Cato, Take Two


Last week some analysts at the Cato Institute surprised me by endorsing trade barriers in the medicine market. Today the other shoe dropped: Cato's president and one of its vice presidents came down on the other side of the issue, with a well-reasoned case for pharmaceutical free trade.

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  1. I actually see a different outcome. I see the U.S. pharma refusing to sell overseas, and I see overseas countries refusing to honor U.S. patents. Generic copies of currently patent-protected drugs will emerge to fill the void overseas. (Remember the AIDS drugs?)

    So now reimportation will die a natural death, as neither congress nor the FDA can vouch for the foreign product’s quality and equivalence to the U.S. product. But worldwide patent protection dies with it.

  2. Naw, I just see export being made illegal. Why would the Canadian government subsidize drugs for Americans. So they’ll either slap on heavy export taxes (to make up for the money they spent pricing them down) or simply make it illegal to export more than a certain quota.

  3. Well, I thought I could predict the consequences of reimportation, but now I’m not sure. In any case, allowing reimportation just says that the US gov’t will let US consumers buy whatever they want, and if the drug companies and foreign governments don’t like it then that’s for the drug companies and foreign governments to sort out. Maybe foreign governments will ban reimportation. Maybe drug companies will stop selling in countries with socialized medicine, so that the Americans (who are currently paying for R&D) continue to pay for R&D.

    In any case, for once the US gov’t is saying that it won’t intervene in a choice made by consumers.

  4. “For once the US gov’t is saying that it won’t intervene in a choice made by consumers.”

    For once?

    – Private Schooling
    – Air travel to Baghdad
    – Simulated Kiddie Porn
    – Sodomy
    – Abortion
    – General Porn

    For once?

  5. This article is a good step toward justifying drug reimportation, but fails to address satisfactorily the issue of patent seizure. The author waves his hands.

    We enter treaties protecting intellectual property precisely to guard against that kind of theft. The American government should be defending the property of American companies, not asking American consumers to pay ransom to ward off international thieves.

    That’s well and good, but hardly addresses the problem of patent seizure, threatened so often by African and South American countries already.

    It would be a great step toward diminishing international welfare to remove import/export bans on medicine, but if patent seizure is not addressed adequately, such legislation will accomplish nothing but the destruction of the US drug industry, because once a patent is seized, and assuming import/export bans are eliminated, an American patient can in effect purchase a generic drug immediately after the name-brand drug is released. I’d like to see this issue addressed more seriously.

  6. Foreign countries with price controls are relying on the countries with patent protection to provide reasonably safe and effective drugs. If the generics flooded the market, then the question of the generic’s reliability would become more of a factor, thus certification boards would sprout and become important. Would you buy an AMA-approved drug versus an untested generic with the same claims? Why should the FDA be the only valid certification board? Perhaps the free market in pharma might actually give the CSPI something useful to do. The FDA regulations are part of the reason R&D is so costly, what makes you so sure the FDA couldn’t be more effective at half the price?

  7. Once again, I didn’t know buying products from those who acquired them by exortion constituted a “legitimate market.” Again, does the man who stole or extorted TVs from the local electronic store constitute a “legitimate market?” Do laws preventing me from purchasing stolen or extorted goods also constitute “market distortions?”
    It seems ironic that the Reason, which normally would be a staunch defender of property rights, has no qualms when it comes to buying goods stolen or extorted by other nations.

  8. Steve – you’ve obviously not been reading Reason for very long if you think it is a staunch defender of property right…

  9. Steve, any prescription drug you buy at your local US pharmacy already IS a product of extortion. The FDA won’t let many drugs be sold without FDA approval and without the prescription of a government-approved doctor.

  10. Russ – all the more reason to axe the FDA as well, but in effect a red herring. Two wrongs don’t make a right.

  11. I have a tough time believing that the pharmaceutical companies will not lobby for export taxes on drugs in foreign countries or wheter other countries will not enact them in order to prevent drug shortages. In any event, I dont see the real issue as being intellectual property qua intellectual property, I see the real issue as being intellectual property qua having had to jump through the appropriate bureaucratic hoops. That is the real value of drugs as intellectual property.

