To describe drug pricing as free market is simply ignorance

Suzanne Moore has a very powerful piece about the meningitis B vaccine and its pricing. Sadly, the core of her argument is also entirely wrong:

Second, and maybe not so emotional, is that this is actually the market in all its gloriously free form. It is a choice. The market can charge what it likes for vaccinations against meningitis, as it will do for Ebola or malaria if these are developed. Cancer drugs, retrovirals, the new anti-rheumotoids: they are all expensive. There is something utterly immoral about the market holding not just the NHS to ransom, but the sick and the suffering around the globe. These untramelled market forces must be challenged.

There is nothing remotely free market about the pricing of drugs. For those who develop such drugs are granted a legal monopoly upon them for 20 years. We call this monopoly a “patent” and legal monopolies are not part of that “free market”. Indeed, the existence of such legal monopolies such as patents and copyrights is a flat out admission that the free market, the market unadorned, does not deal well or cope with every problem. The art is in working out when this is so and what should be done at that point.

The most obvious two examples of when the unadorned market does not cope well are pollution and public goods. Yes, Coase pointed out when there are indeed private solutions to pollution: but equally his analysis pointed out when they will not work. Public goods are, by definition, non-rivalrous and non-excludable. Knowledge is an obvious example. That once knowledge has been attained we cannot stop someone from using it, nor does their use diminish the amount other can use, poses an economic problem. It means that it’s terribly difficult to make a profit from having uncovered that knowledge.

We’re also pretty sure that people respond to incentives: thus, less profit from uncovering knowledge will lead to less knowledge being uncovered. And we like knowledge being uncovered, it’s one of the things that makes us all generally richer over time. So, we deliberately construct these time limited monopolies in order that people who uncover knowledge can profit and thus have the incentive to do that grunt work to uncover it.

This is not, by any means at all, a free market. It’s that flat out admission that the free market does not work in all circumstances.

And this is, of course, what happens in drug development. Getting a new vaccine through testing (please note, this is not an argument about the original research, whether that was government funded or not) costs in the $300 million to $500 million range. Someone, somewhere, has to spend that much. We can indeed do this in different ways, none of them will be free market ways because of that simple public goods problem. Once we know how to make the vaccine it is terribly cheap to reproduce. Almost all of the cost is in working out how to make it.

And thus we come to the argument about how much should that monopoly holder be able to charge for access to that new drug. We can’t just say “a reasonable return on manufacturing costs” because that is ignoring the very problem that led to the construction of the legal monopoly of the patent in the first place. We also can’t say that they “deserve” some amount of money, possibly equal to the human misery and suffering that won’t happen as a result of the roll out of the vaccine. There is no “deserve” here. Nor can we say that bugger them, that suffering is so great that we’ll just nick their $500 million. For what we’re actually trying to achieve is to leave people with the incentives to go and spend the next $500 million on developing the next vaccine.

We are not weighing in the balance the amount the capitalist b’stards are trying to charge against the joys of wiping out meningitis B. We are, in these price negotiations, trying to work out how much profit we let them make on this vaccine so as to incentivise the development of all the future vaccines that might ever be developed. This is a rather difficult question.

And it really is a difficult question. Which is, of course, why we really do try to use markets where they work even acceptably if not perfectly. Simply because using non-market methods is so damn difficult.

Economic Nonsense: 35. Big companies cut safety & build in obsolescence to boost profits

If big companies actually did this they would be very silly indeed, and would not remain big companies for long.  What companies want is satisfied customers, preferably repeat customers.  They want customers to value what they are buying, and to come back for more.  They want customers who will spread the word and encourage others to become buyers as well.

One thing companies do understand is that reputation matters.  If they made unsafe products that became unusable, they would soon gain a reputation bad enough to deter buyers.  Buyers are not captive; they can turn to other firms.  It is because of this that firms compete against each other, trying to outdo each other in the value they provide.  That value includes both safety and quality.

