The left, of course, has its own fantasy solution set: drugs should be both innovative and cheap.
But clinical trials for a single successful drug cost $500 million, and not because the labs have outrageous administrative overhead. Even if the government were in charge of running them, they would still be on the hook for that $500 million, which would have to come out of taxes. We can get existing drugs on the cheap by essentially stealing the property of shareholders in drug firms, who risked a lot of money on drugs that they reasonably expected to be profitable under existing laws. But that's a one-trick pony. We cannot get new drugs at bargain basement prices.
Many people are holding out the hope that the government can somehow substitute for the pharmas, bolstered by the ludicrous claim that the government really discovers all the drugs. This is arrant nonsense; government-funded research discovers targets that might someday turn into drugs, if the Big Pharma chemists can: find a molecule synthesis can be economically mass produced; keep the molecule from killing rats, mice, dogs, or humans; get the molecule into a form that does not have to be directly injected into the bloodstream; tweak the molecule so that the liver doesn't immediately chew it into pieces that no longer affect your target; and shepherd the entire thing through years of clinical trials. That's just off the top of my head; research chemists will undoubtedly have more.
There is no evidence of a nationalized industry that consistently does cost effective innovation. Yes, you have a list of things invented by the government--but that number is a small fraction of a fraction of one percent of the number of things in the private sector. If the universe of products were your house, the government would have invented one washer inside the tap of your bathroom sink; the private sector would have developed every other thing you use. Even where the government is given credit for "inventing" something, such as DARPANet's invention of the internet; it turns out that 99% of the process of actually turning it into a product that was useful to end-consumers was handled by private actors, most of them corporations like Netscape, Microsoft, and AOL.
This is why when you start to make a list of all the state-run economies that have produced large numbers of innovative products with a high level of consumer satisfaction, you have to throw your privately manufactured gel pen aside in disgust. For whatever reason, the government is just not good at producing innovation.
Before you say it, I know that you are leaning forward in your chair, your eyes alight, preparing to demand "What about the military?!" and lean back triumphantly in your chair. My friend, have you ever taken a close look at the military procurement process? It costs a fantastic amount of money to generate products that often aren't even wanted by the end users--how many times have you read about some military service being forced to buy some gargantuan piece of equipment they don't want because the thing is being manufactured in a key congressman's district? This is how we spend four percent of our national income on something that most of the American public never sees. Forgive me if I'm not excited about applying the same process to health care.
Even if we keep the model of having private research to develop drugs, we should have the final clinical trials done by a government agency at taxpayer expense. Having this part of the process controlled by those with a finachial stake in the outcome of the trials is what leads to the hiding of adverse information and the marketing of dangerous drugs. The current system of having comanies do the testing on their own products is inherently corupt!
"What about the military?!"
Actually, extremely sophisticated military hardware may be the exception that proves the rule. The procurement process is a politician-produced nightmare, but the US military has managed to develop some very advanced weaponry.
One key reason that government doesn't tend to be very good at innovation is that the incentives aren't good. But in the case of the military, their people could die at some point if they don't have good stuff, plus they'll lose encounters and look bad.
Basically, our military knows that it may have to 'compete' with other militaries. The problem with most government bureuacracies is that they don't face competition, but the military knows that it may face it in a life-or-death setting. That makes a difference.
Another thing we could do that would really help controll costs in health care and have a low implementation cost would be to follow the Austrailian model for getting information to phasicians. They like us have pharma reps calling on MD's giving them only the information that sells their drug. Instead of restricting the free speach rights of these companies as some on the left would like us to the Austrailian government does studies comparing drugs head to head (something that drug companies are loath to do because their drug might loose) and have government drug reps who visit MD's just like the sales reps do and give them information about which treatment is most cost effective at controlling a given condition. It turns out that the newest and most expensive drug is not always the best (even though that would be the safe way to bet absent other information).
Pharma innovation "health care system", Megan. And happy belated birthday!
Not that I know a lot about these issues (so maybe the following is not an apt analogy). But why do innovations in semiconductor technology keep driving down the price of hardware? Nowadays a pc that retails for $400-$500 has more processing power than a supercomputer built 10-15 years ago. Was all that innovation in microchip technology cheap? Why is the pharma and health care industry so different? Who don’t innovations drive down costs of drugs? While I don't think the solution is to get the government involved, I do think that the U.S. Pharma industry is greedy and monopolistic. Why are the same drugs cheaper in Canada? It makes no sense.
Rum raisin,
Costs of drugs do fall. Compare the price of generics to the cost of a new drug. But prices are high on new drugs while they are under patent so the company can make back what they spent on drugs that failed.
Military history suggests that rapid innovation in military hardware tends to happen during wars. Wars provide lots of field trials. Flying coffins get replaced by Sopwith Camels.
Even so, it is worth remembering that Harry Truman made his reputation in WWII by exposing fraud and mismanagement in the war industries. The reaction of centralized planners was sadly predictable:
"The Roosevelt administration had initially feared the Committee would hurt war morale, and Under Secretary of War Robert P. Patterson wrote to the president declaring it was "in the public interest" to suspend the committee.
http://en.wikipedia.org/wiki/Harry_S._Truman
Innovations in hardware like computers and other electronics are generally ways to do things better and cheaper. Electronics companies are researching new methods of manufacturing, new materials, etc... to make their products do more for less.
The equivalent in pharma would be a new way to make an old drug or improved manufacturing processes. These sorts of innovations probably do happen, but the marginal cost of a pill is pretty low, so there's probably not much incentive to spend a lot of money reducing it even more.
Brand new drugs, on the other hand, are more like inventing an entirely new technology that does something other technologies just don't do. The research isn't into reducing the cost or making the product more efficient, it's in developing an entirely new drug that does something other drugs don't do. I'm sure that drugs that are similar to existing drugs are cheaper to develop than drugs that do something that has never been done before. However, a lot of the cost of bringing a new drug to market is in getting FDA approval, which is a process that every drug must go through and requires a lot of studies and probably hefty liability, insurance, and risk management costs.
As far as the military goes, the goal of the military is to be the most effective, NOT the most efficient. We can afford to outspend our enemies so we don't have to make every dollar go as far as possible. Our military is NOT cheap and while they probably try not to waste their material, I'm sure that soldiers in the field aren't counting bullets when they're under attack... the military isn't a good model for maximising efficiency.
Re: the military and innovation
Isn't most of the new military technology developed by private defense contractors (GD, Raytheon, Lockheed, etc), simply being commissioned or paid by the government? The result being that you DO get really great innovation, but at extremely high cost?
Of course this supports, rather than refutes, your argument that
1. private companies do most of the innovating
2. trying to move that to government will not lower costs
The other element that makes comparing military technology to medical technology nonsensical is the breath of demand for the product in the general population. No person in your neighborhood desperately demands that he or she be able to personally utilize an F-22 at an affordable price, thus Lockheed is allowed to make a lot of money on each one, which means that they were willing to sink massive amounts of capital to develop it. Everybody in your neighborhood demands, or knows someone who demands, that they be able to personally utilize the newest cancer drugs. Start having the government, by direction of Congress, "negotiate" prices of a drug, prices which members of Congress use as a means of boosting their electoral chances, and private capital will no longer flow as readily to the area of drug innovation.
If people really thought that private capital was unimportant to drug innovation, they would be advocating that patents no longer be issued.
Private companies DO do most of the innovating, where defense technologies are concerned - but not only does government involvement raise the price, its procurement process is agonizingly slow: the Air Force issued the requirement for the F-22 in 1981; the first production model was delivered in 2003.
Was all that innovation in microchip technology cheap? Why is the pharma and health care industry so different? Who don’t innovations drive down costs of drugs?
Actually, yes, processor development is quite cheap compared to health care, and always will be, for three very good reasons.
The first is that computers are much, much simpler than the human body. A computer chip is designed to do one thing, and one thing only -- process binary numbers as fast as possible. It's really easy to test whether a new chip design is successful, because all you need to know is if it does process the numbers faster, if it gets the right answers, and make sure it doesn't do anything nasty like overheat and melt. Testing those things is simple enough that you can actually automate a lot of it.
Of course, it's possible that you might miss something in testing, such as the Pentium floating-point bug from the mid-nineties. In that case, you're up for a little public ridicule, but that's pretty cheap. If you missed something really really bad like a tendency to melt and become a useless lump of metal, you might have to issue a public recall and replacement. However, nobody dies from these things, and you're not likely to be on the receiving end of billion-dollar lawsuits. So you don't have to conduct large-scale exhaustive tests under all possible conditions, or look for consequences which might only be visible years and years later.
Finally, most of the processor development going on right now is incremental innovation. We're figuring out how to make them smaller, run cooler, and to pack as many of them together as possible. We are also not designing radically new chip architectures. The computer you're reading this on uses essentially the same basic architecture as a computer bought in the early 2000s, and is not fundamentally dissimilar from the chips of the early nineties, when the x86 architecture first arose. In medical terms, it's the difference between one antibiotic and another, rather than the discovery of antibiotic drugs.
Megan: Right-on on drugs, a little wrong about the relative weight of DARPA-funded stuff in the Internet.
And the x86 architecture is a actually late-seventies thing. The original IBM PC had an 86 series processor (the 8088) and was released for sale in 1981. In 1990 people were buying 386s (third generation, after the 8086 and the 80286) and the 486 was around the corner.
Megan,
You vastly underestimate the role that government already plays in innovation. A great number of developments come directly out of NIH and are then used by the medtech sector. It is true that innovation would be affected but not as dramatically as you make it seem. Let's not forget that along with drawbacks, there are perks in having the government play a more active role. As Jon Cohn has pointed out, an innovation council or however it would be set up would be more likely to take a longview in allocating resources.
"What about the military?!"
You'd kinda need a private military to be able to make the comparison there.
I wonder if there's any way to compare the innovativeness of the US military to that of the private security firms in Iraq?
@ jj: "innovation council"?? Shouldn't it be "Innovation Council"??
From there is one small step to Pharma Five Year Plans...
Censor: yeah, it's a typo, I meant to say eighties.
Re DARPA and the early Internet, Censor is also right that Netscape and the like didn't do much actual *development*. Mostly, all they did was popularize it. The big deal about the early Netscape/Mosaic was that it was able to display images, but that's a user interface thing, not a fundamental technology development.
Early Internet development also depended at least as much on universities like Stanford and Berkeley as it did on DARPA. In many cases, such as the development of TCP/IP, DARPA mainly provided the funding, and academics actually did the legwork. Also, commercially funded research labs such as Xerox PARC did significant protocol research.
