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.