Yet Another Diatribe on Patent Monopolies and How They Are Not Talked About in Polite Company

October 26, 2020

I had a short vacation last week, so my comments are both late and short. I will yet again take a shot at patent monopolies as a mechanism for financing the development of prescription drugs. This is because it is in the news, both with Purdue Pharma’s settlement in the opioid case and also with China’s moving forward in distributing a coronavirus vaccine.

Patents and Lying

Starting with the Purdue Pharma settlement, I did not see any mention anywhere of the fact that government-granted patent monopolies give companies like Purdue Pharma incentive to push their drugs. While I would not expect that of every article that reported on the settlement, or the opioid crisis more generally, I would expect that we would see references to this obvious point at least some of the time.

It would be as though news reports on the low agricultural output in the Soviet Union never made reference to its system of central planning, which seems to be ill-suited to promoting high productivity agriculture. Again, we would not necessarily expect every news report talking about a poor harvest in the Soviet Union to give a diatribe on the failures of central planning, but we would expect that there would be occasional references to the issue. And that certainly was the case in my memory of the reporting.

In case the point is not entirely clear, by raising drug prices far above the free market price, patent monopolies provide a powerful incentive for drug companies to push their drugs, even in contexts where they may not be safe or the most effective treatment for a specific condition. This is Econ 101. People respond to incentives. The high prices allowed by patent monopolies give companies large incentives to sell as many prescriptions as possible.

While generic companies also make a profit and also have an incentive to sell as many prescriptions as possible, the margins for generic manufacturers don’t provide anywhere near the incentives provided by patent monopoly prices. In the former case, we may be looking at markups of, say 100 percent, over the costs of manufacturing and distribution. In the case of patent-protected drugs, the markups can easily be several thousand percent. For those sorts of profits, companies are willing to lie about the safety and effectiveness of their drugs.

The opioid crisis is an extreme case, but we see instances where drug companies provide misleading information all the time. A famous example from the now somewhat distant past was when Merck was accused of withholding information indicating that its arthritis drug Vioxx, may be dangerous for people with heart disease. This was a particularly big deal since there is a large overlap of people with heart conditions and people suffering from arthritis.

We did a paper on this topic a few years back. The point is both that lying about the safety and effectiveness of drugs is a 100 percent predictable result of patent monopolies and that such lying occurs all the time with very real health consequences.

Incentives for Secrecy Impede Progress

I have been jumping up and down, here in Southern Utah, complaining that we did not pursue a collaborative process for developing vaccines and treatments for the coronavirus. The argument is that since we are paying for much of the research upfront, we should require that it all be open so that everyone could benefit from other companies’ research findings. This sort of collaboration should have been negotiated on an international basis, which is the sort of thing a competent administration could have done. This would have both expanded the pool of useful research and limited free-riding.

The latest news in this area is that China continues to move forward with the development and distribution of a vaccine. It is now in the process of mass distribution of one of its vaccines, although it has not yet completed Phase 3 testing.

While not waiting until all the results of a Phase 3 trial are available may not be a good practice, if we had gone a collaborative route, people in the United States would have full access to a Chinese vaccine as soon as it was determined to be safe and effective (by our standards, not theirs.) Since we are now back to over 70,000 infections a day, and one thousand deaths, even a month’s gain in the use of a vaccine would make a large difference in terms of prevented deaths and infections.

It is unfortunate that Trump insisted on an America First approach, and allowed companies like Moderna to get patent monopolies even when pretty much the entire research costs were picked up by the government. It will be a needless tragedy if tens of thousands of people die and hundreds get infected as a result of this decision.

Patents and Inequality

It is now accepted wisdom in most circles that growing inequality is a serious problem and that we should be taking steps to try to reduce inequality or at least limit it. Incredibly, patent and copyright monopolies never come up in discussions of inequality.  

This is sort of mind-boggling since they are so obviously a contributor to inequality. High-income people benefit from patent and copyright monopolies. There are not a lot of current or former autoworkers and dishwashers who draw substantial income from patent rents. That they redistribute income from lower-income people to higher-income people is not really a debatable proposition. I have argued that they redistribute a very large amount of income, likely more than $1 trillion a year, or roughly half of before-tax corporate profits.

And the other obvious point is that patents, and their twin copyright monopolies, are explicit government policy. We can make them longer and stronger, or shorter and weaker. Or we can choose to have alternative mechanisms to finance research and creative work. How much income is redistributed upward through these government-granted monopolies is entirely a matter of policy. It is not a fact of nature.

Nonetheless, you can go through the endless volumes on inequality and almost never see a reference to patents or copyrights. They are simply ignored.

Question for Discussion: Why Don’t People Talk About Patents?

So, this brings us back to the topic of why? When the abuses and inequality resulting from the patent system kick us in the face on a daily basis, why does no one ever talk about it?  Does it really not occur to any of the economic, legal, or health care reporters that cover the Purdue Pharma settlement that patents might be relevant to the story? Did no one writing on the progress of the U.S. and China in developing a vaccine ever think that it may have been good for both countries and humanity if we had worked together? Did no one who writes on inequality ever think that Bill Gates might be less wealthy if the government didn’t give Microsoft copyright and patent monopolies on its software?

I really have no idea what the answer to this question is. I don’t know why reporters, economists, and other policy types don’t talk about the abuses and waste created by patent and copyright monopolies. I just know that they don’t. Maybe I will come up with some good answers on my next vacation.  


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