Some products do become obsolete, of course.  In areas characterized by innovation and rapid progress, this year’s wonder product can be out of date in a few year’s time, or even sooner.  Most buyers would not want a computer or a phone that would last 50 years.  There would be no point.  But this is not obsolescence that is deliberately built in; it is obsolescence brought about by improvement.

Because firms compete against each other, they can attempt to occupy different market niches.  Some people would prefer to buy things that are cheap and cheerful and not as long-lasting, rather than things that are more durable, but cost significantly more.  Competition allows both types of people to be satisfied.

The claim that companies cut safety and build in obsolescence is often made by people who are simply anti-business, and these are usually people who do not understand what business is all about.  They think business is some kind of conspiracy against the public and that firms make profits by swindling people.  It is in fact about supplying value for money that will leave both buyer and seller feeling they have gained by the transaction.  This is far more likely to be achieved by selling safe products that are long-lasting enough to satisfy customers than it is by cheating them.

Dealing with the other side on the gender wage gap

Though there is a very large literature suggesting that the gender wage gap is not down to discrimination, this is not a universal finding, even in new papers. Three recent studies, for example, allege that their evidence supports the gender discrimination model of the labour market. However, their methodologies cannot well account for alternate hypotheses (e.g. gender difference) and we would do well to look primarily at the work which does try and factor these possibilities in.

“Estimating gender differences in access to jobs” (2012 pdf, 2015 gated), from authors Laurent Gobillon, Dominique Meurs, and Sébastien Roux, finds that:

females have a lower access to jobs at all ranks in the wage distribution of job positions and that the access function is decreasing with the rank. At the lowest ranks, the probability of females getting a given job is 9% lower than the probability of males. The difference between these probabilities is far larger at the highest ranks and climbs to 50%.

But wait! Their data allows for three explanations!

First, females may apply less often for high-paid jobs because working hours are less compatible with family constraints. Second, there can be taste discrimination against females which increases with the rank. Third, there can be statistical discrimination such that the skill distribution is the same for males and females, but skills are observed with more uncertainty for females than for males by managers.

Turns out there are lots of existing papers suggesting statistical discrimination (i.e. not sexism/racism) explains a big fraction of differential labour market outcomes between groups. And we have lots of evidence that men and women have different preferences about work hours. Let’s not point to taste-based (i.e. sexist) discrimination before we’ve considered more well-supported alternative hypotheses.

“Gender and Dynamic Agency: Theory and Evidence on the Compensation of Top Executives” (2015 pdf) by Stefania Albanesi, Claudia Olivetti and María José Prados is even stranger. They:

document three new facts about gender differences in executive compensation. First, female executives receive lower share of incentive pay in total compensation relative to males. This difference accounts for 93% of the gender gap in total pay. Second, the compensation of female executives displays lower pay-performance sensitivity. A $1 million dollar increase in firm value generates a $17,150 increase in firm specific wealth for male executives and a $1,670 increase for females. Third, female executives are more exposed to bad firm performance and less exposed to good firm performance relative to male executives.

But their data shows that this is more or less entirely explained by male executives being older and more experienced. They don’t have the data to control for age and experience so they don’t try and just report these numbers! Sure this isn’t quite how they try and report it in their abstract and conclusion but what else does this mean?

The managerial power/skimming view of executive compensation can rationalize these differences based on the notion that female top executives are less entrenched than male top executives, due to their younger age and their relative difficulties in accessing informal networks.

Whereas we know that for otherwise similar male and female execs, women get promoted more aggressively and earn more.

“The gender wage gap among PhDs in the UK” (2015 pdf) by Ute Schulze finds a similar sort of thing. There is a gender wage gap among even highly talented and motivated people—those who manage to earn a PhD. But is this down to discrimination? Schulze thinks it is: even within fields and within academia the gap ranges from an average of £559 to £10,902.

But does Schulze control for the positions these people end up reaching—no. She is right that men get higher returns on their observable characteristics, but she hasn’t observed enough characteristics to justify her conclusion. There is quite a lot of good evidence that academia isn’t significantly discriminatory towards women, and this simple regression based study is not enough to turn that over.