"Let's not forget that along with drawbacks, there are perks in having the government play a more active role. As Jon Cohn has pointed out, an innovation council or however it would be set up would be more likely to take a longview in allocating resources."-jj
A good case could be made for the government to increase its funding for basic research, but that is quite separate from the question of whether to impose price controls on drug companies (or to use the government's monopsony power, which amounts to the same thing).
What McArdle wrote is clearly correct: there is a tradeoff between affordability ad innovation. Reduce the rewards for private innovation and you will get less of it.
Now, it coud be that we are not at the optimum--that we have gone too far in favor of innovation at the expense of affordibility. If so, then it makes sense to make some changes.
In general, it is bad public policy to resort to a heavy-handed government solution when a market solution is available. In this case, the government solution would be price controls. The market solution would be to reduce the length of patent protection.
The latter approach offers a more efficient way to shift the balance in favor of affordability. So there is no need for price controls (nor any kind of "single-payer" monopsony).
I can think of one nationalized industry that did very well at innovation. The old Soviet Military-Industrial complex was wonderfully innovative. Of course, it was the only part of the Soviet Union that had to deal with real competition, it's competitors being western defense industries.
While not a roaring success, the Communist bloc didn't do a bad job with military innovation - the AK-47 and MIG were damn good weapons and much cheaper than their US counterparts. One reason military procurement is so screwed up is that the has so much damn money that they inevitably make the perfect the enemy of the good.
So, increase the rewards for public innovation. What's so hard about that?
I forgot: Government bad! Market good!
liberalrob, you're missing the point. Sure you can increase the public reward, but then you're not reducing costs, and the argument is to use government's monopsony power to reduce costs.
So if you want to use single payer to reduce costs, you give up innovation. If you want to continue innovation, you can't cheap it out.
that's a user interface thing, not a fundamental technology development
Understanding that user interface design is a fundamental technology is how Steve Jobs got rich.
Come on, liberalrob, though you and I often disagree, I had always thought you an honest interlocutor. But you are misrepresenting what I wrote (as the astute SG seems to recognize). As I started my post:
Indeed, I'm inclined to think the government ought to increase funding for research (since there are positive externatlities involved). So "Government bad! Market good!" is not a reasonable summary of my views here.
I'm still inclined to think you honest. Probably this was just a slip.
Rum_raisin: Price of *output* does fall in the pharma industry. A drug will often replace something that e.g. required surgery, and be cheaper and less risky than the surgery, even with the patent in force.
Patents are less of an issue in the computer industry because, in order to copy someone, you have to invest a hell of a lot of money, and buy up a lot of expertise that isn't cheap. The corrolary to Moore's Law is that production costs for new chips *rise* exponentially. Thus, the high natural barriers to copying give them a built-in kind of patent that pharmas don't have.
The Netscape Browser was built off the Mosaic Browser, developed at a public university (UIUC) at an NSF-funded institution (NCSA). The WWW was developed by a government funded institution in Europe (CERN).
Microsoft did virtually nothing in the early days of the internet to popularize it, Bill Gates himself said it was his biggest mistake as boss.
It's true that private companies picked up the ball and ran with it, but by the time companies realized they could make money off the internets, 99% of the hard work was already done.
Atlee Breland: The point about Netscape, AOL, etc. isn't that they did the basic technology research, although I'm sure they did a fair amount (and I agree with Ralph Pheland, as well). But that they did the research and legwork to take DARPAnet and turn it into a consumer-accessible product, which is an equally important function. Similarly, NIH and research universities do a lot of basic research on biochemistry, but it's the pharma companies who take the basic research and turn it into usable products.
On the military: I'm reminded of Milton Friedman's division of spending into four types. Single-payer health-care is spending other people's money on other people; it will be wasteful and inefficient. Military spending is, in some sense at least, spending other people's money on yourself: you try to get the best possible, but don't try to control costs. Which is exactly what we see.
Megan,
I do agree with your point that government cannot effectively substitute for the pharmas (not atleast in the near future) especially because the government would have to face similar financial constraints as that of the pharma companies, which usually accounts for the increased price of these drugs. But, we should not underestimate the large number of factors the government has in its favour, the presence of highly equipped research institutes with well qualified research scientists, the state of the art clinical trial facilities and not to mention the easy marketing options.
Megan,
I do agree with your point that government cannot effectively substitute for the pharmas (not atleast in the near future) especially because the government would have to face similar financial constraints as that of the pharma companies, which usually accounts for the increased price of these drugs. But, we should not underestimate the large number of factors the government has in its favour, the presence of highly equipped research institutes with well qualified research scientists, the state of the art clinical trial facilities and not to mention the easy marketing options.
Here's how you manage pharma research for the public good without taking over the industry...
Determine what drugs are needed but are not being produced. Offer a huge reward for the first company that brings a successful drug to market. Something on the order of hundreds of millions of dollars to a couple of billion, depending on the relative importance of the drug.
The reward could even depend on the patent status... a lower level if the drug company also keeps the patent, more if they release it to the public domain..
Let the drug companies fight for the prize. If no one takes the offer, it's not high enough. Over time, the rewards can increase if a drug is needed badly.
Incremental goals could be set for basic research, too... like identifying a receptor, synthesizing a molecule in the lab, etc...
As far as I can tell, this is a fantasy stastistic. Apparently this all goes back to one study, the 1991 DiMasi study, in which several, er questionable, methodologies were adopted.
First, the $500 million is a projected, not actual estimate. Second, the study neglected the tax credits available, something on the order of one third of the money actually spent on R&D, that is, only .66 on the dollar. Third, the opportunity costs vary as estimates on rate-of-return varies (in the original DiMasi study, he used an annualized 9%, and his original figure was not $500 million, but $231 million. Later revisions went up to 14% on rate-of-return . . . an unrealistic amount for most of us.) Fourth, the drugs for which this figure was derived were not representive drugs, but the most expensive kind possible, new chemical entities (NCE's), and not the ones they acquire from other research organizations (like - drumroll - public universities.)
And so on and so forth. The actual costs to bring to market new drugs is more like $100 million or less.
Not that the actual figures matter that much; it's just that "500 million dollars" seems designed to provoke an emotive response rather than a reasoned one. "100 million dollars" much less so in these debased days. Que to Dr. Evil saying in rounded caps One. Million. Dollars. BWAHAHAHAHAHH!
Megan,
I do agree with your point that government cannot effectively substitute for the pharmas (not atleast in the near future) especially because the government would have to face similar financial constraints as that of the pharma companies, which usually accounts for the increased price of these drugs. But, we should not underestimate the large number of factors the government has in its favour, the presence of highly equipped research institutes with well qualified research scientists, the state of the art clinical trial facilities and not to mention the easy marketing options.
I'm frustrated with the constant drumbeat of free market free market free market all the time in response to things that the free market doesn't do well, like prioritize any aspect of health care, because you can't quantify the public good in an economic formula. Apologies if you aren't so committed to that position. I saw "McArdle is clearly correct" and that was all I needed to see; I disagree with her position.
But not in this case, right? Because a market solution is apparently NOT available.
Which of course is why private enterprise came up with quantum mechanics, electron microscopes, discovered the structure of DNA, figured out how to sequence genes, publishes most of the articles in 'Nature', 'NEJM', 'Jama', etc.
No, I'm pretty sure that the record shows just the opposite of what you claim. Now why would that be?
Rob,
What exactly are you disagreeing with here?
The basic claim is that government takeover of drug development cannot reduce costs without also reducing innovation.
Even if we ignore public choice theory for a moment, it will be just as expensive for the government to develop and test a consumer-ready drug as it is for private industry to do so. Medicine is expensive, and there's just no way around that.
What are you smoking? Moore's law?
Heedless, are you _really_ claiming that the government would spend large sums of money to come out with what are essentially reformulations of an old drug? You know, like pharmaceutical companies do? I have a hard time believing that.
Someone tell Megan that a normative judgment is not equivalent to a solution.
Larry Geater wrote: Having this part of the process controlled by those with a finachial stake in the outcome of the trials is what leads to the hiding of adverse information and the marketing of dangerous drugs. The current system of having comanies do the testing on their own products is inherently corupt!
This would only be an accurate statement if one of the fantasies of the uberLibers actually came true: disbandment of the FDA. Within any aspect of the pharma industry that falls under FDA jurisdiction (including, incidentally, delivery systems like hospital machinery for controlling IVs and such), FDA auditors are more feared than the IRS. They are extremely thorough, to the point of questioning stray marks on a piece of test documentation; they have been known to rigrously search random trash cans on an auditee's site; and if they ever feel like they're not getting the whole story, they only need to make one phone call and your business is suspended from the industry, effective now. Don't like it? Fine, here are the 15 flaming hoops you need to jump through in order for your product to be recertified. Some of them may cost you in excess of $1M each by the time you've met all the requirements -- hope you've got that much money.
This doesn't eliminate the potential for fraud or carelessness, but it certainly cuts it back to levels that are, at worst, equal to what would occur in a government-run institution.
"Because a market solution is apparently NOT available."-liberalrob
Yes, a market solution is avaliable. We could just reduce the extent of the patent protection for drugs. That would certainly reduce prices for consumers.
In a perfectly free market, there would be no patents at all. We grant patents to encourage innovation, but it might well be that we have gone too far in granting monopoly protection for new drugs.
So far I have not seen any convincing arguments that price controls would be a better solution. The government has never been very good at setting prices, as the painful history of the Soviet Union makes clear.
SoV wrote: Which of course is why private enterprise came up with quantum mechanics, electron microscopes, discovered the structure of DNA, figured out how to sequence genes, publishes most of the articles in 'Nature', 'NEJM', 'Jama', etc.
The government can also produce a nuclear bomb from the ground up when the urgency is high enough and money is no object, but that doesn't mean the government is "good" at innovation when measured in terms of monetary efficiency.
Also worth noting that several of the innovations you have cited are primarily informational in nature, providing the basis for e.g. pharmaceutical innovations but not actually producing the innovations themselves; and in any case, were really the cascaded fruits of a long series of discoveries, some public and some private.
I'm pretty sure that the record shows just the opposite of what you claim.
I don't think so. There are (at least) two kinds of innovation here, basic research innovation (e.g., discovery of DNA structure) and engineering innovation (making something useful out of fundamental discoveries). Most of the effort and cost of innovation are in engineering, not basic research. Most of the unpredictability is in basic research, not engineering. It makes sense for government to fund basic research, because you never know what you might find or when you might find it, but you need to keep looking anyway. It makes far less sense for government to fund engineering, because the problems are along the lines of "how can we make this thing scale." Market forces provide excellent incentives for doing engineering innovation, but lousy incentives for doing basic research.
And, once again, SOV makes comments that clearly show he has no knowledge on what he comments.
