The third lesson ?

by John Quiggin on October 9, 2019

Another review of Economics in Two Lessons has come out. It’s by David Henderson and appears in Regulation, published by the Cato Institute (link to PDF). There’s a blog post with extracts here.

Unsurprisingly, given the source, it’s mainly critical of the analysis, but still has some kind words about the book. This para gives the flavour

Quiggin is a good writer who lays out much of the economics well. His analysis of rent control and price controls in general is a thing of beauty. Along the way, though, he makes small and big mistakes. He also shows by omission that the book, to be complete, badly needs a third lesson, on why government works so badly even when it intervenes in cases where markets work badly.

Tyler Cowen made the same point about a “third lesson” on “government failure” in his brief notice of the book. Of course, I discuss specific failures of government policy, such as rent control and the use of military power to generate economic benefits, both of which are noted by Henderson

The idea of “government failure” isn’t just that governments sometimes get things wrong – that’s true of all kinds of decision. Rather, it’s the claim, central to public choice theory, that government actions are driven by concentrated interest groups, rather than by ideas or broad social classes.

There’s some truth to this idea, as I note when I talk about regulatory capture in the book. But overall, I don’t accept it. In our current situation, we need more government action, not less.

{ 68 comments }

1

politicalfootball 10.09.19 at 1:05 am

Henderson’s blog post is a libertarian delight. He offers us Rita’s Friendly Oasis, a place where you can either do business or die, and correctly notes that the person doing business with Rita is not on equal terms, bargaining-wise. But (if I’m reading Henderson correctly) he regards this as a model of a successful market.

His life and not much else? It seems as if Friday got a pretty big benefit from that particular trade.

All libertarianism reads like a parody of libertarianism.

2

Chetan Murthy 10.09.19 at 2:27 am

Thank you, politicalfootball, for that! I went and took a look, and chuckled! Indeed, it’s un-parody-able. I remember there was a different version of the story, where another participant, Jake (who had a ton of water, and wanted some more to wash his car) offered Crusoe $50k+$1, and gets the water to wash his car with; Friday dies, b/c hey, he doesn’t have enough money. And this is reckoned a utility-maximizing outcome. Delong once cited Negishi on this, to the effect that one’s utility is divided by one’s marginal utility of money. So those with a ton of money, only need to benefit a little, to outweigh those with little money, who might benefit a lot.

Really, libertarians are all such hypocrites. I mean, they pretend that only the property rights they deem relevant are worth protecting by government (gosh, that’s a form of government action they don’t find objectionable, I wonder why). Any other property rights (like to clean air, clean water, etc) are 100% not protectable by the government, and when a “real property owner” wants to pollute the water or air and is stopped by government, why, that’s a “taking”. As if the pollution of the air in poor communities near petrochemical plants (b/c they never build petrochemical plants near the mansions of the rich) isn’t a taking also.

Sigh. Such hypocrites.

3

Ross Smith 10.09.19 at 8:20 am

I’ve always thought that the widespread American distrust of government is a perfect example of a self-fulfilling prophecy. If people believe that government can’t be trusted, then of course they’ll end up with an untrustworthy government.

4

J-D 10.09.19 at 10:39 am

Desert Island Economics:
http://existentialcomics.com/comic/234

5

J-D 10.09.19 at 10:40 am

Rather, it’s the claim, central to public choice theory, that government actions are driven by concentrated interest groups, rather than by ideas or broad social classes.

As opposed to private actions, which are driven by ideas or broad social classes, rather than by concentrated interest groups?

6

Tim Worstall 10.09.19 at 12:20 pm

“In our current situation, we need more government action, not less.”

Well, yes, perhaps so. But which actions, decided upon by whom? Which is rather the public choice problem again, isn’t it?

7

reason 10.09.19 at 12:29 pm

But their arguments are irrelevant. If their argument was relevant, they should agree we should abandon both government and capitalism – as perhaps anarcho might turn up and point out.

The correct answer is to get government and capitalism to work as countervailing powers to improve both. i.e. Avoid both corruption and monopoly.

8

Lee A. Arnold 10.09.19 at 1:51 pm

I demonstrate at the end of this animation how government regulation is a basic source of growth:

9

Mike Huben 10.09.19 at 2:27 pm

There are so many problems with the Rita’s Friendly Oasis example. Start with the deceptive name: capitalists are not your friends. They are opponents attempting to capture as much surplus as possible from customers. And they are obviously not friends when they engage in price gouging.

However, David Friedman (another libertarian) has a similar example of needing to use somebody’s weapon to save the world (In “The Machinery of Freedom”.) His solution is to steal it and pay compensation. A similar solution would work for the Oasis: steal the water, then pay the marginal cost. Both are Pareto efficient: the latter is less unjust than price gouging.

10

MarkW 10.09.19 at 2:49 pm

I remember there was a different version of the story, where another participant, Jake (who had a ton of water, and wanted some more to wash his car) offered Crusoe $50k+$1, and gets the water to wash his car with; Friday dies, b/c hey, he doesn’t have enough money.

I imagine Henderson would respond to this by claiming something like the following. He might say that actually the bad outcome of water being wasted on trivial things or misallocated to people who don’t really need it is more likely (and in real-world situations, not contrived Robinson Crusoe thought experiments) when anti-gouging laws are strictly observed and enforced. The first people who make it to the store (because they live the closest or perhaps because they’re cautious plan-ahead types) buy water and get extra because the price is as low as always and ‘better safe than sorry’ and ‘it won’t go bad — we’ll drink it eventually’ and generally because they’re the cautious planner types. They’re not mustache-twirling billionaires getting extra water to wash the Range Rover, just ordinary people doing what makes sense to them personally. They feel they’re being prudent, not selfish. But there’s no water left for late-comers all the same. And maybe the store didn’t lay in much extra stock ahead of time because water is a very low-profit product, they can’t charge any more during the emergency, and they might get stuck with a lot of extra pallets if the storm turns and goes the other way. And then once the disaster does strike, nobody goes to great lengths to rush in extra water because it’s difficult and expensive to do so and if they succeed, they can only charge the normal, very low price anyway.

(Also — why wouldn’t Jake, who is almost swimming in water, give Friday a drink in exchange for Friday doing the car-washing?)

He offers us Rita’s Friendly Oasis, a place where you can either do business or die, and correctly notes that the person doing business with Rita is not on equal terms, bargaining-wise. But (if I’m reading Henderson correctly) he regards this as a model of a successful market.

Well maybe it is — albeit one under the most extreme conditions. Why, after all, is Rita there in the middle of the desert with two quarts of water to sell at any price? Why are there no other vendors? Well maybe there were other vendors but, being nice pro-social folks, they quickly sold all their water at low prices and then closed up and left. Why no NGOs? Well maybe there were NGOs, but the danger from the local warlords became too great and they pulled their volunteers from the field. But greedy Rita the profiteer is still out there by herself, still holding on, willing to take the risk to make obscene profits (while cutting in the warlords on every sale). And maybe the previous customer, very thirsty but not quite dying, would have bought all her remaining water if she had been charging only $10,000/quart. But at $25,000/quart, they left two bottles. So here is our dehydrated traveler paying $50,000 to Rita and surviving. And hating her for it — what kind of person would charge a dying man $50,000 for water!? (not realizing the answer was, “the only kind of person who would be there with any water to sell”). Is this an example of a ‘successful market’? Nothing about it is ideal, and Rita is a heartless shit, but in her greed she made water available to a dying person when nothing and nobody else would have. Then maybe we can end this whole thought experiment Hollywood style. Rita, having disposed of the last two bottles for sale, closes up and heads back to civilization with her (ill-gotten?) gains to restock. But on the way her mule kicks over the only jerry can she’s saved for the journey and she dies of thirst in the desert, all her useless money blowing away in the wind. Fade to black. Bonus scene after the credits — a year later, a thirsty traveler approaches Rita’s Friendly Oasis. Saved! Then he arrives to discover that it’s empty and stares off toward the horizon, realizing his fate is sealed.

