November 10, 2003

Intellectual Property

Mark Kleiman talking sense on intellectual property:

What Pharmaceuticals Has William Safire Been Using?: As Poor Richard could have told William Safire, it's better to remain silent and be thought a fool than to open one's mouth and remove all doubt.

Safire's column today on prescription drug pricing and the issue of re-imports from Canada betrays a pluperfect ignorance of microeconomics. He seems to think that (1) American pharamaceutical manufacturers could collude to raise prices in Canada without violation about seventy-'leven anti-trust laws and (2) if they did manage to raises prices in Candada, that would magically cause price reductions for American consumers.

His column would be as laughable as he himself is contemptible -- he is, after all, a man who, at the very start of his journalistic career, let himself be used to convey a threat from the Nixon gang that if John Dean didn't shut up he'd be put in a prison where he was likely to be raped -- if I didn't suspect that he has some residual influence in the darker reaches of the Republican power structure.

The question of how to pay for innovation in the pharmaceutical market is a very tough one: it resembles the question of how to pay for music, but with the differences that there's much more money at stake and that no one ever died for lack of an Eminem CD.

The logic of the problem is well known to everyone who kept awake in his freshman micro or policy-analysis class: unlike the consumption of chairs or cars or houses, where if I have the item you can't have it, consumption of products that are made up, in economic terms, entirely or almost entirely of information is "nonrival." Physically producing another copy of a CD or another bottle of pills costs effectively nothing, but someone has to pay to write, perform, and record the music or to invent and test the drug.

If copyright or patent protection is used to allow the makers of the CD or the drug to charge more than the marginal cost of production and distribution, an inefficiency results: some people who are willing to pay more for the CD or the pills than it costs to make another album or bottle, but less than the artificial price created by the laws of intellectual property, will go without. But if those means are not used, then there must be some other system of incentives (not necessarily monentary ones) to keep the process of innovation working.

It's easy to show that, in principle, direct subsidies to innovators (grants or prizes) can maintain innovation while avoiding the inefficiency created by monopoly pricing. However, that leaves the question of how to evaluate each new product if we don't have the evidence of its value provided by consumers' willingness to pay for it.

No solution will be perfect, and a solution needn't be perfect to be better than the current system. There's no reason to expect that the right system will be the same for inventions as for artistic works, or that all categories of invention or artistic creativity ought to be treated alike. The triumph of Big Pharma, as of the software industry and the recorded-music industry, is keeping the whole topic of alternatives to state-enforced monopoly pricing off the agenda.

Every year, the proportion of developed-country GDP that is non-rival-consumption information rather than rival-consumption matter, energy, and personal service rises, so getting workable answers to the varied problems of "public goods" production (the rather misleading label econonmists apply to this class of problems) grows increasingly pressing. Neither collectivist nor libertarian slogans are likely to provide useful guides to action.

Posted by DeLong at November 10, 2003 07:48 PM | TrackBack

Comments

"His column would be as laughable as he himself is contemptible -- he is, after all, a man who, at the very start of his journalistic career, let himself be used to convey a threat from the Nixon gang that if John Dean didn't shut up he'd be put in a prison where he was likely to be raped -- if I didn't suspect that he has some residual influence in the darker reaches of the Republican power structure."

I've just been reading William Nordhaus' 1972 paper on the optimal life of a patent, so I find this post particularly salient, but I have to say that I find the sort of vicious stuff in quotes above incredibly distasteful, and I think it adds nothing of value to Kleiman's argument.

Isn't it possible for Kleiman to take apart Safire's views without descending to poisoning the well? Why should a professor go in for such base rhetoric when it contradicts everything his academic position represents? It appears some people will only be happy when all debate is reduced to the hysterical level found on LGF or the Daily Kos.

Getting back to the substantive part of Kleiman's post, I'd be interested in learning just what sort of alternatives he has in mind to traditional patent protection, seeing as he thinks "neither collectivist nor libertarian slogans are likely to provide useful guides to action." That doesn't really leave much room for other options, does it?

Posted by: Abiola Lapite on November 10, 2003 08:21 PM

____

So--without slurring Safire too much more than is necessary, and not being an economist--

I'm deeply confused by the pharmaceutical industry. Pharma companies team up with American universities and join research teams that that are jointly funded by the pharma company and the NIH. The research team gets to publish (well, after a year or two, after the patent applications are in) and the pharma company gets a new job.

And then they come back and charge the American people a premium, so the government has to pay a second subsidy to get a decent (that is, competitive with Canada) price.

