The Scientific Activist Takes on the Free Market Myth

[LongTomH]

The Scientific Activist blog takes on questions at the intersection of science and public policy. The blogger is a Rhodes Scholar and biochemistry grad student at Oxford University.

His most recent post: Free Market Frenzy takes on the myth that total deregulation will produce the lowest prices for consumers. To be specific, he considers deregulation of energy and our "free market" big pharma industry.

The basis of the argument for deregulation depended on price competition between power suppliers, but due to a lack of real competition in most areas, prices have only gone up. In fact, deregulation was sold as a silver bullet that would address a variety of issues beyond just lowering prices, including encouraging infrastructure updates and modernization. However, in real life…

The blogger, Nick Anthis, addresses the pharmaceutical industries argument that the high cost of drugs is necessary to cover the high cost of research to provide a steady stream of new "wonder drugs."

The idea that the income generated from a drug is the most important factor at play here seems surprisingly cynical coming from an industry purported to have the humanitarian goal of alleviating human suffering from disease. Although I have already written at length about this, I should reiterate that the drug industry is indirectly, but heavily, subsidized through federal funding of biomedical research. I’m pretty sure that voters support this funding for the promise of medical breakthroughs and new medications, not to give big pharmaceutical companies new vehicles for making bundles of money.

Although there are plenty of differences between the energy and pharmaceutical industries, the drug companies’ previous use of research and development costs as justification for high prices isn’t that different from energy companies preaching the benefits of deregulation. As the logic of both of these arguments begins to break down, it appears that the lessons learned in one may have some relevance to the other. Regardless, based on how things have gone in these industries, the idea of paying a price for a good or service based on what it actually costs to deliver doesn’t sound all that unreasonable anymore.

Follow some of his links. The examples will infuriate you if anyone in your family depends on costly pharmaceuticals.

[Greyhound]

1. K&R

:kick:

[skids]

2. Free market "forces" do exist... but not in a vacuum.

...which is why we need both government and private nonprofit entities to properly leverage them. They are far too weak to work on their own. Just look how slow the energy sector is adjusting to high fossil fuel prices, even with record demand for renewables.

Add to that the fact that there is a capacity for negative influences to enter, preventing the market from actually being free through a series of strategic actions aimed at stifling competing industry in a destructive manner.

[applegrove]

3. Well put. Dis-information too is the enemy of a functioning market...

and marketing tries to dis-inform at times. So the markets sometimes end up like the Catholic church in the middle ages... with all the information and not sharing any of it with anyone.. or allowing alternative viewpoints. And everyone knowns the middle ages were a really bad time for consumers, workers, etc.

Look at health care! A little information up front by say a free check up every 6 months.. saves health, prevents illness or mitigates it and saves millions. But the market wouldn't like that? What!! Saves millions!! Shame on those people going for check ups!!

[applegrove]

4. OH NO! Neocons done caused some big trouble if all sorts of brains

're taking a look at economics. Watch out! The radical economists are coming.. the radical economists are coming!!

[xchrom]

5. k & r

we haven't seen a free market -- we've seen a market dominated by some very large international corporations -- both here and abroad -- and they have set the market agenda.

[hvn_nbr_2]

6. Free market forces work in an economy of medieval shoemakers.

After all, every Adam Smith economic theory example of how market forces work tells about lone-wolf shoemakers competing with each other in an isolated medieval village.

Multinational mega-corporations are not subject to the same restraints as medieval shoemakers. So they don't play by the same rules.

Or to put it in a sound-bite style, bumpersticker, T-shirt catch-phrase:
Exxon-Mobil is not a medieval shoemaker.

[eppur_se_muova]

10. Nor are today's international markets a medieval village. It is not only..

organisms that evolve.

(I thought there was going to be a joke here about an economy of "old cobblers".:D)

[Igel]

7. But his assumption is wrong.

Pharma's not a free market.

Pharma's heavily regulated, with new drugs requiring testing and licensing. This puts a fence around the market: New actors cannot freely enter the market, they require sufficient capital and means to produce not only the product, but the even more important paperwork.

If the drug is produced in a country with lower paperwork costs, and therefore with lower drug prices, then national laws regulate and usually ban the importing of the drug.

Pharma has a rather long time between starting the research to find possible new drug and the first shipment to market, even without any regulation or testing beyond what's necessary for simple-minded advertising. Any new competitor must have sufficient funds to survive this period, government support to independent researchers notwithstanding. However, that support is also another hindrance: established pharma companies have easier access to grant money by virtue of their track record, established grant-procuring protocols, and contacts. (My wife's new faculty in a grant-dependent field ... she's had a hard time getting grants, while long-time grant winners are getting bigger grants.)

Pharma's heavily dependent on the existing distribution network, which involve contractual obligations: If Coke/Pepsi and music distributors frequently have monopolies over distribution networks, is it any surprise that it's difficult for a new competitor producing a generic drug to be able to penetrate the market? If each manufacturer produced only one drug, this problem would fade, but then production and distribution costs would increase.

Pharma's heavily dependent on intellectual property law and rights, which grant monopolies to patent holders. Importation of drugs from countries that do not honor intellectual property rights is usually banned, but the drugs are cheaper.

The ideal free market permits of easy addition of competition in production, easy and free access to the market, and allows the competition to flourish based on the virtues of its product and little else. Pharma's hardly an ideal free market. Rather, it's a series of monopolies with a tinge of free market here and there.

[msgadget]

8. Excellent point

But, do you think the affect of the benefits this administration has bestowed upon Big Pharma equal deregulation? In particular, the fight against reimporation of cheaper drugs, the upholding of patents by the courts (preventing competition from generics), their freedom to set outrageous prices, the limiting of their liability and not requiring discounts for their biggest customer these days, Medicare.

[Zynx]

9. The 18th, 19th, and early 20th centuries proved that totally free markets

don't function anywhere near what their proponents would suggest. We make a mistake in assuming that they actually believe this stuff. The only reason they wanted deregulation is so that they could hike prices and gouge consumers. Would it make any sense for a publicly traded company with an obligation to continually increase profits and pay ever increasing dividends to support a policy that would hurt its prices and therefor its revenue?