Pray tell, what are these drugs that private pharma acquires from public universties? How many of them are there? What is the brand name of these drugs? I am sure a citation happy person such as yourself has this information handy.
John's point is a good one. As economists have long recognized, the government is reasonably good at basic research (which is not really excludable), while private firms are better at tailoring that research to the specific needs of consumers. This again explains (in part) why the Soviet Union was able to develop some first rate scientists, and yet unable to develop consumer products that would really enhance welfare.
Those who are interested in what sorts of polcies can spur innovation, increase growth and enhance welfare might want to start with this interview with Paul Romer (perhaps the top expert on economic growth in the world), and go on to other works by and about the man.
As Romer explains, the tremendous improvement in living standards over the last 100 years or so is due to a combination of a high degree of economic freedom and good institutions (including, crucially, well-established property rights):
the government is reasonably good at basic research (which is not really excludable), while private firms are better at tailoring that research to the specific needs of consumers.
This is also why public research labs are so stuffed with equipment built by private firms. Academics invented lasers and electron microscopes, but most often today they buy such things off the shelf.
rwe: In a perfectly free market, there would be no patents at all.
You mean in a perfectly free market that lacks a kind of property right you don't like.
We could just reduce the extent of the patent protection for drugs. That would certainly reduce prices for consumers.
And reduce private investment in future cures. No free lunch.
ScentOfViolets: The only thing correct in your 500 vs 100 million post is that the figures don't matter much. Debating over whether drug research costs a HUGE amount or megaHUGE is irrelevant, and if your argument hinges on drugs being $100 million to develop rather than $500 million, your position is fundamentally flawed.
*Whatever* the true cost of R&D, it WILL increase over time, no matter what, for the simple reason that researchers, and human action in general, go for the lowest-hanging fruit first. If a drug doesn't cost $500 million to develop now, some other drug or treatment in the future will, and if government reserach can't make it happen, and the private sector profits aren't sufficient to justify the research, then NO ONE gets the cure, ever, at any price.
Something to think about.
I'm frustrated with the constant drumbeat of free market free market free market all the time in response to things that the free market doesn't do well, like prioritize any aspect of health care, because you can't quantify the public good in an economic formula.
I'm frustrated with the constant drumbeat of people who clearly don't understand how markets work making silly claims about what they can't do.
Uh huh. So why, pray tell, didn't private enterprise invent computers, lasers, electron microscopes, etc?
I mean, obviously, what with the goverment being "monetarily inefficient" and all.
So then what's the difference between the two that we can see? I've already mentioned computers, lasers, electron microscopes, etc. Those aren't engineering? The original transistor(officially, that is, there is an unofficial version) was done by Bell Labs. Shockley did research that showed that in certain substances (semiconductors) electrons behaved more as if they were confined in two-dimensional sheets rather than some sort of free atomic gas. Sounds like original research to me. Otoh, the techniques to manufacture raw silicon of the necessary purity was done by the University of Minnesota, I think. Anyway, some university. That sounds pretty much like engineering.
There is this to consider as well: if you're claiming that would drug companies do is more along the lines of engineering, then they really aren't doing any real R&D to discover new drugs, are they? They're either ringing through the changes of old formulations, or else figuring out new fabrication techniques. By this standard, Ford trying out new kinds of resins for deformable bumpers is doing "research".
Not quite the risky leap into the wild blue yonder the cheerleaders would have us believe, eh?
Link.
It's actually rather hard to pin down the "inventor" of the laser, given that the theoretical work preceded the practical application, and masers preceded lasers.
The story of the electron microscope (and for that matter the electronic computer, especially if we're talking about a semiconductor computer) is similar, with academics and industry both making major contributions.
SOV, the $100 million is a lowball figure beloved of anti-pharma activists, but with, AFAIK, less basis in fact as the $800 million figure beloved of conservative op-ed writers. It is the figure for a single clinical trial, not the entire clinical trial process. When you factor in things like all three phases of the trials, cost of capital, administrative overhead, requests for more data from the FDA, etc., the lowball figure is $300 million, the median estimate is $500 million, and the highball figure, which includes opportunity costs, is $800 million.
SOV:
Nobody's saying that the public sector doesn't have a useful role to play in funding basic research. The claim is that the private sector is better at evolving and refining commercial products than the public sector. Do you find this claim controversial?
And as an aside, according to Wikipedia the concept of the laser came from Albert Einstein, the first laser patent was granted to Bell Labs, and the first working laser was produced at Hughes Research Lab, i.e., the laser was privately produced.
You are, Yancey, and I mean this in the nicest possible way, and idiot. If you want to see some of those cites, you need to say, publicly, that cites are good things, that any argument should be backed up with facts, cites, quotes etc. I also want you to say that you don't tend to do this - you certainly haven't done much in that department that I can see - and that your opinion is uninformed opinion of the guy off the street.
Bottom line, moron: don't simultaneously sneer at cites (which is itself the mark of a negligible entity) and demand them.
But this raises an interesting point: does anyone here besides Yancey want to state that cites, sourcing, et al, are bad things?
Anyone? I want to know, because if anyone really think that, I don't want to waste my time in any sort of conversation with that person.
the government is reasonably good at basic research (which is not really excludable),
Is it? I thought that argument was that if you subsidise something e.g. research, you get more of it than if you did not subsidise it.
This is not proof that research will be done better or cheaper simply because it is done on the goverments dollar.
SOV,
Coming from almost any other commenter, I might actually be insulted by you, but you have consistently shown yourself to be someone not to be taken seriously.
However, I still await your citation (citations are often good, especially if the citation itself is actually accurate in it's information) of all the drugs private pharma has acquired from university labs (stolen and otherwise), and sold in the market and collected all the profits. Put up of shut up, as they say.
If that's what you think, where's your research? I've pointed to mine, and that's just one source. Let me post it again so that you can criticize it:
http://www.citizen.org/documents/ACFDC.PDF
I don't claim it isn't partisan, btw, but it's certainly no more partisan than the pro-pharma formulations we've seen so far, and arguably much less. Check out the credits of the reviewers of this paper, then look at page four for the overview, and finally page seven for critiques of how that $500 million figure was arrived at.
I don't know about you, but neglecting to mention the tax credits one gets for R&D and refusing to factor them in strikes me as pretty dicey accounting, for example. If you dispute this, or any other finding, let me know, tell me why, and post your sources.
Again, I'd like to see your sources, see if they followed the appropriate methodologies, who funded those sources, etc.
I'm willing to be convinced, as always, but one thing I will not be convinced by is shoddy scholarship, or worse still, a complete lack of cites to bolster an argument.
one thing I will not be convinced by is shoddy scholarship, or worse still, a complete lack of cites to bolster an argument.
Neither will anyone else.
But hey, if you don't want to give Yancy cites re: drugs developed at NIH, then just give him the names, and I'm sure he can dig up the cites himself
ScentOfViolets and Megan_McArdle: What did I say about arguments that hinge on R&D costing $X always and forever...?
Not quite the risky leap into the wild blue yonder the cheerleaders would have us believe, eh?
By your own (disputed) source, bringing a new drug to market is $100 million dollars. Are you claiming that putting $100 million dollars into something that might fail isn't risky?
What is the argument you are trying to make? That producing a new drug is such a trivial undertaking (it's only $100 million dollars!) that there's no sensitivity to the ROI. Or that the public could pick up the drug development costs with the cost savings to be realized from monopsony purchasing. Or that you're just a dick who enjoys being contrary without any larger point implied.
What the hell are you trying to say?
"Computers" may have been invented by some government research program, but the computer on my desk was refined and made many times more powerful, cheaper, and smaller by private companies.
I read the report on R&D costs and price controls for drugs and commented on it in the other thread on drug prices. In short, it really makes a weak case.
Right now, the market for drugs (and other medical procedures) is distorted by the fact that consumers typically face fixed costs (low co-pays) and don't have any incentive to shop around. Insurance companies respond by aggressively denying claims and strong-arming providors into reducing all of their prices.
What we need to do is figure out how to get pricing signals back to the consumer. I would like to see percentage co-pays rather than flat co-pays for most procedures or possibly just let ocnsumers pay for day-to-day stuff and only use insurance for unexpected high costs (you know, like it was actually "insurance" instead of "insurance + medical spending account").
Then we could actually see if the market works.
I also like the prize model for funding research... it means that tax payers only pay for successful research and the cost is known before you start.
SoV:
Your own study (p. 3) says that "DiMasi’s original $231 million figure does not represent what companies actually spend
to discover and develop new molecular entities. Rather, it includes the cost of all failed
drugs and the expense of using money for drug research rather than other investments."
Um - if a drug fails during clinical trials, the drug company doesn't get its money back. Any claim to derive the cost of drugs that doesn't include the cost to develop the (large) number of drugs that don't make it to market is inherently bogus. That sort of argumentation renders the remainder of the argument highly suspect at best.
You know, I'm really upset about the cost of entertainment. I think we should cap movie theater prices at $2, and if necessary set up a government agency to finance and/or produce movies.
What do you guys think? Can't miss, right?
For the Nth time, basic research, in the areas relevant to drug discovery, does things like detmining new biochemical pathways that influence things like blood pressure or a cancer cell's ability to evade death or blood sugar levels. Some of the proteins or enzymes involved in said pathways will appear to be good targets for a drug. This is where drug companies step in. They, in the aggregate, spend much more than the government spends on basic research each year. In so doing, they often find that actually, target A is a crappy drug target because of unavoidable side effects, or a second, redundant pathway that compensates for the first. So the government-funded basic research is not an infallible launching pad for the private sector at all, though it is of course invaluable; moreover, in validating or disproving some of the assumptions coming from government-funded basic research, the pharma industry winds up doing quite a bit of 'basic' research on its own. Research programs fail for other reasons too, of course, so even if the suggested target proves to be a good one, many programs will wind up churning through a lot of money. Drug discovery costs are dwarfed by clinical trial costs, however. I agree with Megan that the $1bn value is usually high, but the $100 million is laughable for reasons too numerous to go into. In total, a program that gets to phase III and fails usually will burn close to a billion dollars from conception to RIP. Tax breaks aren't going to bust that down to $100 million, folks. Most failures don't get that far, so the average will be much lower - if we count programs that don't even reach the clinic, the average might be MUCH lower - nevertheless aggregate R&D stats are widely available and the fact that they are larger than, say, the NIH budget for biology research ought to tell everyone not named 'Scent of Violets' something.
The $800 million figure comes from the best study in the literature, which is indeed Dimasi, whose most recently published work on this (i think) is 2003.