Given that the NIH grant is seen as an investment by the American people, or a way of nationally absorbing some of the risk, why can't we expect back a return greater than the sheer joy of knowing the medicine is in the world?

Posted by: Dan on November 10, 2003 08:55 PM

____

Collectivists are the nutcases who believe nothing should be private property, libertarians the nutcases who believe everything should be. (If it isn't obvious why this leaves a vast expanse of options in between, my apologies for calling you a nutcase)

Strong-IP people, like Revolutionary Workers, seem to believe in the Labor Theory of Value.
The worker spends time creating, and asks the state to ensure a fair wage (rather than bargain with Capital)
The Pharma spends time creating, and asks the state to ensure a fair ROI (rather than bargain with Consumers)

Posted by: Dave on November 10, 2003 09:06 PM

____

Please explain to me why it is good business practice to relocate the companies IT department to India, but the American consumer can't travel to Canada and buy prescription drugs?
Walmart can save money by hiring illegal alians, people that pay no taxes, send a great deal of their wages to Eastern Europe to support their families, but the American consumer is breaking the law by shopping for cheaper prescriptions in Canada?

Posted by: Yoursinthedesert on November 10, 2003 10:38 PM

____

Please explain to me why it is good business practice to relocate the companies IT department to India, but the American consumer can't travel to Canada and buy prescription drugs?
Walmart can save money by hiring illegal alians, people that pay no taxes, send a great deal of their wages to Eastern Europe to support their families, but the American consumer is breaking the law by shopping for cheaper prescriptions in Canada?

Posted by: Yoursinthedesert on November 10, 2003 10:40 PM

____

Shorter Will Safire: Drug companies should obey the laws of free market economics by acting against their own self-interest.

Also, the Seattle PI link no longer works, as far as I can tell. Here's a fresh, extra-juicy new IHT link! http://www.iht.com/articles/115243.htm

Posted by: Julian Elson on November 10, 2003 11:55 PM

____

I've been studying information economics for about 2 years now, so let me try to parse out some thoughts.

In national systems of governance, patents are means of rewarding innovations. Intellectual property rewards innovators with a temporary monopoly on such good. Government assigns this reward because innovation is expensive and the marginal cost of distribution cheap. This is much more sailient in the pharma industry because it's really easy to figure out how to make a drug.

With information goods, we have a market failure from the start and this market failure results in competing dillemas for governments. You want to reward innovation yet get the least amount of dead weight loss from the good.

Governments typically have two policy levers that can adjust these affects: breadth and duration. Breadth covers how wide a patent gets covered and duration covers how long a patent lasts. For instance, in the US, breadth for patents is quite large. There have been patents covering the idea of the internet, and presumabely, everyone is infringing on those rights. Duration is 20 years.

Allowing pharmas to price discriminate (e.g. prices for the same drugs in Canada is cheaper than US drugs) is a good thing because it matches up everyone's willingness to pay with the good. The only problem here is that the "willingness to pay" price points are different for everyone, resulting in a really jacked up system. (Compare this with regional encoded DVDs)

To synthesize, I think it's appropriate to re-read Karl Polanyi's Great Transformation (i.e. ficticious commodification of goods) and read some articles here: http://ist-socrates.berkeley.edu/~scotch/

Berkeley is undergoing an academic revolution in the field of information economics and policy implications resulting from the commodification of information. And I'm very excited to be here at this moment :) John Zysman, Brad Delong, Hal Varian, Steve Weber, Suzanne Scotchmer, Pam Samuelson, Bronwyn Hall, Shankar Sastry's, and many more proffessors are talking about the same thing. It's just a matter of time before all them meet and hammer all the details out.

Posted by: David Yoo on November 11, 2003 04:20 AM

____

Oh, go ahead and smear Safire. He does it himself (e.g., Hilary Clinton, Wen Ho Lee, and others...), and so, has it coming.

Posted by: Matt on November 11, 2003 04:20 AM

____

Matt, Matt, Matt - you Evul Librul PC Kullektivist Pro-Saddamite Islamofascist Symp :)

You obviously can't understand simple reality - everything that Safire wrote about the Klintons and their EvulLibrulPCKullektivistPro-SaddamiteIslamofascistSymp
Band of Bandits was, in fact, proven - just listen to Rush if you're in doubt.

Even Safire's columns wherein he claimed telpathic abilities, printing their very thoughts, have been shown to be nothing more than the simple truth. We should be grateful that St. Safire used his psychic abilities for good.

Posted by: Barry on November 11, 2003 04:38 AM

____

"Please explain to me why it is good business practice to relocate the companies IT department to India, but the American consumer can't travel to Canada and buy prescription drugs?"

