Ali’s blog

Mostly quant stuff with occasional digressions

The real face of unfettered capitalism

Posted by alifinmath on January 17, 2008

A raid on big pharma in the EU:

European regulators raided some of the world’s biggest pharmaceutical companies on Wednesday in an inquiry into whether they conspired to keep up the price of drugs after patents expired.

The EU is increasingly concerned about the rising cost of medicines and declining innovation. Neelie Kroes, competition commissioner, said: “If we have the feeling that something is rotten in the state, then let’s take the opportunity to find out.”

And by the way, raids like this could never, ever happen in the utterly corrupt USA, where politicians and FDA regulators routinely go to bed with pharma companies and industry lobbyists (indeed, the regulators often wind up working for the very companies they’re supposed to be regulating). Ah, the joys of unfettered capitalism, where the only ones who get screwed are the little guys who have to buy exorbitantly priced pharmaceuticals.

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2 Responses to “The real face of unfettered capitalism”

  1. Chris Prouty said

    Again I find myself agreeing with one of your posts. Although you know me to be a libertarian, Rand-ian objectivist, pharmaceuticals are one place that America desperately needs to put the hammer down. Big pharma has degenerated into nothing more than a street pusher in a $3000 suit. The fundamental economic flaw with pharmaceuticals is that if you need it, you need it absolutely. This is in stark contrast to virtually every consumable product, where there is the opportunity to swap out one product for another which is virtually the same. If the terms offered to you at the Ford dealership are unfavorable, Chevy is across the street and probably willing to make a deal (especially these days!). Not so with pharmaceuticals. You can either afford the drugs or not, and due to the substantial R&D costs involved in drug development, not all drugs have a suitable equivalent offered by another brand, keeping prices high.

    Advertising is also out of control. Certainly many people suffer from the ailments which have remedies that are advertised on TV. However, the language used in the commercials is so broad that even a healthy and sound-minded person may occasionally find themselves wondering if they suffer from “restless leg syndrome”. The marketing firms responsible for this drivel should be ashamed.

    Another crippling problem is patent law. Pharmaceutical companies have correctly observed that it is easier and cheaper to hire a law firm to figure out how to re-badge and re-patent the same compound instead of accomplishing some true innovation deserving of a patent. Clearly intellectual property must be defended, but broader standards are needed in defining whether a drug patent is seeking to protect a novel compound or simply extend the life of an existing one.

    I am in favor of very, very, very few government controls on private enterprise and property rights and I like to believe that the free market displays certain elegance in achieving a fair society. But the appropriation of medicine is one those few places where capitalism, intellectual property rights, and the general welfare of people cannot coexist. I admire the EU for doing the right thing.

  2. alifinmath said

    I agree with you in general. A quick point I want to make is that pharma’s excuse of R&D as a pretext for high prices simply doesn’t wash. The following piece, in the New York Review of Books,
    (http://www.nybooks.com/articles/17244)is quite revealing — and worth getting a printout of:

    QUOTE But while the rhetoric is stirring, it has very little to do with reality. First, research and development (R&D) is a relatively small part of the budgets of the big drug companies—dwarfed by their vast expenditures on marketing and administration, and smaller even than profits. In fact, year after year, for over two decades, this industry has been far and away the most profitable in the United States. (In 2003, for the first time, the industry lost its first-place position, coming in third, behind “mining, crude oil production,” and “commercial banks.”) The prices drug companies charge have little relationship to the costs of making the drugs and could be cut dramatically without coming anywhere close to threatening R&D.

    Second, the pharmaceutical industry is not especially innovative. As hard as it is to believe, only a handful of truly important drugs have been brought to market in recent years, and they were mostly based on taxpayer-funded research at academic institutions, small biotechnology companies, or the National Institutes of Health (NIH). The great majority of “new” drugs are not new at all but merely variations of older drugs already on the market. These are called “me-too” drugs. The idea is to grab a share of an established, lucrative market by producing something very similar to a top-selling drug.UNQUOTE

    On a side note, I have disagreements with a libertarian outlook: the history of the last few thousand years shows the influence of state structures. When the first states were created in Lydia and Babylon, everyone else had to organise themselves similarly — or face invasion. The same problem remains today: any group of people, any society, not organised along state lines, will suffer annexation by a state.

    With regard to capitalism, look at the historical record: from early modern Europe, with its state support of buccaneers, pirates, and armed colonial invaders, to the USA and Japan today, capitalism and state structures have co-evolved. But opinions vary.

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