It seems more plausible that the large differences in preferences observed even between highly talented men and women explain the gap here—with men taking on more competitive, harder and just more work and hence ending up with dissimilar labour market outcomes.

It’s true that this could come from social/cultural pressure, but at the same time it could be primarily biological. What’s more, it doesn’t seem to lead to women rating their lives as worse, in fact quite the opposite. Raising children and doing work in the home tends to be related to women reporting higher happiness, well-being and life satisfaction.

So it’s not clear to me that this new hat-trick of papers adds anything to what we already know about sex/gender discrimination in the workplace—it still seems like there just isn’t that much of it.

A puzzling policy committment from Scottish Labour

Perhaps we should spend too much time puzzling over whatever it is that Scottish Labour wishes to promise us all given that current indications are that there’s not going to be a Scottish Labour soon enough. But their attitude towards food banks does deserve some puzzling over:

His announcement came the day after he promised a £175 million anti-poverty fund that he said would be used to end food banks in Scotland.

Why would we want to end food banks on Scotland?

It’s entirely true that use of food banks has soared in recent years. But it’s also true that we’ve got to be very careful in determining whether this is a supply shock or a demand shock. And all the evidence we’ve got is that it is indeed a supply shock. As the Trussell Trust itself points out, back a decade and more there simply were no food banks (OK, perhaps two or three) in the UK. Now there’s a great network of them, alleviating the number of tens of thousands of people each week.

It is possible that there was no hunger back a decade. But anyone with any experience of the benefits system of the past would not claim that it did not make mistakes, that it did not underpay, take a long time to pay, take weeks to start getting the impoverished some cash to alleviate their hunger. Some of us here have direct experience of just those situations.

So, it is not that the benefits system is worse today than it was: it’s that we’ve a new technology, those food banks, to deal with an already extant problem. That is, it’s a supply shock, not a demand one.

At which point we come to something of a logical puzzle. The little platoons have worked out a way, a very effective way, to deal with the inefficiencies of the State. The response is thus to nationalise by that very State the thing that alleviates the State’s inefficiencies?

Umm, why not just leave the little platoons to get on with the job they are doing so effectively?

An interesting example of how politics works today

True, this example comes from the US, where one of us does some media work and is thus bombarded with press releases. But this really does quite take the cookie, as they might say over there:

NEW YORK – An open letter signed by over 130 faculty members was delivered this morning to NYU President John Sexton calling for fossil fuel divestment. The letter, which began to garner signatures in early February, calls on the university to divest its $3.4 billion endowment from the top 200 publicly traded oil, gas, and coal companies. The university currently has an estimated $139 million in fossil fuel investments.

The letter was delivered in hard copy this morning by the Environmental Studies department chair, Dr. Peder Anker, who stated, “NYU needs to divest, because it’s the right thing to do.”

Delivering it on paper? Isn’t that going to kill trees? However, what interested us was, well, we know pretty much nothing about New York University. This is not a comment about the divestment campaign please note (a silly idea but it’s not about that). It’s a question about, well, is 130 members of faculty an interesting number or not?

We could imagine that NYU has 140 faculty members. In which case this is highly interesting, even if not important. So, we asked. And it should be noted that this list of 130 includes those at other campuses, associated study groups, remote locations and so on. The answer for the total faculty was:

The latest number I found from 2013 is for “Academic Staff” is 6,564.

We’ll assume that Academic Staff is a rough proxy for Faculty shall we? And our rough, back of that fag packet with the cancer warnings on it, calculation is that 2% of the faculty have signed this petition.

From memory, so don’t quote us on these numbers, some 11% of Americans are convinced the Moon landings were fake, 18% think that Obama was born in Kenya and, judging from legislative acts, more than 50% are sufficiently deluded to think that raising the minimum wage increases the number of people in employment.

But, this is how politics is done. Some papers will print this release without questioning the numbers and it will become a standard tale that “the faculty of NYU call for divestment”. And thus is politics done in this modern age.

Aren’t we all such lucky people?