Monday, October 17, 2005

More on honesty

Tom Bozzo points to this post by Dean Baker that fleshes out the argument quoted here and then much discussed in comments. Baker writes:

While we cry over this loss of expected profits, let’s ask why are we in this mess to begin with? In other words, why are we relying on patent monopolies to finance drug research? The Holy Grail in economics is that price should equal marginal cost. Yet, drug patents lead to situations where prices are hugely out of line with marginal cost, in some cases by a factor of 100 or more. Drugs are almost invariably cheap to produce; they are only expensive to consumers because of patent monopolies.

Of course patent monopolies in prescription drugs lead to all the bad things that economists warn about when prices diverge from marginal cost. The most immediate effect is the deadweight loss that results from people not getting drugs that they could afford at the competitive market price, but not at the patent protected price. And, this is not just poor people in Sub-Saharan Africa, there are tens of millions of people in the United States who do not take the optimal drug or the optimal dosage because patent protection makes it too costly.

But this is just the beginning of the distortions. Monopoly profits give drug companies incentives to undertake expensive and often deceptive marketing campaigns. The industry spends more on marketing its drugs than it does on research. In some cases this marketing has effectively amounted to kickbacks to doctors who prescribe their drugs.

Patent monopolies also provide incentives to research copycat drugs rather than breakthrough drugs. The industry’s data suggest that approximately two-thirds of its research money is spent developing copycat drugs.

Patent monopolies also encourage drug companies to conceal negative research finding, or even to lie about their research. The New York Times has run many excellent articles over the years highlighting such incidents. (Merck’s effort to conceal potentially harmful side effects from Vioxx is the latest installment on this list.)

Patent monopolies encourage the production of counterfeit drugs, which can be sold at a fraction of the price of the patented drug.

And, patent monopolies encourage drug companies to spend large amounts of money on lawyers, lobbyists, and propaganda to protect and extend their monopolies.

The $220 billion question (current U.S. spending on prescription drugs) is where are the economists? Remember, economists are people that get high blood pressure from 10 percent tariffs on shoes or pants. When Bush put a temporary tariff on steel imports that maxed out at 30 percent, economists all over the country became apoplectic. So why is the economics profession overwhelmingly silent about drug patents, which are the equivalent of tariffs of 300 percent on average, and affect a product that is much more important to our economy and our health?

We recognize that patents are a way to provide incentives for research, but where is the economic research that shows that they are the most efficient way? You won’t find it, because economists have mostly chosen to ignore the issue.(emphasis mine)

I'm not so sure about the Vioxx example, and I think he goes in the wrong direction at the start by invoking actual deviation from marginal cost: duh, we have monopoly power. The basic point is indisputable: we do not know if our current arrangement is the best possible arrangement. And economists seem not to pay sufficient attention to it.


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