11

TF79 10.09.19 at 5:26 pm

The conclusion from (many? All?) Public Choice Theorists that “Regulatory agencies may be captured by special interests, ergo we should get rid of regulation” always struck me as odd.

12

Henry Grodsk 10.09.19 at 7:19 pm

“…the parent should not have a legal obligation to feed, clothe, or educate his children, since such obligations would entail positive acts coerced upon the parent and depriving the parent of his rights. The parent therefore may not murder or mutilate his child, and the law properly outlaws a parent for doing so. But the parent should have the legal right not to feed the child, i.e., to allow it to die”
Murray Rothbard (1926-1995) Ethics of Liberty (1982)

I used this quotation last year in teaching Swift’s Modest Proposal. Most of my students (of literature, not economics) thought it was satire.

13

politicalfootball 10.09.19 at 8:17 pm

The libertarians won the rhetorical war when they convinced everyone that “government” and “markets” are distinct entities. Nobody except the most committed libertarian talks, for example, about how government shouldn’t interfere with the natural functioning of roads or sewer systems.

14

J-D 10.09.19 at 11:43 pm

Tim Worstall

“In our current situation, we need more government action, not less.”

Well, yes, perhaps so. But which actions, decided upon by whom?

You have not made it clear whether you are interested in:
A. a statement of general principle;
B. a description of specific mechanisms;
C. an immediate practical political program; or
D. being a smart-aleck.

15

J-D 10.10.19 at 2:16 am

Henderson writes

The otherwise dehydrating person gains the value of his life minus $50,000 …

That’s only a gain if the value of his life is more than $50,000; if it’s less than $50,000, that counts as a loss.

It is reported that human lives trade on the open market for a lot less than $50,000:
https://www.havocscope.com/black-market-prices/human-trafficking-prices/
https://www.havocscope.com/black-market-prices/contract-killing/

16

Timothy Scriven 10.10.19 at 3:03 am

+1 to Ross Smith. The American belief that governments are totally incompetent at everything as led to, to steal a right wing phrase, “A soft bigotry of low expectations” except it’s a rather hard bigotry. It is absolutely a self-fulfilling prophecy. The US needs to get serious about its public institutions. Empirical evidence takes precedence over theory, and whatever public choice may say, other countries have managed functioning public services, regulation etc, thus,so can the United States.

17

derrida derider 10.10.19 at 6:50 am

No libertarian I – I think most actually existing ones are either naive fools or (when shilling for the rich and powerful) hypocrites. But the polsci Crookedarians will know that public choice theory is rather more sophisticated than the examples being put here by both its friends and enemies.

In particular, the reason its advocates insist on systematic sources of government failure (regulatory capture is but one such source) is to make the point that identifying a MARKET failure is necessary, but crucially not sufficient, to make a case for government intervention. You are, in effect, weighing one failure against another and which is worse is something to be determined case-by-case.

They then usually go on (and here is where most of us here can legitimately part company from them) to assert that the positive political economy of a democracy is such that the scales in such judgements are weighted in favour of too much government intervention – but by then you’re off into Hayek et al, rather than strict public choice.

18

politicalfootball 10.10.19 at 12:42 pm

MarkW@10: You can have Henderson make up any scenario you want to, since he didn’t try to explain, but you ought not contradict him, as you do when you suggest that Rita might be bringing water at great risk and cost. It is Henderson’s entire point that the two sides come to the bargaining table as unequals, and Henderson selects a scenario of extreme inequality specifically to make this point. Equalizing matters by making Rita’s situation more difficult and desperate is a direct denial of the point Henderson is making.

But I do understand the temptation, when someone is spouting gibberish, to try to interpret it in a way that makes some kind of sense. A lot of people wonder why the media does such a bad job of reporting on President Trump, and I think this accounts for a lot of it. Reporters can’t just say straight out that something the president says or does is absurd, but journalists are nonetheless obliged to string words together in a way that makes sense. So they don’t have the vocabulary to deal factually with someone like Trump.

It’s best, I think, just to acknowledge Henderson’s silliness for what it is, and if you want to make some different point, make it yourself.

19

MarkW 10.10.19 at 5:20 pm

The conclusion from (many? All?) Public Choice Theorists that “Regulatory agencies may be captured by special interests, ergo we should get rid of regulation” always struck me as odd.

I think the conclusion is more along the lines of something like, “Because the threat of regulatory capture is ever present, we should try to make do with fewest, clearest, simplest regulations we can so that it is possible for citizens to track what’s going on and so that the sweetheart deals and cheaters and can be detected and exposed. ” And when there is a choice between regulatory and non-regulatory approaches, Public Choice suggests we should favor the latter (e.g. a simple carbon tax rather than fine-grained, complex, industry-by-industry regulating of emissions or energy efficiency).

20

reason 10.10.19 at 6:20 pm

politicalfootball, @13
Yes but the real reasoning failing is seeing both markets and governments as single entities. They aren’t (markets aren’t even an entity).

21

rcriii 10.10.19 at 9:09 pm

In line with politicalfootball at #13, note the rhetorical sleight-of-hand in the idea of “governmental failure”. Governments are not the only organizations that interfere in markets for good or ill. And governments generally do a lot more than interfere in the market. So shouldn’t the third lesson be “Organizational failure”? Or are we just back to the fact that markets sometime are successful, and sometimes are unsuccessful (leaving aside who gets to define success).

If the claim is “government actions are driven by concentrated interest groups”, why use the term “failure”? Because the project is to de-legitimize government.

22

J-D 10.11.19 at 12:26 am

derrida derider

Obviously without the benefit of public choice theory nobody could ever have come up with the idea that proposals for government action should be assessed on their merits instead of simply assuming that all government action is good.

23

J-D 10.11.19 at 12:34 am

Henry Grodsk

Allowing children to die has been a common practice across time and around the world. It hasn’t usually been as practically disapproved of as it has been in rich countries in modern times.

However, I don’t know that Murray Rothbard was aware of this. He was probably just being a swine.

24

Collin Street 10.11.19 at 2:24 am

A person whose first response to learning they’d been missing a major factor in their assessments is to insist on the existence and salience of a new factor that has a strong tendency to line up with their previous thinking…

… is not a person who’s actually learned anything, or can learn anything.

25

MFB 10.11.19 at 10:26 am

But is it not extremely likely that government actions are driven by concentrated interest groups — that is, corporations? And that, therefore, governments respond badly to crises because it is impossible to respond effectively to, say, a banking crisis when you cannot offend or undermine the power of the bankers who caused the crisis in the first place?

The solution that there should be less government intervention, in this case, is no solution at all, because it simply leaves the field to the concentrated interest groups. This is more or less what has happened in South Africa in the last fifteen years, where a Cabinet which many believed was too sympathetic to the rich (Mbeki and co.) was replaced by a Cabinet which was almost entirely in the pay of the rich (Zuma and co.) and more recently by a Cabinet largely consisting of agents of the rich (apart from President Ramaphosa having been sponsored to win his party leadership with hundreds of millions of rands from various mining houses, we also have a Minister of Finance whose previous job was at Goldman Sachs and a Minister of Minerals whose main claim to fame is belonging to a party subsidised by various mining houses and who is also famed for having a lawyer opposed to hydraulic mining arrested).