See The price of innovation: new estimates
of drug development costs
Joseph A. DiMasi a,∗, Ronald W. Hansen b, Henry G. Grabowski, Journal of Health Economics 22 (2003) 151–185
Citing Public Citizen as a serious source of impartial information is laughable.
While I don't dispute the basic point of this claim if one includes the general caveats, I didn't think this was the claim being disputed; the claim I take issue with is that the drug companies charge the prices they do because of the high cost of risky research, and that any attempt to tamper with this would inevitably result in fewer drugs being brought to market (there's a hidden assumption there that the drugs are actually useful in sense of having a positive impact on health.)
No. I am saying that the risk is not as large as claimed, in part because what is risked is not has great as being claimed. Are you trying to draw an arbitrary line? That seems nonsensical, since every business routinely risks sums of money. Pharmaceutical companies are no different from any others; in particular, note that auto companies will invest millions, tens of millions, hundreds of millions of dollars on new lines of autos, and some of those new entries are quite definitely lemons. _And_ they do R&D as well. Do you see them justifying their pricing on the high cost of research? No, you do not.
Sigh. I'm giving you one chance. Only one chance, clear? My point is as above, and further, in a prior post, I wrote this:
So I clearly noted that quoted figures from the industry seemed to be hign at least in part to evoke an emotive 'gosh that's a lot of jack' feel, _as_well_as_also_noting_ that $100 million is still a lot of money, just not as emotive a figure.
Now, I have been polite, and shown where you erred. If you pop off like you did again, I really don't much care to talk to you anymore. And in fact, in a classic case of projection, I would not be at all surprised if you were looking for a fight.
If that's not the case, fine, but if so, if I were you, I would be mending some fences. A word to the wise, eh?
SOV,
I am still waiting for that citation.
(Sound of crickets....)
Do you see [auto makers] justifying their pricing on the high cost of research? No, you do not.
Do you see auto makers "justifying" their pricing at all? They don't have to "justify" their prices, because everyone understands if you don't like them, you don't have to pay them. Just enter the car equivalent of the "generic" market at your local used car dealer.
Furthermore, everyone recognizes that the marginal cost of a car is substantial, and must be paid; the marginal cost of a pill is next to nothing.
Drug makers face a constant drumbeat of criticism for high prices in light of low marginal costs. Hence, the need to "justify" these prices in terms of their costs, one of which is R&D.
I'm having problems with that myself; it seems rather clumsily written. It seems that what they're trying to say was that (from the immediately proceeding point) that only a certain class of drugs, the NCE's, the most expensive kind to develop, were included in the study and that this was extrapolated into the average cost of all drug development, and further, the study improperly folded the costs of _all_ 'failed' drugs (I don't know what they mean by that term either) into a study that was looking at just the NCE's. I don't know, but you're certainly write that the cost of 'failed' drugs don't magically go away, if that's what they were implying.
However, in _same_ bullet point, it also mentions that in the original DiMasi study, the fact that part of that research money was a tax write-off was not accounted for, that in fact, after taxes they really only spent .60 of every dollar they claimed they spent on research.
Surely that was worth a mention, and if true, do you agree this is inflating the amount of money that was claimed to have been spent on research?
Further down, we read that the DiMasa estimates were much, much higher than any previous estimate - including one by the pharmaceutical industry itself.
Surely this sets off a few alarm bells, doesn't it?
SOV,
Look, I will make it easier for you: there were, by my count, 55 new drugs approved by the FDA in 2007 (a good year, by the way, compared to the immediately preceding years). How many of those were discovered and developed in the government laboratories before being bought and/or stolen by private pharma?
And a secondary question, while we are at it: how much was spent on R&D in 2007 by private pharma?
the fact that part of that research money was a tax write-off was not accounted for, that in fact, after taxes they really only spent .60 of every dollar they claimed they spent on research.
The significance of this depends on what is meant by "tax write off." 26 USC sec. 174 makes R&D either 1) an expense just like office supplies or electricity, or, at the election of the taxpayer, 2) a capital cost to be amortized over 60 months after the R&D yields revenue. Most pharmas are probably going to choose the former because it lets them recover even for failed drugs.
That means that buying research is treated the same, for tax purposes, as buying paper clips, and nobody thinks you need to include tax effects in declaring that your company spends $X annually on paper clips.
On the flip side, there are some special tax credits for research, which should be included in the calculation.
Why is this the best study? As pointed out by my source[1] they neglected, among other things, to factor in tax breaks, and they improperly took the cost of a subset drugs (the most expensive to develop) and extended this to all drugs.
Surely you agree that those two practices alone are enough to ensure that this was not 'the best study'? (You do agree that what was done was not proper, right?)
[1]I have no problems with saying the study I cited was put out by a partisan group; to deny otherwise would be dishonest (hint, hint.) But that doesn't mean the points they raise are invalid, in fact, I'll even go so far as to post another link for the rebuttal and counter-reply to this report:
http://www.citizen.org/print_article.cfm?ID=6514
Uh huh. So why, pray tell, didn't private enterprise invent computers, lasers, electron microscopes, etc?
You can play that game all day, and eventually it will come back around to the same thing: basic research is where government excels, because most of it is extremely expensive and doesn't have immediate payoff benefits. Engineering the concepts further, however, usually works best in private industry.
The example of the computer is a very good one for this thesis -- yes, the original research that produced designs like, e.g., ENIAC was funded through government. The personal computer on your desk, however, owes 95% of its design and design legacy, and 85%+ of its manufacturing technology, to private enterprise. Other than its ability to process numbers and run on electricity, it has essentially zero commnality with the early, government-funded designs.
I mean, obviously, what with the goverment being "monetarily inefficient" and all.
Perhaps I was unclear. Government is good at the basic research stage precisely because it can dump obscene amounts of money in order to discover things that, of themselves, are very useful to know but have no immediate payback. Unfortunately, when government tries to engineer something, it does so by the same process, and then develops very little practical technology relative to the capital outlay. There are some public goods where this is unavoidable and necessary. For most things, however, it usually works better to hand the reigns to private enterprise, and let market forces determine how to allocate resources.
yes, the original research that produced designs like, e.g., ENIAC was funded through government.
Only if you ignore private industry's contribution to vacuum tube technology.
Other than its ability to process numbers and run on electricity, it has essentially zero commnality with the early, government-funded designs.
Unless you use FORTRAN.
Only if you ignore private industry's contribution to vacuum tube technology.
Well, yeah. But the lady is clearly stuck on the idea, so I gave her the most generous interpretation.
Unless you use FORTRAN.
HIISSSSSSSSSSSSSSS! *makes sign of cross with index fingers*
This is kind of a silly argument, for a number of reasons.
First, auto manufacturers don't bother justifying their prices, because no one is threatening to cap them by fiat.
Second, where the government does contemplate mandates that would affect the economics of auto manufacturing (e.g., safety, emission, and mileage standards), the manufacturers immediately bleat about R&D and manufacturing costs.
Third, R&D costs are relatively low in the auto industry (compared to pharma) because conceptually the automobile has been unchanged for most of a century. All the improvements have been small, incremental ones, and would be analogous in pharma to new formulations of existing drugs.
If the auto industry had to come out with new types of cars every five years or so (e.g., switch from internal combustion to batteries to fuel cells), then the industries would be more comparable.
Dimasi is the best study because it is; what other study would you compare with it? and its been widely recognized to be so. As to Public Citizen's objection to the use of before tax figures for R and D costs, i suggest you take a look at the very full discussion of the tax issues in the 2003 article.
from p.174: Hence, a straightforward calculation can be made to use our R&D cost estimates
as inputs in after-tax analyses of R&D rates of return (OTA, 1993; Grabowski and Vernon,
1994). However, some have suggested that an after-income tax figure is the relevant measure
of pharmaceutical industry R&D cost (Public Citizen, 2001).
As a stand-alone estimate for R&D cost, we find such a figure to be inadequate for
our purposes and potentially misleading. First, we are primarily interested in trends in
private sector resource costs associated with getting a new drug to regulatory marketing
approval. Tax rates and tax structures can change over time, so trends in resource costs can
be masked by after-tax figures. Second, even if the objective is to measure the effective cost
to companies, that cost is not properly measured by subtracting the corporate income tax
deduction for R&D from the resource cost estimate. It can also be misleading, as it may
suggest that government is subsidizing corporate R&D by the amount of the deduction.
The corporate income tax is intended to be a tax on profits. Deductions for R&D and other
business costs are the means used to approximate the appropriate base for the tax (revenues
minus costs). Thus, cost deductions on corporate income tax statements cannot be properly
viewed as tax breaks.
The Dimasi figures have been independently verified and are widely cited in the economics and medical literature. See, for instance, Adams and vanBrantner, Health Affairs 25, no. 2 (2006): 420–428; 10.1377/hlthaff.25.2.420]
Ralph Nader and his organizations, on the other hand, are not particularly known either for interest in the truth or for truthfulness. Megan has written about that before.
For the nth time, that's not what was originially claimed:
That is, the government isn't good at this sort of thing. I think I've pretty much disposed of that position, and the new claim is now that, well, it's all basic research, companies do 'applied research', ie, engineering.
I've asked a couple of questions about this and not received a reply: in that case, how much of the credit goes to public institutions for developing these new drugs. Quite a few people here want to draw a line for what seems ideological reasons and claim that public institutions deserve _zero_ credit. Which to me is a mark of ideological correctness, and makes the person advancing that viewpoint suspect.
The second question is where is the line between basic research and engineering, the applied research. It seems to me that when talking about the 'risks' a company is taken, people want to take the risk as akin to the risks of basic research, in which case, yes, there is a genuine risk things may not pan out; pooring money and work and heart into a research project just doesn't make it so, to the dismay of countless scientists. But this is precisely the sort of risk government does well, even libertarians admit this. So then the defense switches over to 'applied research'. But in that case, the risk is quite conventional, it's the risk that a new line won't pan out, and the pharmaceutical industry is no different than any other industry who invests millions or billions into a project only to have it fail.
You can't have it both ways, so which is it: is it the risk of engineering development, in which case the drug industry is no different from any other, or is it like the risk of pure research, in which case, government does not do a bad job, which has already been conceded.
Again, I have to ask, if it's basic in the sense you are trying to claim, why can't the government do it? Secondly, do you have any cites to back up your claim on who spends how much of what? Sounds to me like you're doing an apples-to-oranges comparison: if you're aggregating private industry, why don't you aggregate public enterprise. I'm guessing you're probably doing some comparison (assuming you have the figures for it), on some government department, say the NIH, vs everyone else. Gee, and you came to that conclusion? Whadda surprise. Is this what you are doing?
'I have so many good reasons that I can't tell you a single one.' Uh-huh. Well, I believe you then, no need to linger here, might as well go home.