Simple - in the first case, the American company's expenses are reduced. In the second case, their profits would be reduced, if people were allowed to buy prescription drugs in Canada.

"Walmart can save money by hiring illegal alians, people that pay no taxes, send a great deal of their wages to Eastern Europe to support their families, but the American consumer is breaking the law by shopping for cheaper prescriptions in Canada?"

Again, simple - illegal aliens work cheaper, require no benefits, and have no rights whatsoever. A simple phone call to the INS takes them away, never to be seen in the US again (for all practical purposes).

And, again - if American consumers break the law by shopping for cheaper prescriptions in Canada, then Our Entire Western Civilization will Collapse into Evul PC Librul Islamofascist Anarchy.


Posted by: Barry on November 11, 2003 04:46 AM

____

"but the American consumer is breaking the law by shopping for cheaper prescriptions in Canada?"

Maybe the same reasons why state governments are all in a tiff about consumers buying goods on the Internet without paying sales tax.

Posted by: Mcwop on November 11, 2003 05:42 AM

____

Dave wrote: "The Pharma spends time creating, and asks the state to ensure a fair ROI (rather than bargain with Consumers)"

Again, the problem is that bargaining with Consumers doesn't actually work. Consumers will use their leverage with the state to steal the IP - it has already happened in Brazil with AIDS drugs, and if the governments are unwilling to actually break the patents, then they drive such a hard bargain that a 'fair' ROI is not possible. The USA Consumer ends up subsidizing some large fraction of the world's research, because the other countries are willing to pay only manufacturing costs.

Posted by: Bruce Cleaver on November 11, 2003 06:08 AM

____

So the drug companies are charging what the market will bear in Canada, and what the market will bear in the US -- the US drug market is more tolerant because there is less collective action on the part of customers -- customers being (a) individuals, (b) medical insurance companies and HMO's, (c) the government Medicare/Medicaid (and Social Security in the offing as a customer). I am assuming an HMO has more market clout than an individual but apparently less than the Canadian government. But if the US drug market became less tolerant of high mark-ups, what would be the upshot? Presumably less R&D. Not sure where I am going with this, just trying to clarify the issue I guess.

Posted by: Jeremy Osner on November 11, 2003 06:57 AM

____

In reply to Abiola, Dave says: "Collectivists are the nutcases who believe nothing should be private property, libertarians the nutcases who believe everything should be. (If it isn't obvious why this leaves a vast expanse of options in between, my apologies for calling you a nutcase)"

But I think this is missing the point, even aside from the fact that arguing by reductio ad absurdam is a bit cheap, There are really very few people who fall entirely into one or the other camp, and a "solution" that is 60% collectivist and 40% libertarian is still using collectivist and libertarian ideas as guides to action. Which is just what Kleinman's interesting original post says is not likely to be useful. I think Abiola's question remains.

Posted by: Tom Slee on November 11, 2003 07:02 AM

____

Bruce says: "The USA Consumer ends up subsidizing some large fraction of the world's research, because the other countries are willing to pay only manufacturing costs."

Let's not forget that more money is spent on marketing drugs than on researching them. Here in Canada, direct to consumer advertising of prescription drugs is not allowed. Why should Canadians subsidize the cost of advertising to the US consumers?

Posted by: Tom Slee on November 11, 2003 07:07 AM

____

"Neither collectivist nor libertarian solutions." Hmmm... I'm not even sure what the libertarian or collectivist solutions *are* in this case. Does the libertarian say "to heck with artificial government monopolies on drug manufacturing" and get rid fo the whole intellectual property system? Or does the libertarian say "if you create an idea, you own it! No more expiration after 20 years!" The whole idea of intellectual property being property for 20 years, then going into the public domain seems like a stand impossible to defend on deontological, moralistic grounds, though from a consequentialist viewpoint, it's sensible (perhaps not optimal, but sensible) (ack! I've been reading too much of the comments section of Matthew Yglesias!).

For that matter, what would the collectivist stand be? Have the government assume control over R&D and pay for it on the taxpayer's dime, then immediately put research into the public domain, where any manufacturer can manufacture and sell drugs (at about the manufacturing cost, of course)? Maybe have the government assume control over R&D, but *not* release it into the public domain, but rather keep a state monopoly on drug manufacturing (seems more collectivist that way, though I'm not sure why you'd want to do that)?

In most cases, the "libertarian solution" and "collectivist solution" is more clearcut, but in the case of pharmaceuticals, and intellectual property more generally, I'm not even sure what those mean.

