Reason for a New Age

Posts Tagged ‘patents’

Issues of the Free Market

Posted by publius2point0 on 2010/02/14


As I stated at the beginning of my earlier overview of the free market, there is no reason to assume that a perfect solution for best bettering the life of humanity has been achieved. To toss it away because it is not perfect, however, would certainly be folly. Assuming that there must be a solution which doesn’t require some amount of compromise is likely an unrealistic expectation. But just like we must, for example, compromise our desire to be an actor and instead work where at whatever our second or third choice is because the market isn’t large enough for us to enter, we must also expect the ideal of the free market to be compromised, if it is not achieving its key aim.

The following list are simply some of the larger issues that can clog up or even break the free market. I do not expect it to be exhaustive.

Monopoly

In my overview of the free market, I gave the example of Damon and his machine that he is selling. As the sole provider of a machine that can increase production in the entirety of the universe, he becomes quite free to charge just as much for his product as he believes he can force someone to pay.

The result is that Damon becomes very very rich, and also that everyone else goes into debt. All profit that they earn from their use of Damon’s machine ends up getting funneled back into the central bank, while as they live quite stingily. We would much rather that they not be stingy, and in fact feel quite free to incur new debt as soon as possible. The market ideal would be that no one had to pay anything more than the actual cost of production. If Damon wanted to build a second machine, we would rather than he go into debt to do so than used profit from his old machine to finance it.

We also do not want to give Damon a significantly greater economic power than anyone else. He might hire the most talented minds but then simply have them goof off all day as this is cheaper than having them do R&D and more profitable than letting a competitor hire them and introduce a rival product. He might form deals with retailers that forbid them from selling the competitor’s products. Or he might simply bribe government officials to continuously hassle and delay the competitor. From out standpoint, the more even a position Damon has to battle from with his competitors, the more effort he must put into making his product as good as it can be and the less chance he has to act to rival products. So again, our ideal would be that he take on debt to advance rather than charging profit.

But of course we know that people are greedy and don’t exert themselves unless they can personally profit from their labor. Regardless of what the theoretical ideal might be, it is the real world in which we must work, and so we must allow Damon to profit and become rich.

The alternate solution, then, is to at least make sure that Damon does have competitors or to otherwise make sure that he is not abusing his position.

False Advertising & Trademark

If you watch old episodes of Mission: Impossible, you’ll see several instances of some shady organization manufacturing identically labeled pharmaceuticals–which are actually not medicine at all, just corn starch or whatever–and selling them as the real thing. A modern equivalent of this might be the various cases of China selling cellphone batteries that are actually of shoddy manufacture and either don’t work or destroy your phone, or the more explosive phenomenon where they used chemical waste to bulk out dog food.

A customer can’t be expected to know what’s in a product, whether it’s safe, whether it’s been properly manufactured, nor whether it’s a legitimate product that does exactly what it says on the box. But for every product that he purchases where he discovers that it does not live up to expectations or is even harmful, he loses confidence in the market, and he ceases buying.

To examine what happens when people stop buying, consider that Damon has just invented his machine and prepared 80 units to be sold. Without buyers, he is in terrible debt. Most of the money in the market is based on Damon’s debt, and hence is worthless since it isn’t backed by physical wealth. The end result being that everyone runs around shouting that the sky is falling and generally bad things happen.

Standards

This isn’t a failing of the market, this is a solution that is related to both false advertising and monopolies (and also to the role of infrastructure in economic growth). It is a weapon that tends to be forgotten, in modern day.

A simple example of a standard is building codes. These are the various regulations crafted by local government to make sure that a building is safe, according to prevalence of whatever regional hazards there are. Since these are mandated and enforced by the government, a person may go to any contractor he wishes and be certain that he will get a building which performs up to at least a certain minimum. He has buyer confidence, and so we are safe from issues of false advertising. It also means that wires of certain gauges and manufacture are more prevalent. The market can become more efficient because it knows precisely what is wanted, and it can give exactly that.

Another example would be laws which state that a person must always be able to transfer his phone number from one provider to another. While, theoretically, there’s nothing stopping people from switching providers, we have a strong enough desire to keep our contact info unchanged that we do end up staying with our provider so as to keep it. This gives them a veritable monopoly on subscribers. Given a friendly entry plan, a company can afterward raise your prices more or less freely because you are stuck with them. But by the government simply saying that phone numbers are part of a public pool that is independent of organization–by establishing that standard, the market was improved.

Personally, I would rather have seen greater standardization of OS structure when Microsoft was taken to court for monopolistic tendencies than to have them fined or forced to cripple their products.

The only issue with standardization is that it can also hold back inventiveness since this always moves away from the standard. One must make sure that a standards organization is able to be freely interacted with, decently speedy with its answers and revisions, and good at making sure that rules can be wisely expanded and deprecated.

Patents & Copyright

Say that Damon takes on debt to produce his machine. He sells the first one to Elaine. She looks it over, determines how it works, and begins to produce a copy of it. She might have to take on some debt to manufacture the product, but she did at least skip over the R&D process which saves money. Hence, Elaine is able to charge less for her product, and ends up with all of the business, leaving Damon destitute and in debt.