I've already pointed out some reasons, _specific_ reasons, why those estimates may be high (oh, and don't forget to correct for inflation; I suspect you didn't), and you have yet to address a single one of them.
Ah-hah. It tells me I was right, for one thing. It also tells me that, though you won't explicitly say it, taking the cost to develop the most expensive drugs and applying a multiplier to cover all drugs is bad accounting. If you disagree, please say so. Now, are you going to answer any of those questions?
I find these types of statements interesting: they appear to be an attempt to downplay public effort while lauding private industry, the free market, etc.
So let's just get one thing clear here: what percentage of credit, exactly, do you assign to private enterprise for the computer, and what is the percentage for government?
Also, if there had been no public development of the computer, would we have them now? If so, by what path would you see this happening?
I think your answers will be enlightening; at least it will show why people who are defending what I think is rather obviously an absurd claim on the part of the drug companies.
So, SOV, where is the citation I asked for?
If we're talking about the relationship of risk to profit, the "risk" a company is taking isn't decided by whether it's doing basic or applied research, it's the relationship between the variance in outcomes and the average reward (I've forgotten the precise mathematical relationship financial professionals use).
That is, it makes no sense to say that pharma "takes the same risks other industries do" on the grounds that pharma is doing applied research; it may be that pharma's applied research is much riskier than GM's applied research. Somebody will buy cars even if they don't get 100mpg; nobody will buy an expensive drug that doesn't work as well as a cheaper one. Seen in this light, a similar level of "risk" could be achieved by avoiding research altogether and instead trading the appropriate securities.
Put simply, financial risk is a quantitative, not a qualitative problem.
The distinction between "basic" and "applied" research goes more to excludability and the direct connection to marketable products. If you can't get a patent on your work because you're discovering a law of nature, then private industry has a poor incentive to do it, and governmental involvement may be the difference between doing research and not doing it. Likewise, if you think your work will lead to marketable products, but not for 50 years, the incentive for the research is again poor, because even if patentable, it isn't likely to generate revenue; again, there's a case for government intervention. On the other hand, if you think you can get something to market in 5 years, then private industry can aggregate large quantities of capital more rapidly and allocate them more efficiently than government.
So it's perfectly possible to think that pharma is doing applied research, and doing it better than government, but is still exposed to a much higher level of financial risk than the auto industry.
If you think it's silly, then I have to wonder if you have even been following the argument. The original claim was that pharmaceutical companies engaged in expensive 'research' that the goverment couldn't do. When it was pointed out that the government did do that kind of research, the goalposts were shifted, from the inarguably 'risky do to the unknown pure research' claim, to the quite mundane 'risk' of product development research that just about every other company engages in - like what automotive companies do for instance. Or electronics, or food, etc. Iow, drug companies are hardly unique as to the types of risks they are taking.
Not addressing the point, now that's a surprise.
Really? They make a public case about the research they will need to do? Please show me that this is the case. It should be easy to do, if this is as widespread as you try to make it sound.
Gee, what a surprise, but a lot of the 'research' that drug companies do _is_ reformulations of existing drugs. You would certainly have a point if your analogy was correct . . . but as far as I can see, it isn't. Make your case.
drug companies are hardly unique as to the types of risks they are taking.
Yes, but they may be unique as to the magnitude of risks they are taking. Or maybe not; I don't know.
Look, a soldier in Iraq might be shot on the streets of Baghdad, and I might be shot by a mugger. The physiological mechanism is the same, but the "risk" we take walking down our respective streets is not.
Iow, Tom, the study I cited was correct, and the original study was _wrong_. You know it, and I know it. And no, the study I cited was most definitely _not_ trying to imply that the industry was being subsidized by the goverment; they simply wanted an accurate appraisal of the true costs. Not counting the tax deductions, and then calculating the 'forgone costs' on those deductions as a loss is definitely dishonest.
I get exactly the same sort of dishonesty from my local politicals: years ago the voters were asked to legalize gambling, with the incentive being that the profits (or a good hefty chunk of them) would go towards education. The voters, often citing this as the number one reason for voting to approve gambling were a little upset when those proceeds did go to fund education . . . and then exactly that amount was withheld from the general funds, with the result that the amount spent on education was about the same as before.
Uh-uh. That will most assuredly _not_ fly. Now, do you have any other studies besides the DiMasi study that supports the claim that upwards of a billion dollars are being spent to develop a typical drug?
"I've asked a couple of questions about this and not received a reply: in that case, how much of the credit goes to public institutions for developing these new drugs. Quite a few people here want to draw a line for what seems ideological reasons and claim that public institutions deserve _zero_ credit."
Yup, zero, because they don't develop drugs, they do basic science.
"I'm guessing you're probably doing some comparison (assuming you have the figures for it), on some government department, say the NIH, vs everyone else."
The NIH is the source for the vast majority of biological research government funding. The DOD, NSF, etc. contribute much smaller amounts.
"'I have so many good reasons that I can't tell you a single one.' Uh-huh. Well, I believe you then, no need to linger here, might as well go home."
That sounds good, especially since many people have provided several reasons. If you insist on more, how about looking at an evil corporate pharma balance sheet, or talking to a clinician, or just your family doctor, or anyone who works in medical research, or God forbid, someone who works at an evil corporate pharma company.
"though you won't explicitly say it, taking the cost to develop the most expensive drugs and applying a multiplier to cover all drugs is bad accounting."
Huh? Who did that? Nobody is suggesting that be done. I believe the point was that the average (or median) cost of a drug discovery effort is meaningless, given that different values can be derived by considering or not considering efforts of various length or intensitiy.
"So let's just get one thing clear here: what percentage of credit, exactly, do you assign to private enterprise for the computer, and what is the percentage for government? Also, if there had been no public development of the computer, would we have them now? If so, by what path would you see this happening?"
The computer is a bad example because the government did pay for some of the research that went directly into the first computer(s), whereas this simply isn't the case for drugs. Also, would you in turn suggest that if the government puts in , say, 5% of the development work for some widget, that that should morally or legally outweigh the 95% of the work put in by private enterprise? Why?
SOV - The costs would be higher now than in 1991 (at least in nominal dollars).
Tax credits do not reduce the cost, they just shift the cost around. They might reduce the part of the cost paid by the drug companies (or perhaps a better way to put it would be they compensate the drug companies for these costs), but the costs still exist, and would exist if you nationalized the development of drugs.
Third, the opportunity costs vary as estimates on rate-of-return varies (in the original DiMasi study, he used an annualized 9%
9% is not unreasonable if your looking for an oportunity cost. If your just looking for a cost of capital it would be less, but it would still be a cost you have to apply, you can't reasonably just skip it to get a lower estimate.
And most important of all, even if it only costs $100mil to develop a particular drug (a figure I think is far too low, even if $500mil might be a bit high), most drugs aren't very successful, they get canceled in development, or they don't get approved, or they do poorly on the market. The blockbuster drugs have to pay for the R&D on all those other drugs. The cost per blockbuster drug (including its "share" of the costs for all the failed drugs) would be over a billion, perhaps well over.
Why should the government do it?
Your mind is obviously unsullied by knowledge. The risk of product development in pharma is vastly greater than in other companies (again, Google “torceptrapib”).
Maybe we should develop a pill for stupidity. Now that I think about it, a suppository would be more appropriate.
sorry, SOV, you cited no study. You cited "a case against the drug industry's R and D "scare card"", a polemical attempt to discredit the best empirical work on this topic. That attempt has not been bought by the scholarly community and you offer no argument whatsoever as to why its invocation of the tax issue ought to be persuasive as against Dimasi et al's analysis.
http://www.gooznews.com/archives/000956.html
This post reeks of nonsense but thankfully it has been smacked down about as hard as humanly possible. Check the above link if you like to know things.
I realized I should have included a teaser to my above link so here goes.
The idea that the government can't produce new drugs is a hoary myth. We have systematically undermined the government's capacity to produce new drugs in recent years. That's true. But historically, the government has produced some of the most important breakthrough drugs. Its efforts range from the Walter Reed Army Institute of Research (responsible for most new anti-malarials in the second half of the 20th century) to the National Cancer Institute (largely responsible for 50 out of 59 of the first cancer chemotherapy drugs) to the National Institute of Allergies and Infectious Diseases (the first HIV/AIDS drugs, which were actually recycled failed molecules taken from an NCI program). Indeed, the manufacturing process for penicillin, brought to U.S. shores during World War II by scientists working on the British government nickel, was developed in a U.S. Agriculture Department laboratory in Peoria, Ill.
I usually let drive-by stupidity pass, but this brings up an important point. I said that the risks of development were the mundane risks that other businesses routinely face; I most specifically did _not_ say that those risks were not high.
But high risk is okay, as any insurance company actuary will tell you, what is bad for business is _unkown_ risk. Will the new chip with the parallel architecture pan out? Will this new plastic for auto bumpers actually be an improvement? Even, will skirts of this length fly this season? These are all known risks in the sense that it's possible to put some fairly consistent, though not necessarily tight, bounds on them. And so doing business is possible.
Not so with 'pure' research. There the risk of coming up with something, anything, is unknown. Unquantifiable. And certainly uninsurable in any sense of the word. Physicists wasted entire careers on the "it's all tigers" model of particles. An entire lifetime of toil gone to waste, simply because it turns out that quarks and chromodynamics happened to be the correct theory, and it didn't matter how smart or how hard you worked, what you were working on just wasn't going to cut it. Same thing with Einstein and his unified field theory, it just wasn't in the cards for the simple reason that several important fundamental facts had yet to be discovered (the existence of additional forces) The problem with these sorts of situations is, there was no way to know this beforehand . Dropping a bundle on some bit of theory, hope it pans out, what are the odds? Thousands to one? Fifty-fifty? one-in-a-trillion? That sort of thing does tend to play hob with even the most robust business model.
So if this were the situation vis a vis the drug companies, then yes, these would be valid arguments. But as the apologists have already conceded, what the drug companies are doing is _not_ pure research, but applied.
Sougg? Now that our lesson is over, I suggest you invest heavily in stupid pill futures. Then when they come on the market, you could take 20. As suppositories of course. I don't think they would increase your intelligence much, but perhaps they might give you the wit not to run your mouth off about topics you know nothing of.
Uh, Tom? Your own cite agreed with mine - no, the tax rebates were not included in figuring the costs. They were very clear on this point. Sheesh. They also said that their study was not about figuring costs, but about tracking trends in corporate profits, and that figuring those end would mask the _trends_, not the costs:
Read what your sources have to say before you post them as any sort of proof; that'll save you a world of ridicule.
And btw, no, the Heritage Foundation, AEI, Cato, et al, are not the 'scholarly community'.
