Politics on Drugs

In a very thoughtful article in Wired, “Stop Making Pills Political Prisoners”, Lawrence Lessig addresses the following issue: many people in poor countries are dying because the drugs that could save their lives are too expensive.

This behavior outrages many in the developed and developing worlds alike. How can drug companies be so callous? How can they deny medicine to millions just so they make more money?

The pattern also puzzles economists. Patents give drug companies monopolies over their products. The rational strategy for a monopolist is to price-discriminate, to charge more in places that can afford it and less in places that can’t. For example, with price discrimination, it would make economic sense to charge Africans practically nothing for drugs sold in Africa, as long as the same product could be sold in the US for lots more.

So what’s the problem? Why doesn’t this sort of benign price descrimination result in cheap drugs for the third world? As Lessig notes, arbitrage is a problem, but not an impossible one.

Another reason is more intractable: the grandstanding politician. If big pharma price-discriminates rationally, it guarantees the following query from some representative in some committee hearing: “How come a hospital in Lagos spends $1 for this pill, but the local Catholic hospital in my district must pay $5,000?” And, of course, in the Inquisition that is congressional testimony, there is no effective way to answer such a question. Graphs about monopolies and proofs about the benefits of price discrimination don’t get you far on Capitol Hill. The rational drug company thus expects that rational price discrimination would lead to irrational price control - and the end of the ability of big pharma to earn enough from high-paying countries to support the cost of developing drugs.

Yet again, we see the justification of the equation

rational ignorance + public choice = massive suffering

It is quite rational for the politician to be ignorant of the beneficial side effects of price discrimination; after all, his overriding priority is to get re-elected, and the people in Lagos aren’t casting ballots in Congressional District 3 (hence the public choice part of the equation). Now, one might well argue that a congressman has no duty towards the people dying in Lagos. Be that as it may, the simple fact of the matter is that the hypothetical drug company being discussed will charge a profit-maximizing price in as many places as it can, so the politician is really doing his constituents no good by grandstanding about the price-discrimination. The net effect is that everybody (except the politician) is the same or worse off than they would be otherwise.

Just to make things perfectly clear, I would just like to point out that, although the proximate cause of unneccessary suffering and death in Lagos is, as the anti-globalizationists point out, the greed of big corporations, the ultimate cause is, in fact, the self-serving state. By which I mean to say that, indeed, the reason cheap drugs aren’t widely available in the third world is exactly because it’s not profitable for the pharmaceutical corporations, which have profit as their number-one priority. However, the reason offering cheap drugs to the third world isn’t profitable (at least in this scenario) is not because of “market failure”, stunted morality or any of the standard reasons, but rather because of the perverse incentives created by state action. And not just malicious state action, either: as I’ve pointed out, the politicians who would potentially intervene and try to stop price discrimination are not acting irrationally, given their incentives, nor are they actively trying to screw over the third world. I’m not a fan of corporatism, but I do feel sorry for those in charge of big corporations who get the blame for the problems in the third world when the blame rightfully lies at the feet of the same people who have managed to hoodwink the public into believing that they offer a solution. That Which is Seen, and That Which is Not Seen, indeed.

At this point, it seems appropriate that I insert a caveat. I’m not trying to justify the patent system in this post, as anyone who is a frequent reader is probably aware. Rather, if patents are going to be enforced, it seems to me that they ought to be enforced consistently. That is to say, part of the justification for patents is precisely the sort of beneficial price discrimination being discussed, since the arbitrage hurdle is more difficult to clear absent a legal monopoly (by arbitrage, I mean someone buying pills in bulk for a buck in Lagos and then selling them for a fraction of the $5000 price tag in New York), so it simply makes no sense to justify the patent system on one hand with beneficial price discrimination while effectively never allowing that price discrimination to take place.