you stand; so far, it doesn't seem like you even quite comprehend the difference between the economic perspective and normative justification. If you did, you would not suggest that there was any conflict between economic perspectives and utilitarianism when you write "You ... are the utilitarian. Economic perspectives are not you."

Mr Walker.

I really don't understand your point 6. Consumer and producer surplus are most often a result of transaction costs. Wendy's sells hamburgers at a price with consumer surplus because the transaction costs needed to price discriminate are high. They will take steps to price discriminate by bundling items, senior discounts, special menus for the price sensitive, etc. Wendy's can not tell by looking at customers what they will pay, so they don't bother. I don't understand this lost utility as a market failure you see.

You also seem to ignore marginal analysis and how it helps allocate resources

I agree, to a degree, about normative values sometimes trumping economic models. For example, an economist can tell society how much it cost to run a drug war. And I can understand that society, or a majority, will still vote to continue the drug war because they can not morally accept the social consequences of legalization.

In the case before us, Judge Posner argues that society is discounting the risk of a pandemic. Next he argues that the economics of flu vaccines makes a rapid response to a quickly evolving pandemic almost impossible. The key to successfully fighting a pandemic is preperation before the pandamic occurs.

Judge Posner clearly has a differnt risk profile then a majority of society but that does not mean that he has different normative values. Judge Posner is not fighting to live while a majority of society is suicidal.

Judge Posner then argues that the economics of flu vaccines complicates his desire to fight a pandemic. Of course what he is really fighting is a society that does not share his alarm. He then offers ways that policy makers can tweak markets to get an outcome he desires. His preference is to seek market incentives (rather then just privatize the production of vaccines.)

The economic models just give the realitve costs of alternatives. The information that the economic models supply makes you an informed decision maker, it does not demand a course of action.

Dan,

Great points. Like you say, economic models allow you to make more informed decisions, they do not tell you what normative values you should hold.

With respect to consumer and producer surplus, I think what you really meant to say, and this would be accurate, is that the inability to perfectly price discriminate due to (1) imperfect information and (2) lack of sufficient market power explain why consumer surplus exists. However, producer surplus would still exist even in a market with perfect price discrimination. Thus, it is not really correct to say that all surplus is the result of transaction costs.

I may not have addressed marginal analysis in this particular instance. You are quite correct to suggest that marginal analysis is often at the center of economic analysis, but what I was doing with the preceding posts was not economic analysis itself, but rather exploring the relation of economic models to normative theory.

Marginal analysis does, as you suggest, help predict how resources will be allocated. In particular, you can say that, for a given rational actor, they will continue doing an activity as long as the marginal benefit exceeds the marginal costs (where marginal costs include all costs, including marginal opportunity costs). That is all well and good and probably gives economic models a decent amount of predictive power.

Finally, normative analysis does not trump economic models. At least I don't think this makes sense. Normative analysis is about how things ought to be; economic models try to make predictions about what will result when market mechanisms are unleashed in a given environment under a given set of assumptions. In other words, economic models try to predict or describe. There is no trumping going on. The way you trump an economic model is not by making normative judgments, but by suggesting reasons why what it predicts may be innaccurate; for example, the model in question makes importantly unrealistic assumptions, is based on faulty data, or has logical flaws.

Normative judgments come AFTER you predict what will happen. If we do A, the economic model predicts that X will occur. If we do B, the economic model predicts that Y will occur. To attack an economic model, you would suggest that the model is innacurate: A will not lead to X or B will not lead to Y. To engage in normative analysis, you say whether you think X is better than Y or whether Y is better than X. So, as you can see, it is not really about normative judgments trumping economic models. Economic models don't claim to tell you whether X or Y is better (though sometimes economists WILL do exactly that -- but when they do, they aren't engaging in economic analysis), rather they claim to predict what will cause X or Y to come about. I don't think it makes sense to say normative values trump economic models when, properly understood, economic models do not involve normative judgments about outcomes.

I think the confusion here is understandable. Most economists have strong utilitarian tendencies and, often, they do not hesitate to tell you what they think is "best" immediately after going through some sort of economic analysis. Nonetheless, what is "best" is not really something that an economist is any more qualified to say than anyone else; their expertise lies in making models which hopefully make more or less accurate predictions or more or less accurately describe and explain reality.