Just off the top of my head: NASA. The moon in ten years.
But that was a while ago...
This is exactly the situation with drug companies. They’re doing applied research, but with a large unknown component. Drugs fail all the time for reasons no one anticpated beforehand. (Again, Google “torceptrapib” - seriously - do it. Hell, Google “Vytorin”. A combination of two known and approved drugs turns out…to crash and burn. Oops. Hundreds of millions down the drain. Applied research, indeed.) Medicinal chemistry is nothing like, e.g., bridge building. There are lots of unknown risks.
Physicists wasted entire careers drilling dry wells, but their careers were essentially worthless anyway, since an unproductive physicist is about as valuable as an arts don. They didn’t drop a bundle on some bit of theory; they were wrong, but lost nothing except their time. Suppose they had to pay $500-800 MM (out of their own pocket, not the taxpayers’) and then found out they were wrong. That’s the pharma model.
We're talking about investment and risk, right? In the case of the Internet, 99% of the investment and risk was done by government funded researchers at universitites and nonprofit institutions like BBN and Rand (and some for-profit companies like Xerox). Netscape and Microspft came along after 20 years of research and slapped a pretty face on this technology.
It's an extremely poor support for your argument about pharma, which for all of its faults does take significant risks and does do a great deal of original research. If pharma was like the internet, then the drug companies would be taking government-developed drugs and deciding what color to dye the pills and what shape the box should be.
SoV:
You said this: but a lot of the 'research' that drug companies do _is_ reformulations of existing drugs.
I'd like to know more about what you mean by this. What do you mean by "reformulation"?
Do you mean:
A. Analogues of existing drugs, modifying their chemical structure?
B. Patent-extending measures, like controlled-release forms, etc.?
C. New uses for old drugs, like Sarafem/Prozac?
If you would like, could you please tell us if you find these (A,B,C) to be legitimately patentable in your eyes?
*sigh*
Those who ignore my comments are doomed to rediscover them.
But but but Sougg! I thought that you were claiming that it was _high_ risk that was the problem!
You wouldn't be changing your story without acknowledging you were, uh, WRONG, would you?
You need an ethics enema as well as being stuffed full of stupid pills.
In case your wondering, no, I feel no obligation to reply substantively to you or treat you with even minimal respect.
You behaved abominably. If you want to upgrade my opinion of you, you will a)apologize, and b)admit you were wrong.
I am so goddamn sick of bad behavior here. Imho, there are a lot of people posting who need to grow up, and start behaving like adults. Sitting on your duff behind your keyboard is no excuse for shedding the civility that, presumably, your mother taught you and that you would have the grace to trot out in public when actually interacting face to face with real live people.
Person,
It might help if you clarified your point, or expanded upon it.
Klug, A, B, and C should all be patentable. Of course[1].
My point is that a lot of this 'risky' research . . . isn't. At least, not in the sense of the term when it was first trotted out. My other, cotangent point, is that these 'me-too' drugs, as I see they are sometimes billed, are not nearly as expensive to develop as the NCE's, which was the group of drugs used to get DaMasi's previously unheard-of large figure for the cost of bringing 'new' drugs to market.
Let me make something clear here: for all I know, the pharmaceuticals really do have to charge high prices to stay in business. Maybe their business model precludes small profits, it's either much higher than average profits or bankruptcy, feast or famine.
My point is that the argument(s) advanced so far in support of this thesis are very poor ones. And it is those arguments that I am attacking.
[1]Cures for baldness, or 'erectile dysfunction', or, in a related field, breast augmentation strike me as very silly, very trivial things to waste effort on; they have nothing to do with health. But the fact is, those things are what large numbers of people want, and if company A doesn't supply them, company B is more than willing to step up to the plate and receive the onerous burden of large sums of money.
Am I the only one LMAO over SoV's latest post?
ScentOfViolets,
Well, where is the citation that backs up the following statement you made:
You have had 18 hours, now, to come of with examples of all the drugs private pharma have acquired from other research organizations "like, drumroll - public universities." Is is safe, now, to simply conclude you were blowing smoke out of your ass since you have failed come up with examples?
Dear SoV,
Good morning! Thanks for your interesting answer for my second question for my post of 4:07 AM. But I was actually more interested in my first question: what you mean by "reformulation", A, B or C?
mtraven, you're exactly right. I think that to the already shopworn cliche of public risk, private gain we should also add public blame, private credit.
Developing atomic theory, molecular biology, biochemistry, a plethora of research instruments and techniques? Well, that's not the same as private enterprise who did all the heavy lifting when they brought the product to market.
So all those academics, those researchers, those government bodies? They get squat for credit.
When people say things like that, I tend not to take them very seriously anymore.
If nothing else, it's already been conceded that those research bodies could have produced those consumer items, albeit shoddy, non-streamlined, and highly priced.
But you know what? Without those public group contributions, private industry most definitely would _not_ have come up with computers, hi-tech drugs, etc.
If they want to play the game of who has contributed more, I'm more than willing to play it with them.
Well, let's see here, what did I say? Oh yes:
And gee, scrolling past all the postings, I don't see you that you've done that. As I said, it's quite obvious that you are a partisan idiot, that you have nothing new to say, and that you have not the slightest intention of changing your mind about anything.
Even worse, you don't argue well. No, you're going to have to mend some fences first before I treat you with anything like respect, boyo. Starting with the admission I requested of you. The ball is _entirely_ in your court on that one.
SOV -
"The original claim was that pharmaceutical companies engaged in expensive 'research' that the goverment couldn't do."
No, the original claim was that the government couldn't do it as well. You keep giving examples to show that it's not completely impossible for the government to ever discover anything, but that's not relevant. Government can be (and is) capable of basic research and yet not superior at innovation. After all, basic research isn't necessarily innovation - if researchers keep looking and looking, at great expense, and eventually discover a 'law of nature' that isn't considered patentable because it would have been discovered eventually anyway, then their contribution is significant but isn't particularly innovative.
I was the one that made the 'original claim' that you keep quoting, and I said that the government tends to not be very good at innovation, not that it's impossible for the government to ever do any sort of research.
"Sitting on your duff behind your keyboard is no excuse for shedding [] civility"
That said, "it's quite obvious that you are a partisan idiot."
I think we may safely conclude that SoV stands when typing.
SOV,
Then perhaps you need some reading lessons since, at 2:52 p.m. on January 30, I made the following statement:
Citations alone do not an argument make. The quality of those citations matter.
As for civility, I usually give it, but I reserve it for those who try to practice it on a nearly continuous basis. I forgive the occasional outburst since we are all victims of impulsive anger, but nearly every comment you make here has been rude and arrogant, not to mention factually inaccurate in many cases and just philosophically silly in nearly all cases.
Now, where is the cite for which I am asking for the fifth or sixth time already?
SOV said -
"But the initial claim was that the industry itself was spending x numbers of dollars, not that this was the total amount of money being spent. So I take it we can all agree that tax credits should be accounted for when a company says it spends a certain sum of money on R&D, and that to name a figure without including the tax credit is dishonest."
What? The figures are, indeed, what the industry spent on R&D. The fact that they were allowed to claim those costs as deductions, thus lowering the net amount that they had to pay in taxes, doesn't change the fact that they spent x dollars.
You could make a case that the more interesting number to discuss is the effective after-tax cost of the research, in particular if we are comparing that after-tax cost to the after-tax net profit. But if we want to know how much companies spent on R&D, surely the appropriate measure is how much they did, in fact, spend.
[Note that there may be opportunity costs in there that they didn't actually 'spend', and there's always the issue of accounting for overhead. I don't know details of the accounting. But none of that is related to the idea that they didn't really spend money on R&D simply because that spending was deducted when calculating the final tax payment.]
By the way, great point, Rob Lyman! Over and over again, SOV is the first in a thread to start name-calling, launching nasty attacks and hurling out insults. He/she makes some interesting points but is so unpleasant and confrontational that perhaps we should stop responding to SOV's comments, tempting as they are to rebuff.
I used your quote Ann, but others have expanded on your claim, citing for instance the 'fact' that private industry in aggregate spends far more than the government. Which, btw, seems far more sensible a claim for private superiority than the oft-cited in these parts mantra that public entities are just by their very natures clunky, bureaucratic(in the bad sense of the word), and inefficient.
But if you like, I will modify my statement to "The original claim was that pharmaceutical companies engaged in expensive 'research' that the goverment couldn't do very well."
This, however, is meanly written, and I suspect you know this:
'Not completely impossible', eh? That's damning nuclear energy, computers, relativity, quantum mechanics, most mathematics, satellite technology, etc with faint praise.
The truth of the matter is, for the most part, 'basic research', as you have it, can exist quite comfortably without 'innovation', again, as you define it. The opposite in the modern world is most definitely _not_ true; there would be no computers without 'basic research', no internet, no nuclear energy, etc.
And, I've asked this question repeatedly, even given an example or two, but have yet to receive an answer: what is the difference between 'basic research' and 'innovation'? Other than the fact that some would have it by definition that the former is what the government does, the latter private industry?
"Developing atomic theory, molecular biology, biochemistry, a plethora of research instruments and techniques? Well, that's not the same as private enterprise who did all the heavy lifting when they brought the product to market."
What product? Is molecular biology a product?
No. That's really the crux of the matter.
And government-funded labs to make a computer, or atomic bomb, are largely a thing of the past, as are also, unfortunately, corporate-funded pure research think tanks like the facilities a number of oil companies used to have. Too many companies lost too much money because basic research needs to be monetized, which is why Bell Labs and Xerox Parc, which did a lot of applied research, are so legendary - because they made products. In the latter case, products which the parent company didn't know how to monetize, but products nevertheless.
"Developing atomic theory, molecular biology, biochemistry, a plethora of research instruments and techniques? Well, that's not the same as private enterprise who did all the heavy lifting when they brought the product to market."
What product? Is molecular biology a product?
No. That's really the crux of the matter.
And government-funded labs to make a computer, or atomic bomb, are largely a thing of the past, as are also, unfortunately, corporate-funded pure research think tanks like the facilities a number of oil companies used to have. Too many companies lost too much money because basic research - when done by the private sector -needs to be monetized, which is why Bell Labs and Xerox Parc, which did a lot of applied research, are so legendary - because they made products. In the latter case, products which the parent company didn't know how to monetize, but products nevertheless.
One mistake SoV seems to be repeatedly making is his referral to the 'risks' of basic research. The government isn't particularly concerned with outcomes in the way private enterprise is. The government hires whom it considers to be the best scientists to run the NIH, NSF, etc. and lets them decide how to dole out the money. Hopefully science is not only advanced, but does so in such a way that wonderful things are invented to make our lives longer and happier. But there is no real 'risk' involved. Maybe the NIH will get a little more money next year if they can show that some research they recently funded led to something great, but that's about it. The government isn't going out of business, and the NIH isn't going to disappear.