  12. Sing Poor-

    You’re right. There are other instances where the federal government will let people make their own decisions. However, if you keep pointing out something like that around here, the “glass completely empty” crowd will jump on you. If I had said “This is one of a number of instances where the federal gov’t doesn’t interfere with consumer decisions”, the “glass completely empty” crowd will remind me that we have absolutely no free market, that things are COMPLETELY regulated, that we have NO freedom, etc. They’ll then disregard whatever else I had to say.

    So, I tiptoe around the “glass completely empty” crowd so that I can make my point without being jumped on.

    I haven’t noticed you around here before. I post here most days, but I don’t post on all threads, so maybe I’ve missed you. If you haven’t encountered the “glass completely empty” mentality, you will soon enough.

  13. As I stated before the real value of drugs as intellectual property is the fact that they have gone through the appropriate government hoops. If we really wanted to benefit from R and D abroad, we could simply accept other government’s certifying boards as proof of their safety and efficacy. That is the best way around the problem of subsidizing the rest of the worlds healthcare.

  14. Who said anything about two wrongs? I already pointed out THREE and it didn’t even take 10 seconds of thought. I’m sure if I investigated it further, I could find a couple hundred anti-free-market wrongs. So why bitch about one new “free market oriented” wrong?

    I can think of another one already. Insurance companies do not reimburse the pharmacies the full cost of the product and service provided to the patient. Pharmacies lose money on certain prescriptions. In other words, people without insurance are subsidizing people with insurance.

  15. Russ – seeing as the relevant issue is the proposal of yet another wrong, it would seem that this wrong is central to the debate. Does the fact that it’s not exclusive make it less worthy of consideration? I don’t think so.
    Aside from which, as far as insurance goes, how is collective buying – without the threat of patent expropriation – a market wrong? The fact that countries like Canada buy drugs cheaper isn’t in and of itself a market wrong, it’s the fact that Canada can make such a deal on the threat of simply yanking away the patent protection and giving it to someone else. Buying in bulk is a common practice not limited to governments – it’s the threat of yanking away intellectual property that makes it extortion.

  16. For once?

    – Private Schooling
    You can go for private schooling, but you still have to pay for public schooling too. And you have to pay even if you have no children.

    – Air travel to Baghdad
    Ask any David Nelson

    – Simulated Kiddie Porn
    Ask Pee Wee Herman

    – Sodomy
    Getting better, but not all state’s laws have been challenged yet

    – Abortion
    Being challeneged by Ashcroft. Certainly needs doctor licensing, though I grant that is not direct regulation, it is pretty darn close

    – General Porn
    Ask your local library

    For once?
    Wrong on all counts!

    And really, your argument is moronic anyway. It’s OK to take away some decsions because we still let you make a few on your own? What kind of dumbass logic is that??

    thoreau, you usually make well-thought posts, but that was not one of your better efforts. We’re all entitled to slip ups.

  17. Steve, insurance is not collective buying. Yes, some insurance companies make exclusivity deals with certain pharmacies, but that’s not the pharmas doing that. I’m merely pointing out other examples of market wrongs that affect the cost paid by the end users. Some of which are a direct benfit to the pharmas bottom lines.

    Your argument essentially is that whoever puts the final straw on the camel’s back when it breaks is the one that caused the back to break. But you could certainly take one straw off before putting another one on. And why doesn’t any of the blame get put on the person who put on the second to last straw? So we shoudn’t do anything because the next move might kill the whole system? If that’s the case, then the whole system was pretty weak to begin with and it probably should be broken.

    I understand the IP argument, and I’m hesitant to just simply abandon IP rights. But I still find it flimsy if only for the fact that it always boils down to paranoia – “innovation will be stifled”. And that’s an argument that cuts both ways.

