TCS Daily


Self-Righteous Prescription

By Arnold Kling - August 19, 2004 12:00 AM

"drug companies are dependent on the public for a host of special favors--including the rights to NIH-funded research, long periods of market monopoly, and multiple tax breaks that almost guarantee a profit. Because of these special favors and the importance of its products to public health, as well as the fact that the government is a major purchaser of its products, the pharmaceutical industry should be regarded much as a public utility."
--Marcia Angell

I used to think that if you were publishing a book review, you would use, um, a reviewer, meaning somebody other than the author. But I guess it's different nowadays. Marcia Angell, a former editor of The New England Journal of Medicine has a new pharma-bashing book, for which she gives a rave review in New York Review of Books, the source of the quote above.

Angell is accusing pharmaceutical companies of what economists call "rent-seeking," which Gordon Tullock defines as "special interest coalitions lobbying the government to transfer wealth to them." Her diagnosis is certainly correct. However, her prescription is the opposite of what economists would recommend.

In the past, I have found it useful to draw an analogy between the process of developing a drug and the process of becoming a physician. In both cases, you make an up-front investment in order to acquire intellectual property that is protected by a government license. In the case of pharmaceuticals, you invest in research and testing in order to obtain an exclusive patent. In the case of a physician, you invest in medical school in order to obtain a degree that gives you the legal right to provide certain services, a right that is granted only to licensed physicians.

Like drug companies, physicians depend on government in many respects. Medical schools are heavily subsidized. The value of physician licenses is protected by government--for example, there are many medicines that one cannot obtain without a doctor's prescription. The government, via Medicare and Medicaid, is a major purchaser of physician services.

Angell accuses drug companies of wasting money on marketing expenses and on developing copycat drugs. Similar accusations against physicians are implied by the Washington Post when it editorializes regarding Medicare that "Expensive regions are expensive because they have lots of hospitals and doctors; the medical folks are good at marketing their services." Perhaps we need to do something about "me, too" hospitals and doctors.

The analogy demonstrates that all of the characteristics of drug companies that Angell suggests imply that the pharmaceutical industry should be regarded as a public utility apply to physicians. That is, she could just as easily argue that the medical profession should be treated as a public utility.

In fact, the health care industry is treated as a public utility under socialized medicine. For example, Britain's national health service and Canada's health care system put doctors under government control. The result is a physician shortage. When we vacationed in Canada last summer, our host at a bed-and-breakfast told us that he was put on a two-year waiting list to see a cardiologist.

Regulation begets Rent-Seeking

Wherever there is government regulation, there will be rent-seeking. For example, doctors want to make sure that a prescription is required for medication. In part, this represents genuine concern for patients' health. However, it also represents rent-seeking. There are many instances in which an illness could be safely diagnosed and cured by someone other than a doctor, if the drug to treat the illness could be sold over-the-counter. Ironically, the doctors who are most adamant that they should retain the gatekeeper function over dispensing medicine are shocked, shocked to find themselves on the receiving end of marketing efforts by pharmaceutical firms.

Another phenomenon that leads to rent-seeking is government employment. The unions for teachers and other government employees lobby for higher pay and against tax cuts. In fact, that form of rent-seeking is relatively benign. In many countries with weaker institutions, rent-seeking on the part of government employees consists of demands for bribes. For example, in Eastward to Tartary, Robert Kaplan describes how policemen in several of the republics of the former Soviet Union threaten to arrest you unless you pay the requisite bribe.

If rent-seeking is the problem, then greater government involvement is unlikely to be the solution. Just because you have the government take over an industry as a "public utility" does not mean that it will be regulated by a Platonic philosopher-king who discerns the public interest. On the contrary, it means that you take away the consumer sovereignty of the market and replace it with the backroom deal-making of the lobbyist.

When I think of a public utility, I think of something like Amtrak, the subsidy-addicted railroad. To me, Amtrak represents rent-seeking personified, not eliminated.

Most economists would argue that to treat rent-seeking, you need to shrink government's role rather than expand it. Something like my proposal for Limited Paternalism represents one approach for cutting back government involvement in health care.

Evil Incentives

Marcia Angell is outraged that pharmaceutical companies earn profits and use advertising to encourage people to use their products. To her, these are evil forms of incentives.

However, the alternative to using profits and advertising is to use taxes and regulation. Those are even more coercive forms of incentives. I can choose not to buy pharmaceuticals, but taxes are unavoidable. I can ignore drug company advertising, but I cannot ignore government regulation.

Relative to some celestial utopia in which the "public good" exists as something that is perfectly known and altruistically pursued, advertising and profits are evil. However, back here in the real world, advertising and profits are much more benign than the alternatives.

Profit-driven corporations on the whole take us in the direction of making us better off. As Adam Smith pointed out, this is not due to their benevolence, but to the incentives of the market. In contrast, it is the misguided, self-righteous, anti-market crusaders like Marcia Angell whose prescriptions would lead to more suffering. Rejecting the market and instead turning industries into public utilities would make us dependent on government officials to show wisdom and benevolence. That is like asking an author to write her own book review.


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