It’s no wonder that the ruling class media in South Africa are suddenly very enthusiastic about government intervention (i.e. privatising power, water and transport and curbing unnecessary spending on social services). In a case like this, more intervention is not going to solve any problems.

26

MarkW 10.11.19 at 11:04 am

politicalfootball@18: “You can have Henderson make up any scenario you want to, since he didn’t try to explain, but you ought not contradict him.”

I don’t see that I have. Unless there is more than I have missed, Henderson’s entire scenario is the following:

My favorite story, which I made up, is of Rita’s Friendly Oasis offering two quarts
of water to a dehydrating person who has no other options, charging him $50,000. Both sides gain. The otherwise dehydrating person gains the value of his life minus $50,000 and Rita gains $50,000 minus the marginal cost of the water.

He does not say how this situation (Rita becoming the only source of rare drinking water and a person dying of thirst wandering by) came about. His point, as I understand it, is simply that both parties gain in the exchange. That remains true in my hypothetical fleshed-out scenario as it is in the no-details version.

Incidentally, the closest I ever came to a “Rita’s Friendly Oasis” was this place on the edge of the Mojave desert. The reviews are hilarious (and accurate). The prices are absurd and some of the employees are jerks, but it could hardly be otherwise. The owner has to charge high prices to make a go of it and probably can’t fire the only employees who are A) willing to show up regularly in the middle of nowhere and B) tolerate abuse from angry customers day after day. The customers, the owner, and the workers may not be able to stand each other, but it still works — all of the above are made better off in the exchanges that happen (even if everybody involved feels ill-used).

27

Orange Watch 10.11.19 at 12:28 pm

Ross Smith@3, Timothy Scriven@16:

It’s not just a self-fulfilling prophecy or even a bigotry hard or soft – it’s an outright excuse to justify profiteering and sabotage. If gov’t is inherently corrupt, and pols & bureaucrats inherently lazy and self-serving, there’s no reason not to be lazy and self-serving when you yourself are hired or elected, and indeed, since you’d be undermining a corrupt or even evil institution, you can view failing to do so as naive if not outright supporting an enemy of the people.

28

Collin Street 10.11.19 at 8:56 pm

Both parties only gain in the exchange to the degree that the price charged is less than the buyer is willing to pay. If you’re charging the absolute maximum you can then all the benefit accrues to you and you are providing nothing of any net value to anyone else.

(note that a key element of the water example is the limited funds available to the buyer: this limits the physical ability to pay without limiting their willingness. Rita’s unwillingness to take credit limits tbe price she can charge and means the transaction still has benefit for the thirsty person. This makes it a bad metaphor for what those proposing it wish it to be a metaphor for: incompetence or mendacity, take your pick.)

29

Collin Street 10.12.19 at 1:37 am

[note that failure to realise the necessity of leaving profit on the table for counterparties is one of the typical failure modes of sociopathic businesspeople, the other being trying to sell products you don’t realise nobody actually wants.]

30

Another Nick 10.12.19 at 9:10 am

31

MarkW 10.12.19 at 1:48 pm

Both parties only gain in the exchange to the degree that the price charged is less than the buyer is willing to pay.

But the price charged is always at least somewhat less than what the buyer is willing to pay or the transaction does not take place. One of the parties may not gain much, but as long as the exchange is voluntary, they always gain something (or at least believe they will).

Here’s a real-world example that’s pretty close to Rita’s Oasis. Right now, mariners who require aid in the southern oceans are not charged for rescues that may cost millions (and risk lives) even if they were there for trivial reasons like winning a yacht race or setting an around-the-globe record of some sort. There have been calls to change this, though — why should Australian taxpayers cover the costs of risks taken by foreign adventurers and yacht racers? Suppose international law was changed so that the rescued person had to pay as much of the entire cost of the rescue as they could, including all their present wealth and a large share of future earnings. So now the deal is not your life for $50,000, but your life in exchange for all your present wealth and a future of indefinite indentured servitude. What do you think — would this be just or unjust? What if the rescue organization charging millions was not a government agency but a private, for-profit company? What if insurance was available, but the sailors decided they didn’t want to spend the money? What if the sailors were not out for personal adventure, but to ‘bring awareness’ to climate change? But what if you didn’t believe that and thought that they were trying to green-wash their self-centered motives?

You might come up with different answers for the morality of the situation depending on the details, but the point is that none of that would affect whether or not the rescued party gained in the exchange. If they agreed to it, they believed they would benefit. And it’s not true that they’d have no choice. They might decide — “No, I selfishly took this extreme risk, and I’m not going to impoverish my family” and turn down the rescue.

32

Chetan Murthy 10.12.19 at 7:07 pm

MarkW: To me, you’ve brought an important point to light, but not the one that I think you were aiming at. In the “Rita’s Oasis” story, a subtext is that the oasis is out in the middle of the desert, and there are very few thirsty travelers. But really, the cases where we’re all outraged by price-gouging are much more mundane: hurricane-hit areas with many thousands of people who lived there for years and years, with government policies that encouraged that settlement (in marginal or even flood-pathway zones).

It makes sense for prices to be a signal to people to change their way of life, to live elsewhere. But when we’re dealing with masses of people going about their everyday lives (instead of just a few crazy sailors), it’s a lot more difficult to argue that some sort of rapacious “water at $100 a bottle” is anything other than … legalized looting.

TL;DR There’s a moral difference between a few crazy sailors out in the back of beyond, and thousands upon thousands of people who’ve made their lives, homes, and careers for decades in a government-sanctioned place and manner.

33

Peter T 10.12.19 at 11:32 pm

Dear me. So many free-floating hypotheticals. It is true that exchanges where neither party has much at stake (life, family, status…) there is voluntary agreement mediated by price. This tells us nothing about the exchanges where something important is at stake. In these there is always some mixture of social circumscription and coercion – that is, politics or, dare one say it, government. Messy? Yes. Fluctuating? Yes. Contingent? Yes. Amenable to reduction to simple equations? No.

34

Thomas Colthurst 10.13.19 at 5:20 am

John, I think your post mischaracterizes the GMU theory of government failure. That theory is much, much broader than “government actions are driven by concentrated interest groups”. For example, rational ignorance on the part of voters is a key part of the theory that explains why government officials often lack the proper incentives, even in the absence of interest group lobbying.

35

John Quiggin 10.13.19 at 5:51 am

Thomas @34 I discuss rational ignorance in the linked article, pointing out that it fulfils the same theoretical function as ideas of “false consciousness” used by Leninists and others to justify a vanguard party acting in the interests of workers who can’t see it for themselves.

36

Collin Street 10.13.19 at 7:09 am

MarkW: If you want me to respond, you need to make statements rather than ask questions.

(If you make a statement I get the value of your insight, even if it’s bad, but answering your questions does nothing for me directly. Constantly asking questions is taking-without-giving: selfish if you can give, and bad otherwise if you can’t)

37

MarkW 10.13.19 at 2:02 pm

Chetan Murthy@32

But when we’re dealing with masses of people going about their everyday lives (instead of just a few crazy sailors), it’s a lot more difficult to argue that some sort of rapacious “water at $100 a bottle” is anything other than … legalized looting.

