Comments on: How should we pay for medical research ?

By: BigMacAttack

BigMacAttack — Mon, 09 Aug 2004 22:07:56 +0000

Jason, But John doesn’t really seem to be objecting to the deadweight loss. After all a bargaining system would still result in deadweight losses. He is pointing out that with third party payers, perverse incentives for doctors, and free rider in the area of government funded R&D, help to increase the profits of drug companies, so that the profits they enjoy are far above the social value of the innovations they give us. So from that prespective it makes sense that for the government to bargain back some of that profit. Very good sense. (Assuming of course we can trust government not to bargain profits below the social value of the innovation. Below what the profit would be without the distortions.) At least that is what I think he is arguing. But course another solution would be to just eliminate the distortions. And I am really curious if John really thinks the social value of things can be measured by the market. But since no one will confirm or deny (or maybe you did and I missed it, sorry if you did) my understanding, the answer will have to remain a mystery that will forever haunt me.

By: Russell L. Carter

Russell L. Carter — Mon, 09 Aug 2004 03:29:04 +0000

BTW, the relevant part of the interview cited above is near the bottom, and is completely independent of the prior discussion. This should give you a flavor, but do read the rest: “Reason: You accept no money from industry. Ames: No. If I give a talk at Du Pont. I have them send the honorarium to charity. Reason: So the research money comes from the government? Ames: My research money all comes from the government. It’s fiercely competitive. Reason: Over time, the government, especially the federal government, has acquired a near monopoly on the funding of scientific research… ”

By: Russell L. Carter

Russell L. Carter — Sun, 08 Aug 2004 23:18:27 +0000

Postrel over at Reason mag seems to be parrotting Sebastian’s line, and gets taken to school by an expert, who incidentally claims he’s a libertarian: http://reason.com/amesint.shtml

By: Sebastian Holsclaw

Sebastian Holsclaw — Sun, 08 Aug 2004 20:43:26 +0000

“I think we’re now agreed on the issues that need examining.” Argh. It is too bad we couldn’t have gotten to this point four days ago instead of spending three and a half days complaining about how dense I was and how little I understood economics. But since we did and this post is about to fall off the front page, I guess we won’t get to talk about the issues. “In the case of health care I argue (and I haven’t seen you offer any counterargument)” Well, hmm that may have been because you spent four days pretending I didn’t understand your post and that my points were completely irrelevant until they showed up in the DeLong paper that you threw at me. And even then you dodged for almost two days and multiple posts. And still you are being unusually coy. Do you intend to merely ignore those problems and hope that they won’t be a major factor in your grants and prizes? I still don’t know.

By: Jason

Jason — Sun, 08 Aug 2004 18:21:07 +0000

Sebastian, The tax would be given to the inventor of the product, who would presumably file an application that would look like a current patent application (I’m not suggesting this is as good scheme, as I don’t think the current patent scheme a good one). In fact, you could even call the resulting award a ‘patent,’ although it will not have the monopoly aspects of the current scheme. BigMac, one of the more common ways to think of consumer surplus is to measure the total difference between the ‘willingness to pay’ curve (also called inverse demand) and the price payed. Thus if I am prepared to pay uip to $20 for something and it costs $15, then I’ve made $5 of “profit.” The producer surplus is the actual profit the company makes (including research costs depending on your mood). The total surplus is the sum of these two things. Once the fixed cost (research?) has been paid, monopolies underproduce and thus the total surplus is lower than that for perfect competition (this is a deadweight loss, and their is further administrative deadweight loss to enforcing patents). Of course, this is given the fixed cost being paid. The granting of monopoly profits is used to provide an incentive to do research. It works, but only to a lesser extent. Note, that some projects that should be done aren’t (because the monopoly profit is much less than the potential social surplus), and of those that are, almost all of them would be done for much lower reward than the monopoly provides. In addition, there is a worse cascading effect that in fact stifles innovation. You may be restrained from doing certain research because you’ll be forced to pay people who can claim your work is derivative.