One could simplistically argue that society got the product for a lower cost, but the end result of such a process as this is simply that Damon has no incentive to create his product in the first place, and even if he proceeds to do so anyways, society ends up paying for Damon’s R&D and both of their manufacturing costs after Damon’s debt eventually gets passed on to the rest of society to deal with–since he cannot pay it.

The Race to the Bottom

When there is competition, one is in the unenviable position that he must stay competitive. The alternative is shutting down your business and laying off all of your workers.

A simplistic argument would be that this is alright since the better product won and we don’t need the old one; we are better to free the workers up to move on to successful companies. In truth, though, it’s more often a loss for society. Firstly, you have several months where those workers are simply not working at all–looking for a new job–and of course you are out a competitor, possibly leaving a monopoly behind.

And of course, most CEOs don’t think in such macroeconomic terms. They want to win. They don’t want to have to fire people. CEOs also have investors and stock holders all telling them to do whatever it takes to win.

What this means is that if, say, the farmer across the street hires illegal immigrants to work for half the wage, as soon as he starts to charge half as much for his produce, you are stuck hiring illegal immigrants or shutting down the farm. If your competitor releases toxic waste into the local river, saving 10% of his budget, you are forced to release toxic waste as well.

From a market standpoint, this is all and well. There was a way to increase efficiency, and the market became more efficient. But that’s a paper and pencil world, without the greater ramifications of the real world. Sometimes this is quite possibly an economic good, for instance off-shoring factory work to China because it helps to lead a large section of the population of the world into modernity. But just as often it is not. Ultimately, it’s not a decision that can be left to the least scrupulous member of the market. It needs to be something that is monitored and made to correspond with the better interest of humanity.

The Push for Immediate Results

In my estimation, at least, there is much too great a focus on immediate results among our race. Anything further out than a year or two is really beyond our ability to take seriously. Whatever is happening today, on the other hand, is of vital importance.

An intelligent leader of a corporation might not suffer this particular handicap, having perfect ability to see the direction he would like to take the company over the next several decades, and why doing so would be a certain winner. His investors, and particularly his stock holders, however, are more likely to be interested in what the business will be doing this quarter, not in the next decade. Being somewhat the puppet of the stockholders, the CEO is forced to think quarter to quarter, with nary the time nor ability to think of more long-range goals.

Of course, one could also argue that this trait of humanity’s is based on practical reality. Left to speculate too far ahead, we might end up like Leonardo da Vinci, doodling amazing and fanciful things that are nevertheless impractical for our times.

Arguing the other side, one could say that you need the freedom to be fanciful if you want to do meaningful R&D, which is ultimately the primary apparatus for social good of the free market.

There is almost certainly an ideal ratio in one direction or the other. Achieving that is something that would be an issue for government.

Positive Feedback

See the section on Self-Fulfilling Prophecies here.

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The Cost of Health Care – Part 4

Posted by publius2point0 on 2010/01/06


And continuing…

The US pays more for pharmaceuticals
According to data from the OECD, we do pay more. The average American pays about $728 every year, while as the average European pays about $366. If spending were decreased to match European levels, we would be paying approximately $362 less per year.

In Part 1 I was able to find a few numbers where spending could, theoretically, be cut. That amount was at most $600 and at minimum $260. Taking the greater number and adding in the reduction by pharmaceuticals, we would still have $2138 left to cut in order to match other nations’ spending. So while it would certainly be nice to save this money, it’s certainly not the source of our financial problem.

Or is it?

Our spending is roughly double that of other nations, irregardless of the age of the person receiving care. Your average American visit to the doctor costs twice as much, no matter what. To me this signals that whatever thing there is driving up the price is systemic. If doctors were paid more in the US, for example, then you would see an overall higher rate. Doctors aren’t paid more however. But we do pay double for pharmaceuticals. What if we pay double for not just pharmaceuticals, but in fact everything you see in a doctor’s office?

Do we pay more for all medical equipment?
It’s hard to compare between nations unless you have a single source which computes the numbers for several locations. One study might include certain things as being “medical equipment” while as another might not. If you compare the results of those two studies without being able to quantify what the differences are, then your comparison is meaningless.

Fortunately, I’ve found a source which does offer a comparison of several nations. Here are links to the USA, Canada, France, and the UK. Respectively, these countries pay $304, $145, $132, and $127. The US pays double.

Adding this plus pharmaceuticals, it seems that the US still only has about $520 excess spending. The thing is though–and though I will present more theories of health spending–I haven’t found any other region of spending that explains our spending than the objects used in medicine like lab equipment, pharmaceuticals, and so on. These fit the expectation of something that would factor in to every single medical bill and are consistently double the cost. I haven’t been able to find information on the cost of constructing a hospital in the US versus in other countries, and I really don’t know what all counts in towards being “medical equipment” and what isn’t.