Overall, Dan, I think your post is right on. As you say, "The information that the economic models supply makes you an informed decision maker, it does not demand a course of action."

Typos! This is probably why I should comment from my own blog where I can make quick edits.

"This does somehow transform economic theory into a normative theory."

Should be:

"This does NOT somehow tranform economic theory into a normative theory."

Not to mention spelling error! In the future, I am going to consider writing in a word process and then posting... Anyway, hopefully the mangled English does not detract from substance.

Really interesting blog. Got to know many nice things.

Josh, Is it too, to or two? I never can quite remember. It's like "Who's on first?" "No, Who's on second. What's on first." "NO, What's on third, Where's first?"

For me, you could gather more information on any topic but the transactions costs are often greater then the benefit. The actual costs spent, plus the cost of the time lag etc. Next you could try to contract or even auction your goods or services. i.e. Wendy's could auction burgers outside a Burger King as a way to increase sales and profits but the gains would be minimal compared to the cost. In any case, I just lump these actions, ones I could take, but they aren't worth the effort, as transaction costs. I have better ways to allocate my resources with the full understanding that I may be leaving money on the table during the transaction. In competitive markets I may just ignore the whole issue of consumer surplus. I don't want to dance on a pin about this.

Normative analysis is about how you think things should be. Normative analysis often involves value judgements for example how to balance equity against economic efficiency. So when I say trump what I mean is that value judgements can lead us to sacrifice economic efficiency in pursuit of another societal or personal goal.

Economist also have the right to say that course x is better then course y. And different economist have different biases so their values will color their research. University of Chicago economist are doing wonderful objective analysis while Harvard economist (to the degree they are economist) are often hacks with a political agenda. My bias.

I think your seperation of normative Vs economic may be Ok for debates or teaching issues but it clouds the real world interaction of factors. Economist are not ignorant of normative issues when then study social issues. Policy makers are frequently ignorant of economics, but that does not mean that economic realities will not impact their choices.

Which leads to a related matter. As Justice Scalia would advise, depend less on expert witnesses and various social theories and look to the law when you decide legal issues.

Perhaps we all ought to take a look at the pending "Biodefense and Pandemic Vaccine and Drug Development Act of 2005" instead of trying to reinvent the economic wheel. Is BARDA (Biomedical Advanced Research and Development Agency)set to become the new Nasa? Also, it contains some interesting legislation on Tort reform.

David Welker: You should avoid reckless inferences. But, overall, I am not suprised that you, once again, display recklessness. It is like earlier when you assserted that "Would also note that you don't have an inalienable right to a patent; just read the Constitution!" How much work would it have really been for you to have actually looked at the Constitution before saying something that is so clearly wrong?? Not much.

Like all your hasty comments, this one is based on a misinterpretation. Congress can choose to create patents or not create patents. You don't have an inalienable right to a patent, because the Congress need not create a patenting system. It simply has the power to do so, if it wishes.

Dan C: I agree, to a degree, about normative values sometimes trumping economic models. For example, an economist can tell society how much it cost to run a drug war. And I can understand that society, or a majority, will still vote to continue the drug war because they can not morally accept the social consequences of legalization.

I agree that economics is a social science. Optimality would take into account what actual societal preferences are and use that as its background. Optimality is not determined by the normative preferences of the economist himself!

I agree Dan C, that the economist, much like the judges that Justice Scalia abhors, who reads his own preferences into the data, is an activist one. That is why it is useful to distinguish between "the utiliarian" and "economic perspectives," as Posner stated.

Finally, normative analysis does not trump economic models.

Apparently, it does if you are as blind to your bias as David Welker!

If you did, you would not suggest that there was any conflict between economic perspectives and utilitarianism when you write "You ... are the utilitarian. Economic perspectives are not you."

Exactly, Sally J. In stark contrast to the italicized quote here, one of my charges is that Mr. Welker is one of those people who views economic theory as a means to reach outcomes that square with his utiliarianism -- he does not consider economic questions as a social scientist would. Were he a judge, he would not be a Scalia.