Price signals matter in mundane cases, too. Just before a hurricane strikes, doubling the price of bottled water from, say, $5 to $10 a case would send the signal that water is becoming scarce, that the retailer doesn’t have much in reserve and isn’t likely to get more soon. It would discourage panicky early-shoppers from buying extra ‘just in case’ and emptying the shelves. But the prejudice against price-gouging is strong, and U.S. retailers don’t do this. They maintain normal prices, goods sell out, and the shelves go empty. But water is never really a severe problem. Walmart, for example, loves to ship extra bottled water to hurricane-threatened areas as a low-cost, low-risk PR move (bottled water is inexpensive and non-perishable after all — how much could they lose). And the U.S. is a wealthy society with good transport capabilities — few people die in hurricanes now, and when it does happens, it’s not because emergency supplies of food or clean water cannot reach the area soon enough. Anti-gouging sentiments and laws don’t do much good or harm here.

If you want to see anti-gouging laws in something closer to a life or death situation, look at Venezuela. When you see a story like this, do you support the crackdown on ‘profiteers’? Or do you think the government is making it impossible for supermarkets to charge what is necessary to keep supplies on the shelves?

38

Chetan Murthy 10.13.19 at 10:06 pm

MarkW@37: The inflation rate in Venezuela in 2018 (the year of that article) was in excess of 1m percent (per Wikipedia). Attempting to draw conclusions about price-gouging, in the face of such price instability, is pretty much impossible, I’d think. I mean sure, go ahead and try, but really, it seems pretty pointless.

39

Chetan Murthy 10.13.19 at 10:13 pm

MarkW @ 37: I guess, the content of your comment might be interpreted as “price-gouging doesn’t happen, except in times of massive disorder”. But this is manifestly false: look at the price-gouging rampant in the prescription drug business, for drugs that are neither under-patent, nor were expensive only a few years ago.[1] And I’m sure I could find other examples (the market for gasoline in California comes to mind — it seems pretty clear that there’s something odd going on there, keeping prices unreasonably higher than in other parts of the US).

The trick that libertarians pay is a nice one, though: Claim that unfettered markets are intrinsically better, and then when examples of their iniquity are offered, claim that no-no-no-no, those examples are irrelevant, and offer examples where attempts to rein in those bad effects are of null effect.

[1] In case you’ve forgotten, I refer you the that “most punchable face in America” guy, the one who bought the Wu-Tang Clan album, and also defrauded some of his investors, along with jacking up prices on drugs that had been no-longer-patented for ages.

40

politicalfootball 10.13.19 at 11:53 pm

He does not say how this situation (Rita becoming the only source of rare drinking water and a person dying of thirst wandering by) came about. His point, as I understand it, is simply that both parties gain in the exchange. That remains true in my hypothetical fleshed-out scenario as it is in the no-details version.

No, that’s not his entire point. His language is plain, even if you decline to acknowledge his words. Why did he introduce that hypothetical? He explains:

Quiggin writes, “In the typical One Lesson textbook version of the story, Crusoe and Friday bargain on equal terms and share the gains from trade more or less equally.” I can’t speak for other economists or for textbook writers, but when I’ve taught similar stories, I’ve never made that assumption. Maybe I’m alone, but I doubt it.

And here is my explanation:

It is Henderson’s entire point that the two sides come to the bargaining table as unequals, and Henderson selects a scenario of extreme inequality specifically to make this point. Equalizing matters by making Rita’s situation more difficult and desperate is a direct denial of the point Henderson is making.

This sort of thing is really interesting to me. Let me propose a theory: You are actually unable to read Henderson’s words and incorporate them into your thinking. When you say “Henderson’s entire scenario is the following:” you really are incapable of understanding that he has expressed a reason for presenting that scenario.

I’ll be interested to see your response. Now that it has been pointed out again, with a quote, can you acknowledge the plain meaning of Henderson’s words? Can you acknowledge their existence?

I have the same fascination with your thinking that Oliver Sachs has with his patients. What causes this kind of malfunction? How does it work, exactly?

41

MarkW 10.14.19 at 12:20 pm

Chetan Murthy: But this is manifestly false: look at the price-gouging rampant in the prescription drug business, for drugs that are neither under-patent, nor were expensive only a few years ago

Yes, this is a big problem, but it’s not a problem of ‘unfettered capitalism’ but of fettered capitalism. Specifically, it’s a problem of artificial monopolies created by government regulation. No competitors can enter these markets because gaining FDA approval of new production lines for even off-patent drugs can be a lengthy and expensive process. My favored solution for this would have been to bring in competing suppliers by getting rid of the FDA regulatory fetters and allowing immediate importation of the equivalent drugs from the EU and other OECD countries. If this were done, the new competition would instantly restore normal market prices.

politicalfootball: It is Henderson’s entire point that the two sides come to the bargaining table as unequals, and Henderson selects a scenario of extreme inequality specifically to make this point.

I fully understand that, and whether the two sides come to the table as equals or not may matter very much for our moral judgement about the trade and the traders, but it does not matter at all for the question of whether both sides benefit in the exchange. If the exchange is voluntary, they do. The dehydrated buyer benefits from spending $50,000 on water to save their life regardless of whether or not the seller bore great, heroic risks and expenses to supply the water or is just the Marin Shkreli of the water business.

42

Trader Joe 10.14.19 at 3:57 pm

Several readers seem to be missing the point of the Rita example (in my opinion).

A commercial transaction between two parties always involves at least two considerations – the good being bartered and the distribution of it. We might agree that the value of a bottle of water is $0.25. Distribution varies by scenario.

We all know we can by a bottle of water at a wholesale outlet for later consumption at our convenience that costs darn near the $0.25 per bottle that might represent its intrinsic value. But we also know we should expect to pay more at an airport, an amusement park, a sports stadium or the middle of the dessert. What we’re paying for is not the water, but to have it at the place and time of our choosing.

While I’d fully accept the humanitarian argument that cost of distribution should be curtailed in a true life/death scenario – the fact remains that a good has no intrinsic value if not placed at the point of need (i.e. 10,000 bottles of water at home do me no good if I need even one right here, right now).

43

Chetan Murthy 10.14.19 at 6:13 pm

MarkW@41:

My favored solution for this would have been to bring in competing suppliers by getting rid of the FDA regulatory fetters and allowing immediate importation of the equivalent drugs from the EU and other OECD countries.

Two (obvious) thoughts:
(1) Yes, let’s get rid of our governmental fetters, and instead rely on those of other governments! How is that an argument against governmental action (and fetters)?
(2) those regulations exist for a reason: and we are periodically reminded of those reasons, and of how difficult it is to establish whether certain drugs (or medical devices) are safe. But you’re arguing we can do away with them, and just trust that manufacturers will not produce adulterated or just plain poisonous drugs.

We are regularly treated to proof that individual citizens are incapable of gathering the data, drawing the inferences, required to know which foods and drugs are safe, and which are not. The idea that somehow we can return to that system ….. I don’t know what to say.

44

Chetan Murthy 10.15.19 at 12:19 am

MarkW @ 41:

The dehydrated buyer benefits from spending $50,000 on water to save their life regardless of whether or not the seller bore great, heroic risks and expenses to supply the water or is just the Marin Shkreli of the water business.

This is the libertarian argument, in all its brutality: two parties do not agree to contract, unless both gain something, so the government has no business interfering.

What to make of this? It’s obviously at this point a matter of faith (I’ve heard libertarians argue that it’s an -axiom-, not a theorem — that is, that they would adhere to this principle even if it resulted in massive harm that could otherwise be averted), because there are so many holes in it, it leaks like a sieve.