By: BigMac Attack

BigMac Attack — Sun, 08 Aug 2004 15:18:34 +0000

This will never get read. Thanks. After some careful reading and some thought(thanks) I can see your point. I think. But I think it all hinges on my acceptance that given the correct circumstances ‘the profit from the monopoly is a good measure of the social value of the innovation’ Do you generally accept that proposition? That market value = social value? (Which I think is pretty much what that ends up meaning. But please correct me if I am wrong.) If you do wouldn’t the better solution be to eliminate the cross subsidies and third party payers? And if you don’t how do we haggle over social value? I say market value doesn’t equal social value. I say the market undervalues the social value of the innovation. So I say keep patents since that leads to the highest price and most innovation/social value. In fact I say increase the (real)price via subsidies. More public R&D. (We need to keep the patents because governments cannot make final products and that is an important step.) Did I get that right? Does that make sense?

By: John Quiggin

John Quiggin — Sun, 08 Aug 2004 08:02:29 +0000

Sebastian, I think we’re now agreed on the issues that need examining. Patents involve market distortions and intrusive intervention, grants and prizes require governments to decide how research effort should be allocated. In any given case, it’s a question of balancing which of these problems is worse. In the case of health care I argue (and I haven’t seen you offer any counterargument) patents work less well than in other areas because the market value of a patent is not a good estimate of its social value. So I conclude that, despite the problems noted above, we would be better off relying more on grants and prizes and less on patents. Feel free to put contrary arguments.

By: Sebastian Holsclaw

Sebastian Holsclaw — Sun, 08 Aug 2004 05:27:35 +0000

I don’t see why you think patents cannot be implicated in the part I quote since just prior to those sentences is found: “However, forcing prices to be equal to marginal cost cannot be sustained because then the fixed set-up costs are not covered. Relying on government subsidies to cover fixed set-up costs raises problems of its own: it destroyes the entrepreneurial energy of the market and replaces it with the group-think and red-tape defects of admininstrative bureaucracy.” Doesn’t sound like thought about first-mover advantage. But now you are engaging in wholesale nitpicking while avoiding the central question which is presented by the very paper you cite. Once again—how do you intend to harness the information currently available to the market, how will you evade “entrepreneurial advantages of private enterprise”, how do you evade “the administrative defects of overly-rigid systems of top-down control that come with centralized funding”, and how do you deal with the problem that “government bureaucracies have never been able to choose and assess the directions of applied research and development very well” to use Delong’s phrasing? In layman’s terms: how do you choose what research to fund?

By: John Quiggin

John Quiggin — Sun, 08 Aug 2004 05:01:10 +0000

Jake, I agree that first-mover advantage is unlikely to be adequate. As I said in the original post, referring to various methods of protecting first-mover advantage:

While these methods don’t work forever, in some cases they deliver enough profits to finance a satisfactory rate of innovation. But, as far as I know, no-one seriously suggests this is the case in relation to medical research.

By: Jake McGuire

Jake McGuire — Sun, 08 Aug 2004 03:36:07 +0000

How durable do you imagine the advantage conveyed by being the first-mover would be? I can imagine anything from three months, if you make drug companies publish the composition of their molecule and let the generic manufacturers prove their similarity to the brand-name drug, to perhaps three years if you allow the drug companies to keep their products a secret and make the generic companies do their own clinical trials. With a little industrial espionage, the market-based monopoly might disappear entirely. In neither case is it likely to be economically worthwhile to do drug development.

By: John Quiggin

John Quiggin — Sun, 08 Aug 2004 01:53:15 +0000

I endorse Jack’s first para. The DeLong & Summers reference is clearly to first mover advantage and not to patents. Patents replace the temporary market-based monopoly derived from being the innovator with a much more durable (still finite under current law, but the IP lobby is working hard on this) government-enforced monopoly.

By: Jack

Jack — Sun, 08 Aug 2004 01:11:55 +0000

Sebastian, the short term monopoly referred to in the Delong & Summers article need not be an artificial one at all. It can be merely first mover advantage as works quite well enough for Amazon or Google. If the goalpost is now how the choice mechanisms can incorporate market knowledge, you could just say so. In medicine there are clearly areas where an expertise weighted market opinion might do better than a wealth weighted one. In fact I share your doubts about the efficacy of an institutionalised system but I don’t think the options provided by Professor Quiggin fail to address this. It is easy to confuse patents with their purpose. Professor Quiggin has already demonstrated the deadweight inefficiencies they cause but there are plenty of other objections to them. For example they only reward the value of the innovation, not its difficulty. That leads to all sorts of spurious results and rent seeking behaviour. There are many instances of people infringing patents with no awareness of the existence of the patent holders work at all. Such chilling effects should not be underestimated. Surely a libertarian would think that the market ought to be able to solve the problem of rewarding innovators without the need for the state to intervene through patent law? There is also the high cost of obtaining one and the extravagant cost of defending yourself against a well funded opponent. Patent law is not even mostly about Edison and lightbulbs. My concerns are more aboout the difficulty of persuading institutions to adapt rather than setting one up that can make good decisions. Markets seem quite good at changing incrementally.