Posted by: Julian Elson on November 11, 2003 07:17 AM

____

The other thing that complicates the libertarian stance on IP is that the whole IP system is built around the concept of "first past the post." It's perfectly plausible that you and I could both independently "create" the same idea or formula or product, without influencing each other at all. But whichever one of us hands in the patent application first gets the full economic fruits of our invention (for twenty years), while the other gets nothing. It hardly seems libertarian to say that someone who, on his own, invents a product or idea should be prevented from making money from it because someone else did it first. (This is roughly what happened, by the way, with the telephone in the U.S.) Anyway, I'm not arguing for the abolition of IP, but, like Julian, I don't think there's an easy way to say what the liberal or conservative position on the question is.

Posted by: James Surowiecki on November 11, 2003 07:25 AM

____

What *are* the libertarian and collectivist solutions in this case? Would most libertarians say "to heck with artificial government monopolies: let people steal all the ideas they want, so long as they don't take things that other people are deprived of if taken."

Or would a libertarian say "intellectual property is every bit as much property as the next bit. Would you want your ownership of your house to expire after 20 years? Let's extend patents and copyrights to permenancy!"

Either way, I have a tough time seeing a principled stand for the current solution. It's hard to say, from a moral, deontological perspective, why there should be this weird for of property that lapses after 20 years (even though from a consequentialist, practical viewpoint, it's sensible (perhaps not optimal, but sensible).)

What would the collectivist solution be, for that matter? Having the government assume all funding of R&D, but letting research findings into the public domain immediately, so that any manufacturer can make them (and the price, presumably, goes to manufacturing cost)? Or would the collectivist solution be having the government control the pharmaceutical process every step of the way -- pricing, manufacturing and research alike?

I don't know about everyone else, but I'm not sure what Kleiman means by libertarian and collectivist slogans. Usually, I think of the policy lines as being fairly distinct, but in this case I'm not sure, since the whole intellectual property issue is so murky.

Posted by: Julian Elson on November 11, 2003 07:30 AM

____

By the way, Kleiman's broader discussion of IP is good, but his dismissal of Safire's argument that pharmaceutical companies will respond to American importing by raising Canadian prices as "laughable" doesn't seem to fit the facts. The Times today reports that major drug makers have raised Canadian drug prices 4-8% since the summer, the first increase since 1993. Now, the increases may be rolled back by Canada's Price Review Board, which regulates prices, in a few months. But, regardless, the drug companies appear to have done exactly what Kleiman argued they could not do without "violati[ng] about seventy-'leven anti-trust laws." His rhetorical overkill now looks even more dubious. Safire's second point, of course, still seems confused (and confusing).

Posted by: James Surowiecki on November 11, 2003 07:33 AM

____

Err.. darn. I thought my first post didn't take, so I (roughly) rewrote it, but it did. Ah well.

Posted by: Julian Elson on November 11, 2003 07:34 AM

____

Tom Slee writes: “Let's not forget that more money is spent on marketing drugs than on researching them. Here in Canada, direct to consumer advertising of prescription drugs is not allowed. Why should Canadians subsidize the cost of advertising to the US consumers?”

Do you have any evidence to back this up. My research indicates that this is only true if you add Administrative (employees and basic business overhead) costs to advertising dollars spent.

Ralph Nader's Public Citizen issued a critique in its 2001 report "Rx R&D Myths," (PDF)

http://www.citizen.org/documents/ACFDC.PDF

On page 20 the report states: In 2000, the 11 Fortune 500 drug companies devoted nearly three times as much of their revenue to marketing and administrative costs (30 percent of revenue) as to research and development (12 percent of revenue).

Note the word “Administrative”. What does that account for? Salaries of employees etc..

On page 21 of the report it shows direct to consumer advertising in 2000 was $2.5 billion. R&D far outweighs DTC advertising by a factor of 10.

Regardless, it seems banning DTC advertising is a better government first step than regulating drug prices.

Posted by: Mcwop on November 11, 2003 08:10 AM

____

Safire has agendas up the yinyang and has repeatedly relayed smears and innuendos about others. Everything he says has to be taken with a grain of salt. It would be irresponsible not to mention this fact. (The John Dean story was new to me, and I thank Brad and Kleiman for it).

Kleiman and Brad, like Krugman, are trying to participate in American public life while teaching in the university. Standards are different in the two areas, and when in the public arena you always have to be aware of the fact that some of your adversaries are liars and cheats. This is something academics rarely have to deal with. I think that it's a good thing to have smart people in public life, but if we were to hold them to Abiola's standard, they could not be effective, since they would erroneously take people at face value who, like Safire, always require a very severe discounting.