45

Collin Street 10.15.19 at 6:48 am

The thing is, voluntary transactions do lead to utility gains. The problem is explaining to MarkW that that’s not the only factor here.

And that’s where we start with questions like, “seriously, what exactly is wrong with him?”

46

Tm 10.15.19 at 8:49 am

Ritas oasis is a case study in flawless economic logic. Online one insignificant detail seems to have been overlooked – apparently by everyone here:

*Most people don’t have 50‘000 dollars.*

47

Tm 10.15.19 at 8:51 am

Only one insignificant detail …

48

MarkW 10.15.19 at 10:44 am

This is the libertarian argument, in all its brutality: two parties do not agree to contract, unless both gain something, so the government has no business interfering.

No, no, no! It is true ‘two parties do not agree to contract unless both gain something’ but it does not follow that the government never has any business getting involved. In the case of Marin Shkreli, the monopoly that enabled Turning Pharmaceuticals to raise the price of Daraprim by 50X times was enabled by government regulations — in such cases, the government damn well needs to do something to address a problem that its own policies helped to create.

49

MarkW 10.15.19 at 11:51 am

Chetan Murphy@45 Yes, let’s get rid of our governmental fetters, and instead rely on those of other governments!

Don’t you trust the European Medicines Agency? I do. I also trust the Japanese PMDA. I think we’re better off in a world where these regulatory agencies are in friendly rivalry rather than each having a monopoly in its own market (huge bureaucracies tend to get, well, bureaucratic, slow moving, and expensive — competition between these agencies could help. Even a credible threat of being exposed to competition could help). But mostly the point in doing this would be to create instant competition in drug manufacturing where it does not exist now.

But you’re arguing we can do away with them, and just trust that manufacturers will not produce adulterated or just plain poisonous drugs.

Where did I make that argument!? Obviously, in the case of pharmaceuticals we do need testing both the inherent safety of drugs and in the quality of manufacturing. Does this have to be a government-only function? Maybe not. Underwriters Laboratories seems to have done a good job for a long time. In the U.S. we have both the NHTSA (National Highway Traffic Safety Administration — a government agency) and the IIHS (Insurance Institute for Highway Safety — a private organization funded by the insurance industry). Both do things like automobile crash-testing. Could we have a similar situation with respect to Pharmaceuticals? Why not? But that would be a much bigger hill to climb — the most straightforward way to create competition in both regulatory bodies and drug manufacturing is open up imports from other industrialized nations. In my own opinion anyway.

Those on the left seem to have such a distorted view of libertarians. I know of none who thought that Martin Shkreli was just a shewed businessman and that nothing should be done about the situation with Daraprim. Do you follow the libertarian economics blog Marginal Revolution? Right now, there are multiple posts about the latest Nobel Prize winners in Economics, and some of the topics have direct bearing on what we’re talking about. For example, here’s Alex Tabarrok talking about Michael Kremer’s idea for patent buyouts (and it’s a good example, I’d say, of how libertarian economists think about these kinds of problems):

Michael Kremer wrote two of my favorite papers ever. The first is Patent Buyouts which you can find in my book Entrepreneurial Economics: Bright Ideas from the Dismal Science. The idea of a patent buyout is for the government to buy a patent and rip it up, opening the idea to the public domain. How much should the government pay? To decide this they can hold an auction. Anyone can bid in the auction but the winner receives the patent only say 10% of the time–the other 90% of the time the patent is bought by the government at the market price. The value of this procedure is that 90% of the time we get all the incentive properties of the patent without any of the monopoly costs. Thus, we eliminate the innovation tradeoff. Indeed, the government can even top the market price up by say 15% in order to increase the incentive to innovate. You might think the patent buyout idea is unrealistic. But in fact, Kremer went on to pioneer an important version of the idea, the Advance Market Commitment for Vaccines which was used to guarantee a market for the pneumococcal vaccine which has now been given to some 143 million children. Bill Gates was involved with governments in supporting the project.

50

Orange Watch 10.15.19 at 12:02 pm

Let’s not forget that those offering up Rita’s Friendly Oasis aren’t offering up a market gloriously unfettered by government interference if we take the thought experiment at face value; they’re offering up an interventionist government which has parceled out the commons and enforces its own conception of property rights on anyone who enters its environs. If Rita’s is in fact an oasis, she can naturally possess only the water she’s holding in her hands, and “owning” the rest requires either implicit or explicit force to maintain an arbitrary monopoly on a commonly available resource she has found and “innovatively” fenced off rather than created; it is not Rita’s Friendly Water Importation and Resale Company. If we were truly dealing with a market unfettered by neither government interference nor coercive violence, Rita would not be able to get thousands of bright green paper-cloth scraps (Wall paper? Scratch paper? Toilet paper? Tinder? Her imagination is the only limit!) from nomads without offering some personal property or the fruits of her actual labor in exchange.

51

Lee A. Arnold 10.15.19 at 5:53 pm

Thomas Colthurst #34: “…rational ignorance…”
John Quiggin #35: “…rational ignorance…”

Rational ignorance undermines markets too. Libertarians regularly suppose that free markets provide the most efficiency, innovation, and freedom. The theory is that the “knowledge problem” is solved by the price system. But the price system relies upon “perfect information” for the proper formation of prices. And of course, no one possesses perfect information. It is a circular argument. This problem is leapt over by using concepts such as “satisficing” and “second best” to justify the actual system, which is a mess.

52

kinnikinick 10.15.19 at 6:01 pm

Let’s look more closely at this “Rita’s Oasis” scenario.
There is a trickle of weakened, desperate people moving through an isolated wasteland, and there is also Rita, who is well-supplied and dug in – she has water to spare! Why is Rita there? She can rob the corpses of these unfortunates, hold them for ransom, enslave them, harvest their organs, even eat them. All of these things seem easier than relying solely on an exchange with highly specific and improbable conditions. Yes, this is a thought experiment, artificially simplified to make a point, but why simplify arbitrarily? Why complicate this empty stage by assuming Rita’s preference for honest dealing, or an abstract concern for reputation with no witnesses present, or even a distaste for expedient, consequence-free violence?
Here, the values that constrain Rita’s options to mere price-gouging or negligent homicide originate outside the transaction, but libertarianism seems to have no interest in this realm except as a generator of hand-wavy obstacles to trade. The virtues of the merchant must emerge from contemplation of the benefits of exchange, as a sort of bootstrapped reverse-engineering; the sovereign individual obviously cannot source her values in squishy collectivisms like “culture” or “society”.
I wonder how libertarians learned their mother tongue…

53

Collin Street 10.16.19 at 3:03 am

Where did I make that argument!?

It’s a necessary consequence of the other arguments you’re making: the thing about overlooking a consequence of your other statements is that other people won’t.

I’m not going to go into huge detail, because the basic issue is an attitude on your part that neglects the consequences of your fallibility… which makes your seeing how you’re doing this and why it’s a problem much harder than it would otherwise.

Trust first, then understanding will come. The other way around is basically impossible: you need to take off the blindfold before you can see it.

(Which is to say: people are responding to consequences of your statements that you evidently aren’t aware of. Communication is difficult and requires good will from both sides!)

54

Chetan Murthy 10.16.19 at 6:00 am

MarkW @ 49:

(1) you proposed that we get rid of our government regulations, and instead rely on government regulators …. overseas. How’s that an argument against government regulation? And note that each of those regulators is a monopoly regulator in their ocuntry — they don’t countenance “competition” on their turf.

