September 13, 2019
Last week I was asked on Twitter why proposals for replacing patent monopoly financing of prescription drugs with direct public financing have gained so little traction. After all, this would mean that drugs would be cheap; no one would have to struggle with paying tens or hundreds of thousands of dollars for drugs that are needed for their health or to save their life. (This is discussed in chapter 5 of Rigged [it’s free].)
Public funding would also eliminate the incentive to misrepresent the safety and effectiveness of drugs in order to maximize sales at the patent monopoly price. Without patent monopolies, the drug companies would not have had the same incentive to push opioids, as well as many other drugs of questionable safety and effectiveness.
The idea of direct funding of biomedical research also should not seem strange to people. We currently spend close to $45 billion a year on research through the National Institutes of Health and other government agencies. The idea of doubling or tripling this funding to replace the roughly $70 billion of patent supported research now done by the pharmaceutical industry, should not appear outlandish, especially since the potential savings from free-market drugs would be close to $400 billion annually (1.9 percent of GDP).
So why is there so little interest in reforming the prescription drug industry along these lines? I can think of two plausible answers. The first is a self-serving one for the elites who dominate policy debates. They don’t like to have questions raised about the basic underpinnings of the distribution of income.
The second is perhaps a more simple proposition. Intellectuals have a hard time dealing with new ideas and paying for innovation outside of the patent system or creative work outside of the copyright system is a new idea that most intellectual types would rather not wrestle with.
Starting with the first one, the elites who dominate public policy debates are among the winners in the upward redistribution of the last four decades. While there are plenty of journalists struggling to keep their jobs or working as freelancers, and there are plenty of adjunct faculty who can’t pay the rent, these are not the people setting the agenda in policy debates. Rather we are talking about columnists who enjoy high six or even seven-figure incomes from their writings and speaking fees and top university faculty who can count on comparable pay.
These people do not want to entertain the idea that they didn’t end up as big winners through a combination of skill, hard work, and perhaps a dose of good luck. Even the progressives in this group, who support redistributive tax and transfer policy, would rather see this as an expression of their generosity than a refusal to take part in theft.
The issue can be seen as a distinction between someone who wins a big pile of money in a lottery and someone who slips in a fake card to win the poker pot. If we recognize that patent and copyright monopolies are government policies, that could be completely restructured or even eliminated altogether, it destroys the idea that technology has been responsible for upward redistribution or even a major factor in upward redistribution.
If Bill Gates got very rich because of Windows and other Microsoft software, it was not because of the technology, but rather because the government gave him copyright and patent monopolies on this software. All the high-paying jobs in the STEM sector are not the result of technological change creating new opportunities, but rather the large incentives the government provides with long and strong IP protections.
This is a direction that many, perhaps most, elite types would rather not go. They might be open to coughing up more money in taxes to reduce inequality and provide opportunities for the poor, but they are not open to the idea that they never should have had the money in the first place.
Motivated reasoning is common in public debates, and this seems a plausible story. However, there is also the alternative option, that questioning patent and copyright monopolies is a new idea to most elite types, and they would rather not expend any mental energy on the effort.
If it had not been for my experiences during the housing bubble, and subsequent collapse and recession, I might be reluctant to accept that intellectual types would have a hard time thinking seriously about patent and copyright monopolies. That experience taught me that some ideas can be too simple for intellectuals to understand.
I first noticed that house sale prices were running far out of line with other prices and with historical experience in 2002. House sale prices had generally moved more or less in step with overall inflation. In the years from 1996 to 2002, they hugely outpaced inflation.
Furthermore, this did not seem to be driven by the fundamentals in the market. Rents were pretty much moving in line with inflation. And, vacancy rates were actually very high, not the story you expect when prices are rising rapidly.
Making the matter even more worrisome, the bubble was clearly driving the economy. Residential construction was growing rapidly as a share of the economy and consumption was soaring as people took advantage of the newly created equity in their homes to increase spending. The construction boom would clearly end when prices came back down to earth and the home equity-driven consumption surge would hit a wall when the home equity disappeared.
All of this was very straightforward. The analysis could be constructed from summary data in publically available series, it didn’t require any sophisticated econometric analysis.
Nonetheless, I couldn’t get any economists to take my concerns seriously. (Paul Krugman was a notable exception.) It wasn’t that they had any counter-arguments. It basically boiled down to “we haven’t seen anything like that before.”
Incredibly, even after the fact economists could not own up to their mistake. They insisted the story was not the housing bubble, but rather the financial crisis.
This gave them an out since credit default swaps and collateralized debt obligations can get complicated. Looking at the growth of residential construction and the fall in the savings rate in the GDP data is pretty damn simple. Rather than own up to being too lazy to look at the data that was right in front of their faces, economists and their followers in policy circles whipped up a cock and bull story to conceal their incredible incompetence and/or negligence.
Anyhow, having seen first-hand the laziness and narrow-mindedness of economists in refusing to take the risks of the housing bubble seriously, I certainly can find it plausible that they simply don’t want to entertain the idea that we could have alternative mechanisms to patents and copyrights to finance research and innovation. Furthermore, they don’t want to have to alter their view of the government and the economy to incorporate the fact that these forms of property are determined by policy and can be altered pretty much any way we like.
I have two accounts that are certainly consistent with this view. In one case, I had written an article for a major progressive publication, arguing that we should have publicly funded research for pharmaceuticals, rather than supporting the research through patent monopolies. After it had been through the editing process, the editor sent me a note asking whether I was arguing for “short patents” or no patents.
I wrote back clarifying that I meant no patents. I explained that short patents wouldn’t even make any sense. Since the government had paid for the research, who would get the patent?
When the piece was published it said “short patents.” Apparently, the editor could not even conceive of an innovative new drug being sold in the free market without some form of a patent monopoly.
In the other case, I asked an editor at the Atlantic, for whom I just wrote another piece, whether they would be interested in an article that made the point that patents and copyrights were tools of public policy and that there are alternative mechanisms for financing innovation and creative work. I indicated that the piece would focus on prescription drugs, given the enormous financial and health consequences at stake in the sector.
The editor responded that, although they personally were sympathetic to my argument, the magazine doesn’t publish opinion pieces. If it’s not obvious, nothing that I proposed was an opinion. I was giving facts and logic, but apparently, this editor could not make the distinction.
The takeaway here is that thinking about patents and copyrights as policy tools that can be altered, as opposed to being natural features of the market, requires more reflection than most people in policy debates are prepared to do. After all, it is not as though any of them will lose their job, or even see their career advancement jeopardized, by not considering the implications of this obvious truth, just as none of them suffered any consequence from ignoring the housing bubble.
So, how do we get the idea of replacing patent monopolies with public funding of prescription drug research into the public debate? Wish I had an answer. I couldn’t get the housing bubble into the public debate before its collapse sank the economy or, even after the fact.
Anyhow, I’m open to suggestions. I will keep trying.
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