By: Sebastian Holsclaw

Sebastian Holsclaw — Sat, 07 Aug 2004 23:02:33 +0000

Jason, you write: “Just to answer one small part of your question. A sales tax could be applied after the fact, and thus have no bearing on the research options decided.” What? That would be a sales tax on what? The patented product? That can’t be the answer because we are hypothetically not using patents. On all products? That doesn’t let us decide who gets the money from the tax. And John, I continue to understand that you don’t think the patent system makes the right choices. And my question since the very beginning of this thread is—how will the public funding decisions be made and how will you get around what DeLong talks about the “the importance of Hayekian insights into market competition as a discovery mechanism, of the entrepreneurial advantages of private enterprise, and of the administrative defects of overly-rigid systems of top-down control that come with centralized funding.”? You don’t deal with any of those issues. In fact you have dismissed them as non-concerns every single time I raised them. Furthermore you are just flip when you say things like: “Feel free to add citation to Hayek at this point if you wish.” Adding a citation Hayek most certainly does not satisfy the issue, because you immediately follow it up with a dismissal of the importance of such insights when applied to medical innovations. This is especially true because your dismissal seems to be based on informational concerns which can be remedied with measures far less drastic than getting rid of patents for medical properties. At no point in this conversation have you explained how you intend to harness the information available to the market (See Hayek unless you are claiming that concerns you outline invalidate all or nearly all of the information that would normally be gained by the medical market), how you evade “entrepreneurial advantages of private enterprise” to use DeLong’s phrasing and how you evade “the administrative defects of overly-rigid systems of top-down control that come with centralized funding” to use DeLong’s phrasing and how you deal with the problem that “government bureaucracies have never been able to choose and assess the directions of applied research and development very well” to use Delong’s phrasing. And on that last phrase, I’m quite (American meaning of the word) sure that DeLong is talking about both patents and research. You also write:

As regards the DeLong& Summers para you’ve quoted, thery are not talking about patents here. They are making the same point as I did about innovation in the absence of govt intervention (again, feel free to add citation to Schumpeter if you wish).

I quoted two paragraphs from the paper—both of which appear to deal with patents. The first quote I have requoted extensively above and it obviously deals with both patents and the perils of government directed research. The second begins: “Moreover, in a Schumpeterian economy it is innovation that is the principal source of wealth—and temporary monopoly power and profits are the reward needed to spur private enterprise to engage in such innovation.” Since ‘temporary monopoly power’ is the precise term you use to describe patents repeatedly throughout this post, you may forgive me if I have misinterpreted their use of the phrase in precisely the same way. You suggest they are talking about innovation in the absence of government intervention and then in the very next sentence you admonish me to “Keep in mind the central point that patents are a form of government intervention. So what do they really mean?

By: glory

glory — Sat, 07 Aug 2004 21:45:16 +0000

re: information as public goods, dan kohn has a nice introductory primer and eben moglen goes through some of the legal ramifications

By: John Quiggin

John Quiggin — Sat, 07 Aug 2004 21:34:13 +0000

Ok let’s try one more time. After mentioning some disadvantages of patents, I said

On the other hand, if the product market in question functions well in other respects (in particular, if consumers are well-informed and there are no cross-subsidies), the profit from the monopoly is a good measure of the social value of the innovation, eliminating the need for governments to make judgements on this issue.

Taking the last bit first, this makes the point that under a patent system, governments don’t need to know which innovations are valuable and which are not. That is, I did mention the main advantage of patents. Feel free to add citation to Hayek at this point if you wish. Looking back at the first part of the sentence, I give the reason this mechanism works – monopoly profit is a measure of consumer surplus – and the conditions under which it will work. Having mentioned this advantage of patents in general, I make the point that the mechanism is not very satisfactory for medical research. As regards the DeLong& Summers para you’ve quoted, thery are not talking about patents here. They are making the same point as I did about innovation in the absence of govt intervention (again, feel free to add citation to Schumpeter if you wish). Keep in mind the central point that patents are a form of government intervention