(2) you bring in patents, but the example I gave was NOT about patents — it was about drugs long past patent, that were only covered by regulation, but insufficient regulation. Your answer to the actual problem at hand, was to remove all regulation … which I address next:

(3) And your answer really comes down to: “remove all regulation and leave it to the private market”. Yes, that’s worked so well. You give examples, but these examples are all in sectors where there already is government regulation.

But I can help you out here: look at the purely-private certification given by the rating agencies for bonds. Yeah, that’s worked out SO WELL, hasn’t it? Reputable onlookers point out that there’s a thing called “venue shopping” wherein the producer of a product needing a rating, shops around to get the most sympathetic venue. And since the producer is paying for the rating, it doesn’t really amount to much, does it? The answer such analysts suggest (which almost got enacted) is for the dreaded GOVERNMENT to choose which rating agency will perform the certification, and to set standard fees. So no rating agency will have an incentive to be extra-lenient.

Of course, similar things happen when it comes to accounting firms — another place were at best the government intervenes long after the horse (and the thieving C-suite execs) have long left the barn — and recent history is replete with examples of accounting firms doing diddly-squat to actually audit the firms they’re putatively charged to oversee.

Dude, there’s a reason that, even with all the problems of regulatory capture, the government is better at this than private companies: the government actually has somebody else to whom they’re accountable — private companies at the end of the day are run by humans, and those humans are accountable to nobody except their wallets. And they can be bribed, either legally or illegally (but usually legally, b/c why bother when that’s already more than enough).

Of course, we can’t leave out (4) when there’s no government requirement that all products in a sector be certified (and by a limited list of reputable certification authorities), then there’s simply no way for a consumer to know what’s good and what’s not, other than word-of-mouth.

Dude, these are collective-action problem. I mean, it’s like you don’t have any idea how these things work in the real world. Have you never read about the history of roads, canals, and lighthouses? Maybe you should read Andrew Odlyzko’s writing on this subject?

The world doesn’t run on fairy tales.

55

Chetan Murthy 10.16.19 at 7:27 am

There’s something else that MarkW@49 mentions, that I forgot to address: he writes about

I think we’re better off in a world where these regulatory agencies are in friendly rivalry rather than each having a monopoly in its own market (huge bureaucracies tend to get, well, bureaucratic, slow moving, and expensive — competition between these agencies could help.

But this is insanity. In no sense does “competition between regulatory agencies” help anyone. A consumer wants to know THAT something is safe, or delivers what it promises. What they do NOT want, is to have to figure out which of N different regulators to believe, or weigh the pros and cons of trading off regulator A’s certification, vs a lower price for a product with regulator B’s certification. Etc. Etc. Ad nauseam. This is why, when the US accepts drugs certified by (say) the EU, it happens under carefully-negotiated intergovernmental accords that specify in intricate detail everything about the manufacture, packaging, transport, etc, of those drugs. So that the FDA can know that those drugs are safe, and can provide their own stamp of approval.

More generally, there’s this …. fetish (is the only way to describe it) of libertarians and other hard-core laissez-faire capitalist types, for believing that “more competition is always better”. Like their belief that “less taxation is always better”. It’s laughable in this case (of regulation) but so often it’s taken for granted (e.g. in the “free market for medical care” — something that does not exist in any way, shape, or form[1], as has been pointed out by many people, many times).

[1] that is, in no way do the consumers of medical care meet the preconditions for the various theorems about free markets to apply to them.

56

J-D 10.16.19 at 9:16 am

MarkW

He might say that actually the bad outcome of water being wasted on trivial things or misallocated to people who don’t really need it is more likely (and in real-world situations, not contrived Robinson Crusoe thought experiments) when anti-gouging laws are strictly observed and enforced.

Concerns about water supply are very much a real-world issue, with varying degrees of urgency, in many parts of Australia, the country where John Quiggin is (and also where I am). Governments here respond to these concerns in various ways; I can’t figure any good reason why you zero in on anti-gouging laws as the presumed only or principal government response. I’m no expert on the subject, and for all I know anti-gouging laws may not work well, but that doesn’t mean there’s nothing government can do: there are many other things government can do about water issues, as is demonstrated to people across Australia by practical experience.

I don’t imagine Australia is unique in this respect, it just happens to be where I am myself (and also where John Quiggin is).

57

MarkW 10.16.19 at 11:21 am

Collin Street@53 “It’s a necessary consequence of the other arguments you’re making: the thing about overlooking a consequence of your other statements is that other people won’t.”

No, it’s simply not. And you’re not offering any argument why this must be so — just hand waiving. I claimed that government regulations were responsible for giving Martin Shkreli an effective monopoly on an off-patent drug (due to the cost and difficulty of another company getting FDA approval for a production line combined with the ban on drug importation). But it does not follow from that point (do you disagree with it?) that I’m arguing for the abolition of all drug regulations. I. am. not. I explicitly called for better regulations — introducing competition between government regulatory agencies and getting rid of the drug import ban (do you think those are bad ideas? If so, say why).

58

notGoodenough 10.16.19 at 12:18 pm

So, I am slightly confused. As someone who is a scientist, and not an economist, I apologise if my questions are very basic and obvious – and certainly I will understand if this constitutes derailing and is best ignored – but if CT will indulge me, perhaps you can help me learn a lot!

[Question 1]

If I understand MarkW correctly, their proposition is that government regulations require time/resources for compliance. This creates a de facto monopoly, as not everyone can/will make that investment. But I find this odd, because surely if it is compliance alone which is driving the cost up, one would (perhaps naively) expect costs to be similarly high in other countries since it wouldn´t appear that compliance is significantly easier in EU, Japan, etc. and many companies also hold de facto monopolies on specific drugs (due to the agreement that companies get the IP for a period of time before it is released as the generic drug). However, as far as I can tell, drugs are cheaper in the EU than the US (not at the counter, of course, but NICE itself seems to pay less).

This would, at least to a neophyte like myself, seem to imply it is not government regulation alone leading to the situation. Have I missed something ridiculously obvious?

[Question 2]

Again, maybe this falls into Econ 101, and I don´t want to make people explain the obvious to me, but it seems there is an implicit assumption that the natural state of a free market is competition. But – and again, maybe I´m missing the obvious – it doesn´t seem to me that that would necessarily follow.

From what I see in the world, it seems as though the natural tendency of the successful companies is to grow, and essentially try to become as much of a monopoly as they can. If you are starting a new business, then it would seem difficult to compete as the larger company can exert far greater power than you. For example, if I start nG´s Small Business Co. in direct competition to Large Business Inc., on the basis of no market regulation, what is to stop LBI simply buying me out, lowering prices to bankrupt me, etc.? While this might indeed reduce prices for a short period of time, as soon as nGSBC disappears LBI can more-or-less dictate terms again.

Sorry, perhaps this is again a really simple question, but am I missing something which does lead to the conclusion that an unfettered market is necessarily more competitive (and cheaper) than one which is (at least to an extent) fettered?

[Question 3]

In respect to whether or not government testing is mandatory, I think it is fairly obvious that there could be a number of ways in which it would not have to be. However, I have two sticking points which perhaps people could help me with.

The first is that surely the effectiveness of outsourcing testing to private companies is highly dependent on how it is done. For example, if Big Pharma Company Inc. are paying, then it would create a situation where BPCI will go with the Testing Group who are more likely to pass the drug – which could then lead to a situation where TG feels pressure to pass drugs as much as possible otherwise BPCI might go to a competitor who is more likely to pass. While this might lead to more drugs on the market, it would also seem to lead to less effective drugs. There are already problems*, and my suspicion is this sort of thing would only be exacerbated.