Posted by: Zizka on November 11, 2003 08:55 AM

____

Part of the problem of calculating direct to consumer advertising is that the financial statements filed with the SEC do not seem to break out what any advertising expense. Instead, based on a sample of two (Merck and Lilly), marketing is lumped in with administrative expense. These compaines seem not to file detailed financial statements; instead they file, and deliver to shareholders, consolidated, condensed statements, which do not include enough detail to assess the costs of advertising to consumers.

Posted by: Masaccio on November 11, 2003 09:02 AM

____

Masaccio, you are correct. However, there is a lot of info on the topic breaking out costs and DTC effects on drug sales. Here is one such place:

http://www.kff.org/content/2003/6084/

Posted by: Mcwop on November 11, 2003 09:39 AM

____

Masaccio, you are correct. However, there is a lot of info on the topic breaking out costs and DTC effects on drug sales. Here is one such place:

http://www.kff.org/content/2003/6084/

Posted by: Mcwop on November 11, 2003 09:42 AM

____

Yes, pharma companies have Marketing departments, although that is sometimes treated as a Bad Thing. Why? Other industries (agriculture, automobile, etc.) have them, and the pharma companies have found them necessary to help earn ROI.

Posted by: Bruce Cleaver on November 11, 2003 09:58 AM

____

"There are really very few people who fall entirely into one or the other camp"

My point exactly (how is that ad absurdam?); where we differ is that I think a solution characterized as "60% collectivist and 40% libertarian" would be decided more by looking at the costs and benefits for different values of depth and breadth than by slogans from either side.

Posted by: Dave on November 11, 2003 10:04 AM

____

More ideas on this from Michael O'Hare here:
http://www.markarkleiman.com/archives/paying_for_nonrival_goods_/2003/11/michael_ohare_on_paying_for_music.php

Posted by: Mark Kleiman on November 11, 2003 10:20 AM

____

More ideas on this from Michael O'Hare here:
http://www.markarkleiman.com/archives/paying_for_nonrival_goods_/2003/11/michael_ohare_on_paying_for_music.php

Posted by: Mark Kleiman on November 11, 2003 10:20 AM

____

More ideas on this from Michael O'Hare here:
http://www.markarkleiman.com/archives/paying_for_nonrival_goods_/2003/11/michael_ohare_on_paying_for_music.php

Posted by: Mark Kleiman on November 11, 2003 10:21 AM

____

Something I wrote a while ago on this issue:

http://perfidy.org/comments.php?id=P1121_0_1_0

Drug Prices

Standard but faltering Republican rhetoric on the drug issue is twofold: First, safety is compromised by using those nasty Canadian pharmacies; everybody knows millions of people die every year in Canada from taking bad drugs (right). Second, it's really about the research dollars; the rest of the world is mooching off of the US.

I heard an interview this morning on NPR with the Republican governor of Minnesota, Tim Pawlenty. His plan is a state-sponsored mail-order program that will import drugs from Canada. Citizens (I refuse to call them consumers) order their drugs from a web site maintained by the state, which selects the Canadian pharmacies that are eligible to participate. The state is then able to maintain a significant amount of control over the quality of the pipeline.

Much of the free-for-all that exists in the American drug distribution system simply does not exist in Canada. If you've been following the Washington Post article on the subject, you realize by now that the American drug system is full of tiny suppliers who keep medicines in the back of their Honda Civics, and sell them to whoever will ask. The "chain of custody" for medications is something that the pharmacy distribution system has been fighting for years. Why? They want to preserve their ability to get gray-market drugs, and enhance their bottom lines.

Tamoxifen is one of the most widely prescribed drugs for treating breast cancer. In Germany, in that country's national health care system, the drug costs around $60 US for a month's supply. In Canada, a month's supply costs about $50 US. Here in America, that exact same drug costs about $350 for a month's supply. How many thousands of women are dead because they could not get the medicine? A very large number. And as the number of uninsured increases, the number of deaths increases.

But why does this happen? How can the drug cost seven times as much here as it does elsewhere? The reason is that there is no global cost-benefit analysis within the American system.

If a drug, like Tamoxifen, is the best course of action for a given health situation, the doctor must prescribe it. The cost is simply not a part of the equation. If the doctor doesn't prescribe it, he/she will be sued. The insurance company must pay the bill; if they don't pay, there can be severe consequences. What we effectively do is prevent any form of cost-monitoring, in the system. The drug companies love this, and know this...and they know that they are able to raise their prices almost at will; insurance companies will be forced to pay, because doctors are forced to prescribe. Perhaps it is incorrect to say that doctors are forced to prescribe; they are prescribing what they believe to be the best available medication.

