While researching for my last article on monopolies I found that the biggest threat from monopolies came when the government itself enforced and backed those protectionist policies. The biggest difference between a true, free market monopoly and one backed by government force is that of competition. Competition never goes away in the free market as shown by my example of when Standard Oil controlled 90% of the oil industry. However, when a government grants a monopoly, it is literally illegal for others to compete and, as with everything in government, is backed by the barrel of a gun. Classical economists, including the father of modern economics Adam Smith, usually understood monopolies as those with grants of exclusive privaledge from the government. The fear arose from policy rather than the businesses themselves. Today, our laws suggest we have flipped this narrative around and are afraid of big business more than the policies protecting these big businesses. In a world of antitrust laws it perplexes me how the same government, which is so afraid of big business killing competition, will implement policy fulfilling that exact fear.
There are several examples of protectionist policies but one that seems to rarely get challenged, until recently, is patent law. Patent law can be traced back to the 1400s in Venice and, sure enough, they were formed as a means to protect their local economy. Venice had lost it’s stranglehold on the Eastern trade routes after one of several wars with the Turks. The Venetian government thought they could pull in skilled artisans from other countries by offering a grant of protection to the individuals. Patent law proponents today, however, don’t usually argue from a point of protection but rather from one of ingenuity and reward. The problem with this argument is that research doesn’t back it up. They will even use the IP industry itself as an argument to maintain the laws. That’s akin to saying we can’t simplify the tax code too much because individuals would lose jobs in the tax preparation industry. This argument just doesn’t make any sense to me.
The negative affects of IP law are becoming quite clear in recent times. One of the best examples of this is prescription medicine. We see stories in the news about the price of Daraprim going from $13 to over $700 overnight or the price of Isuprel being raised 500%. Rare diseases can bring annual costs of medicine to insane levels from their beginning but one of the biggest tools the free market has to incentivize the best pricing is competition. The biggest fear from monopoly is price setting. Once a business gets rid of it’s competition then it can set whatever price it wants for the product or service it sells. Patent laws give this power to businesses on a platinum platter.
Many lawmakers are aware of the problem of life saving drugs getting priced out of availability but what are their solutions? Bernie Sanders has been one of the most outspoken reformers for prescription drugs but his solution is what his solution always is, heavier government involvement. This is the definition of insanity. Government got us in to this mess by giving these companies their monopolistic power to begin with so why do we think more government will solve the problem? Bernie’s plan says that drug companies convicted of fraud will lose their monopolistic power and it also says every major company has been convicted of fraud in one way or another so why not make it simple and just remove the power altogether? His plan also calls for transparency from the drug companies. He wants them to publicly breakdown every situation that would cause their cost to rise in order to justify when they do raise prices but this just adds more red tape which by definition will cause their cost to rise. Regulations like these cost businesses over 100 billion dollars last year and these costs will inevitably get passed to you, the consumer. I disagree with other parts of his plan but my concern in this article is patent law. Take this power away from the corporations and let them be subject to the free market. This alone would not be the ‘end all be all’ solution but it would be a huge step forward.
Another objection will be that Big Pharma needs to make more money in order to maintain their research and development in order to make the next life saving drug. Leaving aside the fact that 9 out of 10 of the top pharmaceutical companies spend more on marketing (the majority of marketing going as payoffs to doctors) than they do on RnD. Many researchers have discovered that trade secrets and first mover advantages are more valuable to recouping investment than the patents themselves. At the same time over-regulation by the FDA is a substantial cause of this high cost of RnD. According to a CBO report ‘Innovative Drugs’ on average take 12 years to create because of regulation and other factors. By their estimates, half of the cost of the drug comes from lost interest and earnings from the capital that is tied up during this period. At the same time the National Institute of Health spends upwards of 30 billion dollars a year financing research. I am rarely one to suggest more spending in any federal agency but I have to believe that cutting red tape and freeing up man hours within the FDA could save substantial amounts of money that would be better served doing actual research.
As a free market advocate my goal is not to say a certain business is making too much money but rather to see what the free market actually allocates in the form of prescription drug pricing. Government intervention creates artificial prices. The market allows the people to determine what they’ll pay. As Ludwig von Mises said, “The capitalist system of production is an economic democracy in which every penny gives a right to vote. The consumers are the sovereign people. The capitalists, the entrepreneurs, and the farmers are the people’s mandatories. If they do not obey, if they fail to produce, at the lowest possible cost, what the consumers are asking for, they lose their office. Their task is service to the consumer. Profit and loss are the instruments by means of which the consumers keep a tight rein on all business activities.” In an area that can have such a profound effect on one’s life I must agree with Mr. Mises that the people must have their vote. They must have their voice.