Sorry for semi-double post. Another failed experiment.
Yancey, that's not what I asked for, and you know it. You need to admit you've been behaving badly. I didn't drop a dime on you just because I felt like it. I also - I know you don't want to believe this - didn't do it because of your politics. I did it because of your personal behavior. If you want me to respond to you, you're going to have to admit you've been behaving badly, and you're going to have to promise to try to be better. Hence my conditions.
You're perfectly free not to do this, of course. But then I feel as if I am under no obligation to reply to you. As I said, I find your contributions to be not particularly valuable.
"And, I've asked this question repeatedly, even given an example or two, but have yet to receive an answer: what is the difference between 'basic research' and 'innovation'? Other than the fact that some would have it by definition that the former is what the government does, the latter private industry?"
Well, generally, innovation refers to creating something, rather than learning something, but this becomes a semantic argument, and those are painfully pointless. The issue is what is deemed patentable. You generally can't patent general knowledge (though companies keep trying). You can patent things. That's pretty much what draws the line. You can argue it's wrong, but you can't argue it isn't the case.
Yancey_Ward: I don't know what's to clarify, since I explained it so clearly the first time. The point, if you'll remember, is that debating how much it "really" costs to develop a drug (100 vs 500 vs 800 milllion) is irrelevant, and people should drop it. Here is my original post:
Let me explain it a different way:
-Drug costs WILL increase over time. This is because researchers target the highest reward/effort ratio first, and as those are picked up, the remaining will be more difficult.
-If your argument *depends* on drugs costing less than $X to develop, then you are wrong, because at some point they will cost $X.
Yancey_Ward: if you'll recall, I made this exact same argument on the Mises blog, probably to you. And guess what: even Stephan_Kinsella, anti-IP superhero, endorsed it. Well, at least when I made that exact same argument in the context of Kevin_Carson's claim of harms resulting from the "land monopoly".
So again, folks: read my posts, and save yourself some time.
Oh, and I also made some points about how, "If the part pharma does is so easy, why don't universities do it and pick up the superprofits", and those are being ignored as well.
Oh to be an anonymous ranter!
SOV, your own ability to read is in serious question here. And you've evinced no evidence that you would recognize scholarly work if it hit you in the face.
The issue is whether it is reasonable to count drug development costs before or after tax deductions for R and D; and once again, you completely elide the point. Dimasi et al argue that corporate taxes are supposed to be on profits; that is, income after pre-tax costs are deducted. Your own position and Public Citizen's makes no sense at all. You might as well suggest that the self-employed business person should refigure his/her income upward because pre-tax business expense deductions ought not to be pre-tax.
Maybe Megan can comment on this point as someone more knowledgeable about tax issues; but it is certainly not a plausible argument on its face. But its just what i would expect from Public Citizen and its ilk, which clearly includes you.
No one is threatening to take over the production of automobiles or set auto prices by government fiat. I have yet to see calls for car makers to reduce prices because their prices aren't fair.
Also, the car market is more efficient than the drug market, so car prices are market driven.
Drug prices aren't set by an efficient market, they are set by drug makers who have to convince insurance companies to pay for their drugs.
perhaps we should stop responding to SOV's comments, tempting as they are to rebuff.
No, no, no. The solution is to keep responding--and disagreeing--until SoV decides you are unworthy of attention, at which time you'll be free to criticize SoV's errors without any response. It's what I've been doing this whole thread, see e.g. my posts on tax deductions (which are different creatures than tax credits, although SoV appears unaware of the distinction), on financial risk (which is the real issue to discuss if you're talking about ROI and ROE), and on the difference between "basic" and "applied" research (which I argue is not the same as mere degrees of financial risk), the "real" inventors of the laser, computer, etc.
Tom: as I argued above, it makes no sense to account for ordinary tax deductions when determining an amount spent on R&D, any more than it makes sense to do so when coming up with the total cost of office supplies or janitorial labor. However, there are special innovation tax credits which probably should be counted because they go beyond the usual deductions available to all businesses.
And NASA still hasn't developed commercially viable space flight. Instead, private companies are doing so (in conjunction with a prize method of encouraging them).
If we did pharam like NASA does space travel, we'd be still be grinding herbs.
Person, I saw your posts, and they make sense to me, but I figured you didn't really need me to agree with you.
Since you started this by calling my source a 'propagandist rag', and you are continuing in this vein, I'll be blunt and call you a weaselling idiot.
Are we even now?
And no, Heritage, Cato, AEI, are not 'scholarly', they are propagandist rags. Project much? And again, read your cite. Again. Slowly.
Again, project much? It's not just me (who has real-life experience in the matter, it's not just that 'propagandist rag', it's the OTA itslef:
and:
and:
But I guess the OTA are 'partisan propagandists' too, eh?
It seems my position, _and_ Public Citizen's, _and the OTA, _and_, well you get the picture, all think that. My own brother, a small businessman who happened to take a similar deduction in 1999 thinks that.
Ann, to make your search for "who started this" easier, I used Ctrl-F a few times.
Interestingly, I can't find the words "propagandist rag" anywhere in this thread. I do find Tom calling Public Citizen a "laughable" source of information, which is sort of similar.
I don't see Tom using the word "partisan" anywhere.
I can't find any comment of Tom's in which he links the word "scholarly" to AEI, Heritage, or Cato.
I also cant' find any comment of Tom's in which he uses the word "liberal," never mind "liberal math."
All of which is interesting, because SoV has put those words, for some unknown reason, in quotes.
Fine, SOV, then I will simply assume you concede the original point- otherwise I am quite certain you would have stuffed any meaningful citation in my face. Instead, what have you done? You have evaded the question again and again. As I wrote before, you were blowing smoke out of your ass.
Person,
Sorry, I didn't remember seeing that comment, only the shorter one.
For what it is worth, I enjoy reading your comments and always have, here and on Mises.org even though I tease you about your run-ins with Kinsalla.
So Ann, let's give a small example of who 'starts stuff', shall we?
Here is my first interaction with your fellow traveller Yancey:
Note that a) he started this, b) he starts with an insult and c) he demands a cite while simultaneously sneering at someone for objecting to the lack of documentation present in most comments.
And after telling him what he needs to do to rectify the situation, we get this latest response:
So, Ann, after getting on me for 'starting things', I'm sure your'e going to upbraid this Yancey character for his poor behavior, right?
I will tell you that if you don't, you better have a _very_ good reason. Something better than the fact that he's a tribal ally.
I'm taking the trouble to respond to this because you know, I really do think that backing up a line of argument with sources and cites, references, evidence, etc is really the proper way to conduct oneself. I also think that civility counts for something (a lot, actually), and if you find somewhere where I have just gratuitiously fired off a shot instead of responding in kind, I'd certainly like to hear about it (hypocracy is bad too.)
Of course, you are free to defend these characters, however egregious their behavior has been demonstrated to be. But bear in mind that in the long run, you're not helping yourself or your cause by resorting to such weak backup. Lord knows I've made this point often enough.{1}
[1]Although as more than one person has noted, liberatarians, right-wingers, et al, may have to support these less-than-savory indivuals simply because they have no choice.
No. I’m puzzled why you even say this. My earlier post made exactly the point that pharma research is high risk, and I stand by it.
So it would seem.
Goodness, hit a nerve here somewhere, did we?
I’m unclear on what set this off, unless the answer lies in the realm of pharmacology. Never fear, we’re working on follow-ups to risperidone, if its side effects are a problem.
To put this back on track, here’s your original quote:
Exactly the same as in pharma research. Projects blow up all the time. Yet again, read the torcetrapib story. Seriously. Read it.
So? So what? They weren’t out a dime out of pocket – they just didn’t get to fly to Stockholm. BFD. Now if they’d had to pay back all of their salary up to that point, then we’d have a more comparable situation.
Again, exactly the same as in pharma research. You don’t think Pfizer dropped $800 MM on torcetrapib despite knowing all along it was going to fail, do you?
The odds of a given chemical compound ever seeing the market are probably a million to one, easily. Most medicinal chemists spend their whole careers on projects that don’t work out, and retire, never having had a compound make it to market.
It is exactly the situation vis a vis the drug companies. Precisely the same. I’ve done pure and applied research for over 30 years (equally divided between the two), and the latter is as difficult as the former. Besides the merely scientific issues, additional variables need to be optimized, such as cost, regulatory concerns, competitive landscape, legal landscape (not just patents, but liability – is this compound similar in any way, either in structure or mechanism of action, to one involved in litigation, such as Vioxx?). And on top of all that, when a compound has passed muster on all those issues, it can still blow up in late clinical trials or even after FDA approval – as Vioxx itself did.
Now that’s risk.
Bottom line: pharma research is damned expensive and risky, and no one will undertake the risk unless the reward is commensurate.
ah, SOV, its good to have your true colors so clearly in view here...you're a fine ally of Public Citizen.
i certainly don't envy anyone in any of your classes if your performance here is indicative of what goes on there.
i will certainly defer to anyone with tax expertise here--or to anyone who cares to defend SOV/public citizen's position with argument rather than with repeated contrary assertions, bold print, gray background, and increasingly tiresome namecalling.
by the way i didnt say public citizen was "laughable" as a source of information; i said regarding it a serious source of unbiased information was laughable.
but thanks, Rob!
Yancey_Ward, Rob_Lyman, and everyone else:
Even and especially if you agree with me, SOMEONE should be referencing the (apparently valid) argument I made, either to refute it, or to use it to refute someone else still arguing about costs. Yet instead, you all are STILL debating the "Does it cost $X" issue. It perplexes me, esp. given that someone will eventually make the same argument and get complete agreement.
Perhaps if I reveal some more of my identity and therefore "Person"hood? Since the denizens of mises.org already know who's behind the "Person" brand, I went ahead and put a link to my youtube page. Mostly just dance vids, but one relevant vlog designed to help you distinguish idiots from those who make strong counterarguments when arguing on the internet.
Cheers!
"There is no evidence of a nationalized industry that consistently does cost effective innovation. "
How many nationalized industries are there?
TVA?
The US Postal Service?
They both consistently engage in cost effective innovation.
if you find somewhere where I have just gratuitiously fired off a shot instead of responding in kind
Saying you "respond in kind" to the mild provocations of others is like saying a string of gunshots is "responding in kind" to someone who steals your parking space.
But I suppose Yancy could have been more polite, I'll grant that much.