The second is that companies, if I understand correctly, are generally expected to make a profit. I am perhaps missing the obvious yet again, but it would seem intuitive that the more comp more companies you require for a value chain, the more the price will go up due to markup? So, keeping the number of companies required for development as low as possible would be cheaper?

* I don´t want to compound this, but from what I understand of pharmacological testing, there are practices such as: comparing drugs to placebos, rather than to the currently most effective drug, which means there is a lot of data as to whether a drug is more effective than nothing, but not so much as to whether it is better than what already exists. This isn´t to criticise people working in this area (heaven knows there are weird enough examples in every branch of research!), but it is worth keeping in mind.

[end]

So, sorry again – and perhaps the OP prefers not to pass this comment due to its potential to derail everything – but if people can point out where I´ve gone wrong in a “for dummies” way, it would be much appreciated. If the topics are too long for here, maybe people can suggest a friendly resource for the economically illiterate?

Thank you,

nG

59

Chetan Murthy 10.17.19 at 4:57 am

MarkW@57:

I explicitly called for better regulations — introducing competition between government regulatory agencies

I presume you have some -evidence- that competition between government regulatory agencies produces good outcomes? Better outcomes than when there is only one regulator? As opposed to the well-known evidence I cited, which shows that when there are multiple (admittedly private, but government-approved) certification/audit agencies, companies in need of certification/audit consistently choose the one that will bend to their will, and this produces a Gresham’s Law-like process (where good audit firms, good ratings agencies, are forced to become bad merely in order to survive).

Just saying “competititon! competition! competition!” doesn’t really cut it.

60

MarkW 10.17.19 at 1:14 pm

notGoodenough@58 “But I find this odd, because surely if it is compliance alone which is driving the cost up, one would (perhaps naively) expect costs to be similarly high in other countries”

They may be. But other countries already have companies producing Pyrimethamine/Daraprim who’ve already made the investment to produce the drug. So the point of allowing drugs approved by foreign regulatory agencies to be imported would be to create a competitive market in the U.S. for the Daraprim (and other drugs where single manufacturers with defacto monopolies have jacked up prices).

Chetan Murthy@59 I presume you have some -evidence- that competition between government regulatory agencies produces good outcomes? Better outcomes than when there is only one regulator? As opposed to the well-known evidence I cited

I’m sorry, I don’t see any evidence cited in your last post at all. Did you post something that got lost in moderation? No, obviously I don’t have evidence that competition between the FDA and EMA produces better or worse outcomes — for the simple reason that it has never been tried. But if you trust the FDA and the EMA separately to safely regulate medicines, I see no reason to suspect that they’ll suddenly become untrustworthy when in competition.

And nor is the problem of a regulatory agency being ‘bent to the will’ of those it regulates solved by having a monopoly. You’ve heard of regulatory capture, yes? You’ve seen the problems with the 737 Max and noticed that one of the reasons it seemed to have happened is a too cozy relationship between Boeing and the FAA, right? The thing about a government monopoly regulatory agency is that it never has to fear that huge failures will really hurt it. That’s because there’s no way for anyone to take their business elsewhere. In fact, the common pattern seems that the monopoly agencies try to leverage their colossal screw-ups as justifications for greater funding.

61

Collin Street 10.17.19 at 8:21 pm

MarkW, there’s actually a reason I’m not giving you detailed explanations: it’s counterproductive. Your mistake isn’t in the facts you have access to ut in the conclusions you draw from them: no amount of “evidence” will show this to you because your reasoning processes are self-consistent. Flawed, but self-consistent: the way you are now, the error won’t show up.

The way forward is for you to abandon your faith in the supremacy of your own reasoning and start trusting others a bit more: eventually, not now but later, you’ll (hopefully) see where your errors were. You can’t do it as you are now, that’s for sure.

Also you can apologise for asking questions that have already been answered.

62

Collin Street 10.17.19 at 8:22 pm

(Confusion is just ignorance leaving the brain)

63

Chetan Murthy 10.18.19 at 2:10 am

MarkW @ 60:

(1) Daraprim was -already- manufactured and sold at a low price for decades, before Shkreli came along. Just like in all those other countries. The thing is, those other countries have laws (I’m going to guess) against rapine and pillage. And so should we.

(2) Oh, you’re so clever, with your “you didn’t provide any evidence that multiple certification agencies produces races to the bottom”. So clever. It’s almost as if you were asleep thru the Great Recession. As if you were asleep thru Enron.

So, Rip Van Winkle, maybe read about the rating agencies, and the way that CDO creators would shop around for the most lenient agency. And the COPIOUS evidence that the ratings agencies knew they were watering-down their standards. I mean dude ,they even made a movie out of it, it was so colossally bad, and so colossally obvious.

So, y’know, YES we’ve tried it, and it doesn’t work. It makes things worse.

OK, I’m done. You’re clearly impervious to evidence, and part of that is that you don’t actually know anthing about even the recent history of the world economy. I’m not even an economist (computer scientist) and yet I know these things about the Great Recession, about the ‘auditor shopping’ that went on during the early noughties and continues to this day.

64

J-D 10.18.19 at 9:07 am

MarkW

I think the conclusion is more along the lines of something like, “Because the threat of regulatory capture is ever present, we should try to make do with fewest, clearest, simplest regulations we can so that it is possible for citizens to track what’s going on and so that the sweetheart deals and cheaters and can be detected and exposed. ”

There is no need for public choice theory, or the notion of regulatory capture, in order to arrive at the conclusion that it is desirable for regulations to be clear and simple. Anybody who has ever tried to learn a new boardgame from the written rules will agree that rules should be as clear and as simple as possible, consistent with their intended purpose.

But no simpler than that.

65

Orange Watch 10.18.19 at 10:41 am

MarkW@60:

You’ve seen the problems with the 737 Max and noticed that one of the reasons it seemed to have happened is a too cozy relationship between Boeing and the FAA, right? The thing about a government monopoly regulatory agency is that it never has to fear that huge failures will really hurt it. That’s because there’s no way for anyone to take their business elsewhere.

This misses entirely that the problem with the 737 Max was that the FAA let Boeing self-certify. That was very much a matter of regulatory capture, but it was not a matter of the regulatory agency exercising monopoly over its functions – it was a matter of outsourcing regulatory functions.

Also: government monopoly regulatory agencies are accountable to the citizens of the country of that gov’t to the same degree as the gov’t itself is – so if the agency is unaccountable, the problem is not “not enough competition”, it’s not enough democracy.

66

notGoodenough 10.18.19 at 10:37 pm

MarkW @ 60

Thank you for your response, and for your patience – while this may be intuitive for you, I’m afraid it is a bit mystifying for me. I believe I was clear on your proposal, it was whether or not it addressed the root issue that I was unclear on.

If I understand you correctly, your suggestion is that by making a transfer of drugs from other markets to USA will increase competition, break up a monopoly, and thus reduce cost. Is that a fair characterisation?

I think (assuming this is correct) that I can understand that part of your proposal.

The thing that I still don´t understand (and again, I apologise for my ignorance in this field and hope you will bear with me) is the initial difference in costs. I realise that the situation is very complex, with many factors, so perhaps I am oversimplifying too much, but to me the question is whether there is a difference in pricing to begin with. If, as you seem to be implying, the main contributing factor for a drug’s cost is the regulations in place, it would seem intuitive (given that the EU/Japan are not exactly waving things through) that the cost of introducing to the marketplace should be similar – leading to monopolies, and similar cost increases. That doesn’t appear to be the case, so it would seem reasonable to conclude there may be some other factors in play (unless I am, as is quite possible, missing something).