Thus, you must concede that economic perspective do not clash with utilitarianism

I never mentioned any "clashing". I noted that what the data shows (as a byproduct of economic analysis) conflicts with what you want the data to show (as a utilitarian). That is why you say: "Frankly, no normative theory that I would subscribe to would accept the deaths of millions of people from flu epidemic as making the world better off. Economic theory just does not go there." It's your quote. You're the one who uses "normative theory" and "economic theory" interchangeably. I do agree with your statement that "my meaning as being contradictory and implying that I really am either so simple-minded as two [sic] thoughtlessly switch between normative and descriptive." Notice the [sic].

I would like to see more comments on topic.

One, is society wrong to show less alarm then Judge Posner. (I assume by the digressions here, most people are not afraid of massive death tolls.)

Two, if we should take steps to prepare for a pandemic, how do we do it in the short run and the long run.

Lastly, how does a society make the " institutional reforms that will overcome policy myopia based on inability to plan seriously for responding to catastrophes of slight or unknown probability but huge potential harm."

W,

First, you are absolutely right. I read your writing too fast; it was bit careless on my part. You did accurately assert that there is no inalienable to a patent; I thought you said the opposite. That was my mistake.

Second, either you are totally misinterpreting me
or your still fundamentally confused. Frankly, I think if you are misinterpreting me, it is because you are willfully choosing bad interpretations. I don't use economic theory and normative theory interchangeably. I hope you don't either. I have spent countless posts distinguishing them. So, get it straight. Any interpretation you have where I state they are equivalent is clearly wrong. To be more precise; I don't care what you, or an economic model, say the benefits of allowing millions of people to die from avian flu and I don't care what you say the costs are for saving them. (Unless you can concoct a highly unlikely story where millions of deaths from flu save even more lives. That is so far-fetched in this context. I did not feel this qualification was necessary to the point.) That is because I put such a high value on human life. Whatever value I put on human life, that is not something economics can say is right or wrong.

Third, you have correctly noted a spelling error. But if you had a reasonable degree of perceptiveness and intelligence you would realize that spelling errors can occur when someone writes something on an uneditable blog in a hurry, and it does not necessarily go to the merits of the points they are making. That you apparently think that this is conclusive evidence on the merits of a substantive position reflects poorly on YOU. You just demonstrate your own pettiness and lack of concern with substance.

Fourth, that said, I do think that it is inefficient to make such errors. The marginal benefit of preventing such errors may exceed the marginal cost of taking more time; I have ended up wasting time clarifying what I "really."

Fifth, all things considered, I get the sense that you agree that economic models are descriptive and seperate from normative judgments concerning the predictions of those models. Please clarify if this is not your understanding.

Sixth, W, you have both proposed a (1) governemnt solution to the problem and (2) insisted that government should not act. If I understand your position, it is, that governemnt should not act, but if it does, the best way to act is how you propose. Fine. That is a consistent view, if I am stating it correctly. But you really haven't defended your assertion that government should not act. I think that would be interesting.

Sally J,

It would be interesting if you elaborated on exactly how you think I am biased. I am sure that I am biased, in the sense that I have my own normative views. But then, everyone is biased in that particular manner. So, when you suggest I am biased, what do you mean?

Dan C,

Back to substance, but a slight digression first. You write: "Economist are not ignorant of normative issues when then study social issues. Policy makers are frequently ignorant of economics, but that does not mean that economic realities will not impact their choices."

I agree with you that economists are not ignorant of normative issues. However, like W, I think that they have no special insight into what is normatively best. They are entitled to their views, but those views should be weighted just as much as any other person with an understanding of the relevant data. Ideally, the role of an economist would be to simply report predicted consequences and let others decide. As you note, other policy makers are sometimes ignorant of economic consequences; but I don't think that excuses economists when they insert their own normative values and represent it as being more objective. In other words, they should not use their economics training to seize an unfair advantage for their normative views, whether those views are utilitarian or something else. Ideally, when economists make policy proposals, they would not advance a particular view without explicitly identifying their normative philosophy and perhaps suggesting how different normative philosophies might be advanced by other policies.

Now, back to substance. You write: "One, is society wrong to show less alarm then Judge Posner. (I assume by the digressions here, most people are not afraid of massive death tolls.)"