In Canada, Germany, and other National Health Care systems, the system works a little differently. In these systems there is global cost monitoring. What the system does, in effect, is examine the cost-benefit ratio of a medication like Tamoxifen. At $350 for a month's supply, there is a measurable benefit to the administration of the drug. The health care system is going to look at what else it could have done with that much money. If it can gain better care elsewhere (save more lives, increase quality of life) with the same money, that's what it's going to do. In effect, the health care system itself becomes the consumer, allocating scarce resources where it can find the most benefit.

The price of Tamoxifen in Canada is $50 because that is the benefit it provides to the health system. It is not about price controls; the Canadian health care system will not pay more than $50, because at that point, the money is better spent elsewhere. The German health care system has set this boundary at $60.

I submit that the American health care system needs this kind of global control; or, at least, it can become statistically aware of the efficacy of the drugs it uses, and construct an index of the cost-benefit of medications. The lack of caps on spiralling medical costs in the current American system is due to the lack of global cost-benefit analysis.

Posted by: Ross Judson on November 11, 2003 01:18 PM

____

Bruce Cleaver: Many think that it would be better if the choice of which drug to use (or not) were made by doctors, based on independent medical and scientific judgements. In fact, many naive patients think that that is what happens.

Economically, as far as ROI goes, probably drug advertising pays off pretty well. I'm not sure that anyone ever says anything different.

Though frankly, whenever a free-market ideologue enters the argument, we can expect to be told that there's no expense whatever can be unreasonable as long as the company's profitable. Even if a company goes bankrupt after having been looted by management, we can expect to be told that outside criticisms are unjustified and that government intervention should be avoided at all costs.

I've seen the sales reps passing out their goodies to doctors, and I don't find it reassuring.

Posted by: Zizka on November 11, 2003 01:37 PM

____

Regarding David Yoo post "Karl Polanyi's Great Transformation fictitious commodification of goods"

I was wondering exactly what this meant. Once I locked myself out of my room when I thought I had my work keys in my pocket. They turned out to be my car keys. The guy who let me back in the room informed me that this is a metaphysical phenomenon known as "spontaneous malicious transformation."

Any enlightenment regarding "Great Transformation Fictitious Commodification" and "spontaneous malicious transformation" would be greatly appreciated.

Posted by: northernLights on November 11, 2003 01:57 PM

____

If Canada should decide to cap the price of a drug below the marginal cost of producing and distributing the drug, then the manufacturer will not sell that drug in Canada. It has nothing to do with a “global cost-benefit analysis.” Why would you expect a manufacturer to lose money selling to purchasers in Canada?

If we decide to have the government do all research and development of pharmaceuticals, and then grant licenses to manufacturers, we should be prepared to suffer the unintended consequences of such a policy. Currently the FDA functions (or should function) as an adversary of the industry. Can the government play both roles? Can it act as an adversary against itself? Suppose someone finds a flaw in a new and promising compound under development by the government and blows the whistle. But the government wants this compound to succeed because it wants to reap the financial benefits of licensing the compound to the pharmaceutical manufacturing industry. So what will it do? It will retaliate against the whistle blower. The government can do much worse things to you than industry for blowing the whistle on it. And it has. As evidence I submit the historical behavior of the US Department of Energy (DOE), once known as ERDA, and originally called the “Atomic Energy Commission” (the “AEC”). Here we have the government doing the R&D and then granting a license to industry. For example, laser isotope separation (LIS). Government employees invented LIS and then engineered it’s development. The problem is they took too long, and the world changed while the sloth lumbered. By the time LIS was licensed to USEC, it became a white elephant. The world was awash in fissile uranium and the Russian centrifuge technique proved cheaper. A whistle blower on this project would have run substantial risks as the DOE could hang a security rap on someone who blew the whistle by claiming he revealed classified information. So if we turn over pharmaceutical R&D to the government be prepared for even more dangerous and ineffective medicine than we have now.

Posted by: A. Zarkov on November 11, 2003 02:48 PM

____

The model that Zarkov presents makes sense as an alternative to the Intellectual Property scheme. Currently, much of the research on drugs is done either directly by government, or indirectly through support of university research. Suppose we set up bidding rights for new drugs, and pay the research group a substantial part of the proceeds as a one-time payment for the discovery of the drug. That way, they get paid to discover stuff.