I know, for example, that about 31% of health spending goes towards hospital care. But another 31% is going to “professional services” which, so far as I can tell, is the doctor’s and nurses’ salaries. Probably some of this goes to profit, some to administration, some to janitors and IT personal, but other goes to things like TVs in each hospital room or nice new computers or whatever. I don’t have a breakdown of this data but I suspect that so far as niceties and new equipment are concerned, the US probably spends more than they do in other countries.

Overall, having studied all the various theories of US health spending, my personal bet is that it is on actual physical objects that most of our extra spending goes. I just don’t have the data I need to show it.

But so how do we spend more on “objects”?
A major problem with American health spending is that the person receiving care isn’t really the client of doctor. Nearly all health insurance is simply given to a person by their place of work. The money which goes to pay for your insurance is deducted from your paycheck before you ever see it.

A company offers health insurance as a perk of your employment. The amount that they guarantee you–though secretly removing it from your paycheck–is intended to make you feel benevolent towards the company. It’s not intended to give you the best health for the minimum necessary amount of spending. Instead of being a market for “health” it’s a market for employee satisfaction.

Now, taking a slight tangent, let’s look at cars. When I buy a new car, I’ll pay something like $25k for it. If I turn around and sell that car one year later, I’ll only be able to sell it for about $20k. If your average car has a lifespan of approximately 9.2 years, then at $25k value, I’m paying $2717 per year of use. If I buy a car that is one year old for $20k, then I am only paying $2439 per year of use. The original owner should have sold it to me at a cost of approximately $22.3k based on the expected use time, but instead by selling at $20k, he is effectively giving me a free $2283 for no particular reason.

More impressively though is if you look at the cost of electronics and other new products. A new PC game, for example, might sell for $50 the day it is released, $20 the next year, and subsequently it’s in the $5 bargain bin. In all of these cases, it’s still the same unused product. Unlike a car, the quality doesn’t diminish with time since there’s been no use of the product. It simply doesn’t have the wow-factor of newness. The early adopter ends up paying a significantly higher value than everyone else for no other reason than wanting to have it early.

Now certainly there is something to be said for having the newest and the best when it comes to health. I imagine that if you can afford health care in the US, then you probably have access to more advanced care than most other places. But the US is most likely not properly budgeting itself in terms of actual benefit from these technologies. If I simply wait one year to buy the newest technology and in that time its price has declined by 50%, unless that technology is literally twice as good as the older method, I’m receiving far more benefit from it per dollar spent, and I’m still nearly as technologically advanced as the US. One year behind isn’t terribly significant.

The problem, though, is for example you might note above where I looked at the price for medical devices in the US, the report states that the US is 41% of the worldwide market. If the US starts budgeting to only pay as much as other nations, then there is no early-adopter and the market shrinks by 20.5%. No company can survive a sudden loss of 20.5% of its revenue. The US is paying a significant percentage of the total cost of health technology for the sake of the rest of the world. Of course, a gradual shift towards a more budgeted approach to purchasing would give the industry time to adjust prices to match and offload this burden onto the rest of the world.

But I don’t think that this should be our only solution.

While I can see something of a wow-factor with laboratory equipment and fancy hyper-laser-oscillating-imaging-scanners or whatever, I don’t imagine there to be a large wow-factor for most pharmaceuticals. But if I go into the store and look at NyQuil and compare its price to Store Brand Cold Medicine, the prices will be quite impressively different. If I look at what’s actually in these products, on the other hand, they’ll be exactly the same. They have to be exactly the same or the FDA would strike it from the shelves, in point of fact.

Any customer who buys NyQuil instead of Store Brand is getting duped, one might say. He’s simply paying for advertising. And of course, by extension, a health care system which properly budgeted would always simply mandate that you purchase and use a generic brand rather than a name brand.

But the thing is that generic brands are simply piggy-backing on the labor of others. Any new realm of study in biochemistry is immediately patented. It can take anywhere from 5 to 15 years to develop this little quirk of chemistry into something that might be useful. Developing that into a medicine, testing it, and producing it can take another 5 to 15 years. With development times that span into decades and massive costs in expensive research technology, highly trained personnel, and lots of money wasted on all the paths that didn’t prove out, creating a new drug is a process that costs on average about a billion dollars. But now notice that a patent lasts a mere 20 years. From the moment a path of study is patented to actually going to market, those twenty years are likely almost or entirely gone. So long as your competitor can replicate your drug to the FDA’s satisfaction, so far as I can tell, nearly from the instant you begin selling your drug that you developed, your competitor can begin selling it as well, while having entirely skipped the billion dollar, twenty year process of R&D. He can undercut your price by a significant amount without you ever having a chance to gain a single customer to your side. Only advertising can help you, and of course that only adds to the price.

As a result of this, while our pharmaceutical research companies should be developing new and interesting drugs, they instead are forced to resort to employing their researchers in rather petty pursuits like adding a hint of caffeine to their product so they can re-patent it and sell it as a newer, better product. Having known starting points, the R&D period and testing periods are both reduced, allowing them to get to market and claim that they have something that no one else does, and actually being able to enforce that.

Overall, the course that should be followed is quite certainly that the duration of patents that pertain to pharmaceutical use should be extended by another several decades. Cutting edge R&D shouldn’t be reliant on government-funded research, as it is now.

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