I think this might be a shaky assumption. Certainly, the lack of an adequate market response ex ante does not show the concern or fear that people would have ex post. I think, that contrary to your suggestion, that most people would be fearful of massive death tolls, especially to the extent that they or people they know face serious risks.

Next you write: "Two, if we should take steps to prepare for a pandemic, how do we do it in the short run and the long run."

I think that Posner, and believe it or not, W put forth reasonably good proposals. Subsidies combined with compulsory licensing for research in the area of vaccines to compensate for expected low prices that would be received in case of a disaster would be a good policy response. Alternatively, you might possibly choose to have a reward system, where the government pays a reward for a vaccine or, what is practically equivalent, eminent domain with truly fair compensation. Predictability of truly fair compensation is key if eminent domain is used, since you would not want excessive uncertainty regarding compensation to dampen incentives for vaccine development in the first place.

I think the idea of using a reward system or eminent domain is basically equivalent to compulsory licensing. Except that a reward system or eminent domain has the advantage of not entangling per unit production with licensing fees, which means that the cost of vaccines will closer approximate the marginal cost of production. On the other hand, Posner's proposal has the advantage of being less innovative legally. Compulsory licensing is a known path.

Comparing subsidies versus a blanket reward in terms of compensating drug makers, there is a risk that subsidies will be directed to the wrong researchers, but then there is a risk that rewards will be directed to the wrong risks. Eminent domain with predictable and fair compensation might solve both problems. The private market would select the researchers, but compensation would not flow from the public unless the drug turned out to be useful. However, this is not a satisfactory solution to the extent that you think that the uncertainty of whether a vaccine will be useful will lead to systematic underinvestment in an area where we don't want to take many risks. Subsidies might be better, since then compensation could be spread around more, lowering the risk to researchers that the vaccine they are developing will, thankfully, never need to be used. Also, subsidies could be structured in a manner that encourages researchers to share information, rather than horde information on failed experiments. A reward system seems less satisfactory, since it will surely lead to less cooperation among researcher rushing to win the race. Whether such fierce competition to gain a reward that encourages information exclusion or more cooperation with information sharing will be more efficient is a difficult question. One advantage of the reward system is that it might result in extremely motivated researchers. Does the extra motivation outweigh the costs of those researchers not collaborating and sharing information? Overall, I suspect that if subsidies were structured correctly, they could lead to extremely motivated researchers as well, but with the advantage of more information sharing.

W made the point in an earlier post that sometimes vaccines can be changed to be effective against another strain of a disease. This might ameliorate some of the risks associated with not being first under a reward system. This is true, but I don't think you can systematically rely on this. Even if you could realy on it, being first for a given disease or any particular strain of a disease would always be better. Thus, I think that under the reward system there would definitely be a lot of inefficient hoarding of information. I don't see how you can structure it otherwise and not have the reward turn into something more akin to a subsidy. I would be interested in anything W has to say though.

Overall, I think that the best approach to compensation would be to use carefully structured subsidies, but then have the magnitude of those subsidies be sufficient so that the vaccine can justly be entered immediately into the public domain. This is exactly the same as Posner's proposal, but it keeps prices lower, thus reducing deadweight loss, since no compulsory license fee would be due on marginal units of production.

David

Prof Stigler would talk about how as a young man he favored big government but that with experience and training his views evolved.

All of our normative values are shaped by our experiences and training. What you view as interjecting bias into a study could be viewed by others as wisdom or even common sense. For example, I have a bias toward market solutions to policy issues. That is what my training taught me but it is also consistent with my worldview. I think you ask too much when you expect people to reveal all their biases. I prefer to assume that all social science research comes with some baggage from the researcher. I ask them to be honest, but I don�t assume that they are unbiased uber-men.

I once had the opportunity to meet with Stephen Jay Gould. I think it is safe to say that his scientific views ran on parallel tracks with his political views. Did his political views force his scientific views? I don�t think so. Did his political views and his scientific views interact at times? I think so. I think that is human nature.

On the topic.

I fear overcomplicated solutions. I think you run the risk of people gaming the system. I mentioned before about defense spending. The goal is pretty clear: defend the United States from enemies. But we all see that defense spending becomes, for lack of a better term, creative.