Then the winner would do what it could to persuade a professional antagonist like the FDA (a “Devil’s Advocate”) that the drug met proper criteria for sale to the public. It would then be allowed to sell the manufacturing rights to the drug on whatever terms it could get. But, the wholesaler would have to find at a least a number of manufacturers determined by the anticipated market for the drug. If the market turns out to be greater, then the drug must be licensed to others on the same terms as the first license holders. But, each time, there is only cash, not a cut of future profits.

Vertical integration, or bundling, of these functions is not serving the public well. Assuming that people will not work unless they get a cut of the future proceeds also does not serve us well. There is nothing special about information that entitles it to a cut of future profits, any more than there is about works of art. No one really thinks that Van Gogh’s descendants should get a cut on sales of his work. And surely no one really believes that Walt Disney, Inc. is entitled to a cut every time some one makes a copy of the mouse created by the founder of the company.

If people really think that the mouse should be a fountain of money for Walt Disney, Inc. forever, and that this model is appropriate for drugs, then they have to accept the consequences. Some people will die who could live but for the access to the drug. The rest of us will have to pay more for insurance.

Posted by: Masaccio on November 11, 2003 03:23 PM

____

There is another area where we see abuse of intellectual property rights: copyrights. Unlike patents, which have a life of about 17 years, copyrights last much longer, and can get renewed. There are many books that have been out of print for a long time, yet the copyrights remains in effect, and the work is essentially removed from circulation. If a publisher keeps a work out of print for a long time, it should lose the copyright.

Posted by: A. Zarkov on November 11, 2003 04:22 PM

____

A. Zarkov -- I think you're right. This is an especially big issue with software ("abandonware"). The only problem, for me, is the distinguishing of editions? Should Windows 98 go into the public domain when Windows 2000 comes out, if Microsoft no longer wants to sell Win98? If you allow Microsoft to claim that Windows 2000 is just a new edition, though, and that as such Windows 98 is not abandoned to the public domain, how far might it be stretched? Would, for example, Microprose be allowed to phase Civilization I and Civilization II out of print and sell Civilization III only, without allowing Civs I & II to be considered abandoned IP, because Civilization III would be a new edition?

I suppose there are ways to parse this, and I overall agree with your idea, but still there are some things that need to be sorted out.

Posted by: Julian Elson on November 11, 2003 06:39 PM

____

Posted by northernlights: "Any enlightenment regarding "Great Transformation Fictitious Commodification" and "spontaneous malicious transformation" would be greatly appreciated."

In Greate Transformation, Karl Polanyi indicates three goods that became commodified ficticiously: labor, land and capital. Polanyi notes that the commodification of these goods resulted in mass unrest and hardship. Labor was never before thought of as a good. It was a commons. The Statute of Anne forced many people off their lands and people in the thousands starved to death.

Today, Pharmas commodify information through IP rights that result in massive harms on the world scale (think AIDS, Cancer, etc). Intellectual property was never a property, but a commons.

I do not argue that ALL information should be free because there are circumstances where information should be paid for by users.

I wrote a paper a year ago on this topic which can be found on my website.

Posted by: David Yoo on November 11, 2003 07:58 PM

____

Masaccio, can you point to evidence that measures Government and Univervisty contributions to new drugs compared to private drug companies? Seems that private companies have played an important role along with the other sources you mentioned.

A good example is the human genome project. What started as a non-profit project got a kick in the toosh when Celera, armed with capital, significantly sped up the decoding process. Seems to me a private company, and its capital played an important role in the HGP. Do they get 100% credit? No. Were there some controversial issues? Yes. Those were worked out and the genome was decoded years ahead of schedule. I really don't see Canada as a hotbed of drug innovation.

Posted by: Mcwop on November 11, 2003 07:59 PM

____

It seems like there's not much discussion of the specific issue under contention.

Particularly, I don't see Kleiman supporting his claims about Safire's argument. When Safire talks about the American pharmaceutical industry "deciding" to raise prices in Canada, he doesn't demonstrate that it would be necessary for them to "collude" to do so. They could do so without running afoul of antitrust regulations. They just couldn't do it as intentionally a collective action. And while he's right that there's good reason to suspect that price increases in Canada wouldn't necessarily result in price decreases in the states, Kleiman makes no argument that they *necessarily* wouldn't. Really, it's much more likely that they *would* decrease prices in the US, just not in a one-to-one ratio. Simple market forces are always at work, though just not very efficiently. I've mentioned here my recent experience with generic Prozac: yes, it demonstrates how the market is broken for this product here in the US; but it *also* shows that in some instances it is working (because I *am* able to buy fluoxetine at a significant discount with some effort--a portion of retailers have lowered their prices as a result of lowered wholesale costs).