For example, you mention Daraprim which – if I understand correctly – is sold to NICE at ca. 20$ per 30 tablets as the generic (0.67$ per tablet). Originally, before Shkreli increased the price, it was at $13.50 per tablet (which is quite high!). After all the kerfuffle, in the USA the Shkreli branded is ca. $7500 per tablet and the generic 0.99$ per tablet. Originally from the 1950s, it would seem that it is less the cost of getting things to market, but due to a monopoly on that specific brand and a somewhat assertive legal approach to preventing bioequivalent drug development. That seems less a result of inherent cost to pass regulation, and more the result of the quirks of law.

To break this down further (not for Daraprim, but in general), as I understand it, the typical reason a drug company has a monopoly on a drug is not that there is a lot of problems in terms of burdensome regulations, but because (at least in the EU) drug companies are typically granted a period of exclusivity, after which the drug is opened up for generic development. This is a compromise, and Pharma frequently argues the cost of bringing a drug to market is high and so they want exclusivity for a period to counter this (this is typically not 50 years, so I don’t see Skhreli having exclusivity on the active drug ingredients, rather than the branding). Now, this argument may or may not be complete nonsense*, but it is not unusual to see this arrangement. In the EU, however, companies typically have to negotiate with the government agencies to sell – giving bargaining power to, for example NICE (i.e. the company can sell tablets at $7500 a pop, but if NICE say no they lose the majority of the UK market in one blow). To me, and again perhaps I’m missing the obvious, the solution would simply be to stop granting exclusivity deals on the patents for drugs to companies (or, if that is impossible, at least limit to a shorter period of time), which would open up competition.

In the case of Daraprim it is a little unclear – but it seems the company acquired the exclusive rights to Daraprim and they set themselves up as a monopoly. In the Skhreli era, as far as I can tell, the main thing preventing competition was then Skhreli working to prevent bioequivalence studies. But bioequivalence studies are a net good – after all, the information as to whether or not the new drug is equivalent to the currently existing would seem to be useful (for the end customer/patient, if no-one else!). Prior to Skhreli, I don’t see what was preventing anyone from bringing out a generic product, but it may have been a similar thing. In which case, while you could argue the regulation for bioequivalence studies was the blocking factor (though I’d think you’d agree such a study would be valuable to the patient and customer), it would seem it was equally a problem of the company trying to block such studies. Why then couldn’t such a study be done by just buying over the counter – well, I assume (though I have no legal background and am just guessing here) that if New Drug Company did this, Skhreli could sue NDC (I assume that when you buy drugs there is some agreement which says you are not allowed to analyse them for commercial purposes, as otherwise where is the IP protection?). I can see the argument that opening up the market internationally would mean you skip this study, and then have break the monopoly, but then you have no idea as to whether the international drugs are as effective, and how the effects and side-effects compare.

Surely one alternative is to allow independent labs do such testing and publish the results – that way they are not beholden to companies and the information is available. This is a very simplistic idea (I’m sure there is a huge amount of legal considerations), but I think that having such studies available would be useful for the medical and medical research communities!

I am not unsympathetic to the argument of opening up to international suppliers, but then I think I would ask the following:

1) What would prevent all the companies involve from just agreeing not to charge less than $7000 per tablet (I mean, surely companies want the maximum profit possible?)

2) It isn’t clear that any outside firms could sell in the US anyway – if there are exclusivity deals, or monopolies formed, how do you ensure that outside companies can sell in the US?

3) While I think most people would say currently EU regulations are as good as US, you would probably have to monitor who is exporting to the US as not everyone will be at the same standards. Wouldn’t this mean you’d need some organisation to monitor this anyway?

4) If, as I think was the case for Daraprim, the issue is a company preventing a comparison, I don’t think opening to outside markets will help as the patient still will have no idea which drug is most effective. And surely that is important information if they then have to decide which drug to use – after all, deciding which option to go with is only an informed decision if you have sufficient information to make a rational choice (otherwise, you are just rolling the dice a little**).

If you also get a chance to look at my other queries in 58, as well as commenting on these points, I’d much appreciate it – but of course I understand if you don’t have time or inclination (you don’t owe me your time, after all), and I won’t be offended if you don’t respond.

* I don’t want to side-track into this point too much, but I veer on the “likely to be nonsense” side since, as far as I can tell, the R&D budget is often the same or less than the marketing budget – this suggests again it is less the cost of going past the regulations, but more the fact that companies simply can charge these prices as they negotiate with the insurance companies, who then pass the bill on to the US customer. In that case, none of the negotiators are the end customer, and the decreased bargaining power of individual insurance companies would seem to be key factors.

** It is a key point you have to look at not just what the drug does and doesn’t do, but also possible negative problems too. Lack of information in the pharma industry is – and I mean this quite literally – killing people. Even when getting the infomration is possible (and, sadly, often companies block this in order to ensure profitibility), without a good series of metastudies the consequences can be horrific.

My prices (which are as accurate as I can tell, but I haven´t had time to double check in detail) are taken from here: https://www.pharmaceutical-technology.com/features/us-most-expensive-drugs-uk-prices/

[General comment]

While I am far outside the pharma field, I have found Goldacre’s book “Bad Pharma” to be an excellent (and horrifying) resource. This, coupled with Bad Science, makes for an effective learning tool. I mention these as, as far as I can tell, they are well thought out and highlight the real issues in these fields.

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Chetan Murthy 10.19.19 at 3:06 am

Oh, I forgot: two more examples of “MarkW’s idea of competition amongst government regulators is batshit insane”:

(1) Corporations can incorporate anywhere in the US: in any state. But interestingly, they overwhelmingly choose only a few states: Delaware and (I think) South Dakota. And it well-established that the reason they do this, is that the state laws are very advantageous to them, there.

(2) There’s a thing called “venue shopping” for trials in federal court. And corporations especially, like to make sure that their trials are held in particular courts in particular districts, b/c they know that the judges there will be favorable. As I remember, there’s a court in East Texas that’s famously friendly to corps.

So, y’know, “competition between governmental regulators” ? Yeah, it’s been tried, and it produces a race to the bottom.

Also, another reason competition doesn’t always produce good results: there’s a thing called “adverse selection”. E.g. in insurance.

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J-D 10.19.19 at 12:02 pm

MarkW

But the price charged is always at least somewhat less than what the buyer is willing to pay or the transaction does not take place. One of the parties may not gain much, but as long as the exchange is voluntary, they always gain something (or at least believe they will).

The inclusion there of the qualification ‘as long as the exchange is voluntary’ is suggestive. It implies a contrast between a category of exchanges which are voluntary and a category of exchanges which are not voluntary; there is also a further implication that what is true when an exchange is voluntary (that each party gains something from it) may not be true when an exchange is not voluntary.

Consider the example of payment of ransoms. Some, I am sure, would consider that a ransom payment, being made under duress, don’t count as a voluntary exchange. (If ransom exchanges don’t count as exchanges which are not voluntary, which exchanges do?) Yet isn’t it still the case that when an exchange is made for ransom both sides gain something from the transaction? If it’s always true that both sides gain from an exchange, why distinguish between those which are voluntary and those which are not?

Also suggestive is the inclusion of the qualification ‘or at least believe they will’. Consider the example of cheque kiting. People who accept cheques believe they will gain by doing so; if a cheque bounces, the recipient does not, after all, obtain the expected gain. Since we know there are cases where people believe they will gain from exchange but in fact do not gain as expected, how is the general argument affected?

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