You mention the need to create the right incentives to achieve societies desired outcomes. And I agree with much of the reasoning.

In the immediate case, if Tamiflu is the solution to a pandemic, the threat of compulsory licensing is the best short run solution. I don�t see a practical way around this. Might such action make firms less likely to produce future vaccines? I don�t think so. Even under compulsory licensing, I think the firms have a potential for profit. A fuller answer would require that I understand why Roche is reluctant to license.

In the long run, the United States could put up for bid an annual contract (or a Z number of years contract) to buy X million doses per year with an option to buy Y million doses in the event of a pandemic. Drug companies would, I assume, partner to share the risk of developing an effective vaccine and share (or convert if needed) capacity.

The only difficulty would be getting Congress to buy the insurance policy. I wonder how much such a contract would cost?

I hit post too soon

The advantage of putting the contract out for bid is that the government does not need to buy shots for everyone, they just need a criticial mass number. The drug firms could still sell their drug in other markets, but they are certain that they will recieve a steady income stream from their basic research. They would also be compensated for maintaing excess capacity. The drug companies would still have incentives to innovate and compete.

I'd like to get back to the psychology of institutional design. Surely some psych people read this blog. Is there much of a literature on institutional design and group decision-making? It's a topic that's been of great interest in the legal academy in the last few years. It's fascinating (and frightening) to think about how Homeland Security, DHHS or whoever is taking charge of these policies go about determining what constitutes a risk worth protecting against. This is in some sense the problem Breyer tackled in Breaking the Vicious Circle, I think, only from the opposite perspective.

Another psych-related question: Why are bloggers generally so snarky? Name calling and ad hominem attacks are rampant across most blogs. Is that because of the anonymity of commenting? Anyway, all of the above posters - chill out. Have fun. It's a weblog.

Mr. Welker,
1. I don't think this discussion has been unproductive in any aspect.
2. I don't think we have an eminent domain problem, because eminent domain, loosely speaking, is when the government takes privately-owned property. But it isn't your property if it is federal property governed by the Federal Property Clause. If Congress chooses not to award federal patents to private parties for a given vaccine, and instead the federal government owns the patent, then the property can't be taken away from its owner, because the "taker" is the federal government and the owner is the federal government too. To the extent that states would award patents under state patenting systems, they would be preempted by the federal scheme, and those state patents would have no legal effect.
3. This bleeds into the "hoarding information" critique, which I think is valid, because to the extent that researchers are motivated by the prospect of individual fame, they may seek not to coordinate with others to acheive it. I suppose I have a few responses:
a. Researchers often work in teams; I doubt this would have negative intra-team effects.
b. Teams of researchers often form between universities; I doubt this would prevent a Princeton microbiologist from working with a Harvard microbiologist.
c. There is great waste generated by having two companies race to be first to patent a vaccine; one consideration is that great competition between researchers may not just offset the waste that would have been generated by a winner-takes-all private-system, but it may actually generate greater benefits. The more independent creation of information we have, the better. Researchers may come to the same solution by slightly different methods, which gives policy makers options -- solution1 or solution2? So, it is not just that the same methods resulting in the same solution will be generated by two people, and that the second-runner up can convert his innovation to a cure for a slightly similar strain. (Though, obviously, I still think that is a great benefit of my proposal.)
d. As I stated before, the legal costs drop. I cannot stress how much pressure that reduces on the system. It actually increases the quality of the research generated by scientists, because they aren't mistating what exactly they are producing. Let's say that Company X in 1970 drafts a broad patent that is approved. In 2000, it can go around suing every company whose newfangled inventions plausibly fall within the patent's broad confines, without having actually produced anything of value to the consumer. We really don't need that in the vaccines context.
e. On researchers again: while the race to the first place benefits big companies -- e.g., vertically integrated ones -- smaller companies that cannot acheive those economies of scale can bind together to compete against the big guys. So you may actually produce greater coordination overall between small competitors by creating the conditions for individual researchers to hoard information, i.e., less competition on one level -- between big firms -- may produce greater competition on another -- between big firms and small firms, which reduces the price to the consumer by cutting into the big firms' market power. (I'm sure I explained this poorly. Sorry, you caught me drunk.)