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 monetary 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.
Update Michael O’Hare has a specific idea about how to pay for recorded music.