Person,
As I wrote, I had not seen your earlier comment and, in any case, I have not really participated in the "how much, exactly, does drug discovery and development really cost" debate.
By the way, Kinsella just posted on Mises. :~)
Rob,
Yes, I certainly could have been more polite but, over the course of the last 3 months, SOV has done little to deserve civility. I thought it time to give him a taste of his own medicine. In the future, I will most likely ignore him as I do most commenters of his ilk.
i will certainly defer to anyone with tax expertise here
I have a small (really, quite small) amount of expertise, but it isn't a matter of tax law, but of opinion.
One strong reason NOT to account for tax savings caused by deducting R&D is that you only pay taxes if you make a profit. Small companies that collapse before the make any profit will get no tax savings from their deductions, because they pay no tax.
A larger company may be able to buy their loss carryovers as part of buying the little company, so long-term, there may be some tax savings realized. But it would be silly for the managers of the small company, sitting at a budget meeting, to account for the value of loss carryovers they're acquiring when figuring out how much to allocate for R&D. And it would be positively fraudulent to account for them when telling investors how much money you had spent.
I thought it time to give him a taste of his own medicine.
The homeopathic version, apparently.
Indeed, if it made sense to count the tax savings from deducting expenses, then one would owe tax on these tax savings since your expenses would now not be as high.
Research tax credits, subsidies from government to encourage research specifically, should be accounted for, and I am no accountant, but I am sure they show up in the income statement somewhere already- like, for example, in the net profit?
Rob,
Yeah, the virtual McArdle two-by-four.
Indeed, if it made sense to count the tax savings from deducting expenses, then one would owe tax on these tax savings since your expenses would now not be as high.
Interestingly, this effect is observed in gravitational systems; the reduction in net potential energy caused by allowing the mass of Earth to smash together rather than, say, having a hollow center, actually causes a reduction in the total mass of the Earth compared to the sum of the masses of its constituents. This reduction in mass in turn reduces the available gravitational potential energy (the potential potential energy, if you will), reducing still further the total mass of the Earth.
(Put another way, dense materials are lighter than less-dense materials, given the same number of protons, neutrons, and electrons.)
Or so I am told by people who claim to have measured the effect.
But anyway, suffice to say that our tax laws are inconsistent with general relativity.
Wow, now that was an impressive 100+ comment thread on a topic orthogonal to the original post (or at least obsessed OCD-like with one narrow aspect, the cost of developing a new drug). I love blogs.
If we're done arguing over who's an idiot and who's a moron, maybe we can get back to a higher level?
TAKING AS GIVEN that it's expensive to develop new drugs, should we trust the free market to prioritize how limited research dollars (public or private) are spent? I hate to go back to this example, but vitamin V was discovered quite by accident while researching a therapy for a completely unrelated problem. I have no quarrel with that sort of happy accident being throughly exploited; but how much research money was then spent on ED drugs because V was such a commercial success? Could not those research dollars have been better spent on actual deadly health problems? Yet by turning over the decision on how research money is spent to the free market, that's what you get. Because of one happy accident we see billions flushed away researching a therapy that saves no lives but promises large financial rewards. And then when we complain about the high cost of drugs the pharmas whine about the huge expense and risk of research. Really, I'm supposed to feel sympathy because of the huge expense and risk of researching the next ED or anti-insomnia drug? Because since it's the free market I can't order you to research something useful, and you're going to invest where the biggest and quickest ROI is, and that's probably not going to be the next AIDS treatment...
The free market cannot be trusted to direct research in the public interest. Where the public interest collides with financial interest, the public interest will lose every time.
Yancey_Ward: I made a comment 15 mins ago, but it looks like they haven't approved it, despite it being very articulate, with references to previous discussions.
liberalrob: A large part of the reason pharms research ED stuff in prference to 3rd world or 1st world fatal life-saving stuff, is the tendency of "humanitarians" to consider the lives of these people "too important" to sacrifice to someone's patent rights.
And they very well may be right!
But, that does explain why a lot of pharmas don't want to make such investments, and it's hard to see how this incentive structure is a failing of the FREE market.
If the USPS was that cost effective and innovative, we wouldn't have FedEx, UPS, etc...
Also, liberalrob, if we force companies to only invest in "worthwhile" drugs, we may not get those happy accidents. Ideally, the drug companies would invest in drugs likely to make them money (which would actually give them more money to invest in other drugs) as well as those important to society.
Besides, if you order them to invest in stuff that's not profitable, they'll just quit and go do something else and then the government will have to take over.
There's not a fixed pool of "drug R&D" money that has to be allocated to develop new drugs... anything that looks plausible or profitable will attract some money. Some of that money might have been spent developing other technology, building buildings, buying government bonds, etc...
I go back to the price idea... if some drug is really needed but isn't likely to sell a lot or for a very high price, the government can determine a bonus to whoever develops it first.
That avoids forcing companies to do things while at the same time encouraging them to do something valuable and then rewarding them for it. Companies, especially publically traded ones, are obligated to try to make the most return on their investors' money.
A Debate:
YW: Well, if you look at what Pfizer is spending on research...
SoV: Pfizer isnt spending money on research. Do you have a cite for that?
YW: Yes, I'll give you their own website...
SoV: Well, they wouldn't lie about it, would they? Come on you f*&^^%%$ng moron. You're an idiot. I have a cite from the Daily Kos and another from the World Wide Socialists that proves you're wrong.
YW: I'm not sure your sources are all that reliable.
SoV: Well you didn't give any sources at all. A&^%%wipe.
YW: I did:
SoV: You're a lying liar. A lying, lying liar.
Ann: Couldn't you be a little more civil SoV?
SoV: Look who started it. I'm sure you'll criticize YW for starting it.
Mixner: He didn't.
SoV: Mixner's always been dishonest and stupid.
All: This guy's a joke. Why do even bother trying to discuss things with him?
SoV: (heard faintly in the distance) No guys. Don't leave. I have noone to talk to. I'm all alone. Nobody likes me. (Sobbing)
Liberalrob,
You wrote:
Person has already pointed to the problem with this framing, but I will do so for emphasis- private capital is not public capital. If you think the public should be funding research in other areas, then try to get laws passed increasing it, but this in no way allows the government to direct private capital towards those goals. You try that, and that private capital will elude you every time.
"The free market cannot be trusted to direct research in the public interest."
The free market can generally be trusted to respond to demand. It sounds as though you're saying that, yes, people may want treatments for insomnia and ED, but you in your greater wisdom realize that they're not really important, regardless of how many people want them, and thus wise people such as yourself should be allowed to prevent such spending, in the public interest.
As EI pointed out, the pool of money for drug R&D isn't fixed. If research to treat insomnia is important enough that people are willing to pay for it, why shouldn't they? EI's suggestion that government should offer rewards for specific problems that don't appear to be receiving enough attention, due to a specific market failure, makes sense. But you haven't established that markets consistently and substantially misallocate funds - it sounds like your evidence is that market demand doesn't always match your own personal preferences, but that doesn't necessarily mean that the market failed.
I think the recent move of offering bounties is a interesting way to use public funds to influence how private dollars get allocated. If society sees a need currently being unmet, there's nothing wrong with sweetening the pot.
However, in recognition of liberalrob's larger claim, I would argue that the patent system itself is a concession of the fact that a unfettered free market is not necessarily optimal, and that some degree of governmental intervention can indeed be societally beneficial.
And I say that as a definite free market booster.
Where the public interest collides with financial interest, the public interest will lose every time.
My glibertarian response is that the public interest is probably best determined by what the public is interested in. To judge from the ED commercials, the public is interested in sex with middle-aged women. But only "when the time is right."
But that said, I do agree with liberalrob (!) that plenty of drugs have dubious utility in a broad social sense while having considerable private utility which makes them profitable. The solution would seem to be to find a way to make the "useful" drugs more profitable. I have no useful ideas.
I don't agree that the billions spent on ED treatments were "flushed away." They weren't available in any meaningful sense before being so "flushed." They were in the hands of private investors who could have chosen to put them in to marketing Barbie dolls (now lead free!!!) or buying up gold futures. That is, if the ED drug revolution hadn't come along, there's no reason to think they would have been spent on AIDS research or some other worthy cause.
"If the USPS was that cost effective and innovative, we wouldn't have FedEx, UPS, etc..."
If FedEx were cost effective and innovative, we wouldn't have UPS. Or maybe an absolute monopoly is not always the result of efficiency.
Or maybe an absolute monopoly is not always the result of efficiency.
No, in the USPS's case, it's the result of the law which creates the postal monopoly on first-class mail and forbid private carriers to compete.
Rob_Lyman: To judge from the ED commercials, the public is interested in sex with middle-aged women. But only "when the time is right."
ROFL!!!!
As Rob points out, to compare USPS to UPS or FedEx, one has to look at deliveries outside of first class mail- USPS has a monopoly on that.
SoV - The actual costs to bring to market new drugs is more like $100 million or less.
Even if your criticisms of the study are accurate you don't do anything to back up that claim.
And so it is with the pharmaceuticals: they don't particularly care about the individual risk of investing in one drug, so long as what is called the expectation value is high enough (and this is not an unreasonable situation.) So this 'risk' over several trials is really nothing special or out of the ordinary.
Of course. And force prices down and the expected value goes down, so you get less investment. The risk isn't very special, its an element in the expected return. Since many of the drugs don't wind up being successful, the expected return is greatly lowered. Its still high enough to get a lot of investment. I'm certainly not arguing that we should look for ways to pour a bunch of extra government money in to drug research. I'm only arguing that there is a serious cost to greatly reducing the expected return here.
On the practical side, does anyone _really_ think that the drug companies indulge in risky behavior, staking all on one throw of the dice?
To an extent yes. Its not rare for smaller drug companies to go out of business. But that wasn't my point. The risk isn't some random totally uncontrolled single massive bet on a die roll. It is, as you described a process where you take many risks and the odds are a sufficient percentages of them will pay off. But risk is still the appropriate word. It doesn't only apply to single massive all or nothing bets.
What makes the pharmaceutical industry so special? In private industry innovation and lower costs are the rule. Throw enough red tape and government money at the industry and we have to be happy that at least we're still getting innovation.
To Ann
What about the military.
While many may credit the military in the U.S. for developing innovative weapons the fact is they don't really do that. Virtually all military hardware in the U.S. is developed in the private sector. The military plays the role of telling the private sector what it wants a new system to do, then the manufacturers design the new system compete with one another to secure the Government contract. The military provides consultants to help in the design process. If they did it all themselves it would be another Government run disaster. Besides do you really want your military to take it's focus off defense and put it on public health. That would be one Government program supplementing a different program. And if that doesn't work perhaps we could enlist the help of the road commission and so no.
Thx