In principle (though probably not in practice), the US market isn't actually subsidizing the Canadian pharmaceutical market. Since the marginal cost of an already developed product is quite low, Canadian sales just add to their bottom line. Those revenues are not large enough for them to contribute a large portion of a pharma company's expected recouping of their investment in R&D. And, in principle, were the artificial caps on drugs in Canada raised or lifted, it would translate into either cheaper drugs in the US or greater R&D budgets, or both. In practice, as I said above, this is also going to be true, but not in a one-to-one ratio. (The effect could, in fact, be negligible. But Kleiman doesn't support this, he implicitly assumes it.)

The real problem, though, is if US drug sales are converted to Canadian drug sales. That results in a loss of revenue for the drug companies, which means either higher prices for US drugs or lowered R&D, or both. (And possibly higher Canadian prices, as well.)

To my mind, what this demonstrates at the very least is that shifting US pharma purchases to Canada, either by ignoring them or encouraging them, is just really freakin' stupid. I can't believe lawmakers have seriously considered (and approved) this. I can't believe anyone thinks it's a real solution to the problem.

Safire is naive, however, if he thinks that drug companies can even independently significantly raise prices (or refuse to sell) drugs in Canada. The more they use the leverage they have as the producer, the more incentive the Canadian lawmakers will have to trump it. If the drug companies refuse to sell on the basis that they can't make a profit, Canada will just reform its IP laws to allow Canadian production of those drugs.

In fact, what the American drug companies need to do is recognize that the current situation is unsustainable. They're managing to survive by exploiting the US market's inefficiencies, but those inefficiencies are cumulatively destroying the system as a whole. Their resistance to reform, rather than cooperation with it, may be a form of suicide. Time will tell.

Posted by: Keith M Ellis on November 12, 2003 12:38 AM

____

Brad,

Have you looked at the work by Levine and Boldrin?

http://www.researchoninnovation.org/tiip/archive/2003_2_a.htm

I highly recommend it.

Posted by: Steve on November 12, 2003 12:52 AM

____

"
A good example is the human genome project. What started as a non-profit project got a kick in the toosh when Celera, armed with capital, significantly sped up the decoding process. Seems to me a private company, and its capital played an important role in the HGP. Do they get 100% credit? No. Were there some controversial issues? Yes. Those were worked out and the genome was decoded years ahead of schedule. I really don't see Canada as a hotbed of drug innovation."


Posted by Mcwop at November 11, 2003 07:59 PM


IIRC, Celera used machines, developed by Celera under a program where the federal government paid for their development (ie., machines which wouldn't exist, at this time if the govt hadn't paid for them). IIRC, Celera was able to 'scoop' the Genome project's schedule by producing a less accurate map. Obviously one can work faster if one relaxes the specs.

When the human genome project started, it was a non-starter, under the existing technology. The federal government paid for accelerated technology development.

Posted by: Barry on November 12, 2003 04:16 AM

____

Barry - In my post I state that Celera did not do 100% of the work. Though, Celera did make important contributions that were funded by private money. They were willing to try things, and carry out tasks that the publicly funded project was not willing to do. Their shotgun approach is valid, and produced more information sooner.

I would never want to see a 100% government role in drug development, and IP is an important concept. My reasons are that government funding can be influenced by politics. This means politically charged diseases might get more funding than diseases that effect larger groups of people (e.g. Prostate cancer gets less funding than AIDS even though it is far more common in the U.S. - $2.5 billion versus $485 million). There are certain expertises that private companies have, such as manufacturing, that the government does not (Tamoxofin is a good example - government created private company figured out how to make it synthetic). IP does provide an incentive to attract capital. Regardless, drug patenets do not last forever, and there are new rules that allow generics to come to market faster. For evidence tehre I refer to Barr laboratiores (NYSE Symbol BRL) that aggressively pursue generics under these rules.

Posted by: Mcwop on November 12, 2003 05:49 AM

____

More prizes to more new drugs. Perhaps a time-limited decreasing tax of some 200% manufacturing cost, reduced by 20%/ year starting 1 year after FDA approval of sale; with this tax also on generics. An explicit innovation tax.
Instead of patents.

Masaccio is also interesting. W/o patents, there may need to be some innovation support; mechanisms need to be tried. "Open source" gov't funded drug research seems pretty reasonable.

Posted by: Tom Grey on November 12, 2003 05:55 AM

____

Currently medicare automaticly receives a best price based on any other agreements within the US. The US could expand this best price idea to include drug prices in all first world nations.


Posted by: james on November 12, 2003 07:08 AM

____

Post a comment
















__