    Maybe you’re right and the idea is too radical and could cause real harm. Maybe another solution is to ask some pharmas to allow one or two drugs to be subject to the importation, in exchange for another yar or two of protection on another (or an easing of FDA restrictions on another).

    As you point out, there’s nothing physically stopping anyone from making black-market generics now. And yet I’m not sure it’s really a big problem. People want someone’s word behind the products they buy. The first unsafe generic on the Canadian market will call their system into question, much like the Edsel and the Corvair.

    In drugs, it’s the implied word of the FDA. And the doctor’s license. Ask the Thalidimide babies how great the FDA and their mother doctor’s were. Or ask cancer patients on experimental Thalidimide treatment how great the FDA and their doctors are.

    Patients want a seal of approval, the pharmas have to pay through the nose for that from the FDA. In exchange, the FDA’s empowering body grants some market advantages, robbing peter to pay Paul. If you’re a poor cancer patient, well, you’re fucked if you live in the US, but not if you live in Canada. It’s a stretch to call that an advantage of IP rights.

    I’ll admit my knee-jerk reaction was that it was a good idea. Then after a little thought, I thought of the stifling innovation angle. Then after a little more thought, I thought there were probably just as many engineers that are discouraged from innovation by the current system as there are that are encouraged by it. I think history shows favorably erring on the side of the free-market versus erring on the side of market protection.

    Perhaps true freedom is when you no longer are afraid of your own death.

  18. Mmm… something to chew on, during lunch. I’ll think more about this but for now I have a question. Some people brush aside the concept that eliminating intellectual property rights eliminates the main incentive for creating. But beyond my own experience in engineering, it seems obvious that as a race, we would have produced far less music, literature, any creative endevours had the originators not been allowed to profit beyond the first initial publication of their wares. Do you think this is not the case, or do you think that is an acceptable trade-off?

  19. twistedmerkin:

    I don’t know that the underground economy (drugs) is really a free market. Leave aside the fact that the gov’t is trying to stamp it out, and you have a market without any reliable mechanisms for enforcing property rights and contracts. Sure, drug dealers can use guns for those purposes, just as the gov’t ultimately comes down to the use of guns to enforce laws. However, there are no judges in the underground economy, no rule of law.

    Granted, judges in the regular economy are often anything but impartial. Still, at least the regular economy has people attempting to achieve impartial arbitration of property and contract disputes. The underground economy has no such efforts that I’m aware of.

    Without meaningful contracts and property rights (i.e. the rule of law) I don’t know that there can be a free market in any meaningful or positive sense. There’s only anarchy and law of the jungle.

    I will now pause as the “glass completely empty crowd” says that the regular economy is completely unfree and that I’m being naive if I think that we have meaningful enforcement of property rights and contracts. All I’ll say in return is that the “regular” economy is still doing better than the underground in those respects.

  20. thoreau, I wasn’t trying to imply that the black markets are free markets. I was just trying to show that markets are not fragile systems that need to be nurtured, but instead spring up and flourish despite attempts to stop them. Like weeds.

  21. Kevin: Thanks for the clarifications. Something I said, and which Twistedmerkin disagreed with, might clarify what I was trying to get at.

    Twistedmerkin: I was trying to point out free markets do not exist in reality unless they are fostered by government, and they are only little bubbles in the wilderness. One might argue free markets are not fragile, but I do not think a spontaneous market is anything but trivial, as I believe Thoreau said nicely just now. I actually believe “free markets” are a new invention, historically speaking, and in fact, while they may not be fragile, I don’t think they’re all that robust, either. I also don’t think we’ve worked out all the kinks yet, either.

    Once we’ve admitted there are lines, it only remains to decide where those lines should be drawn.

    I think a free market consists of (1) consumers, (2) producers, (3) developers, (4) distributors, and (5) transportation. If we take Phill’s point that there are also non-zero regulation costs in a market, and we add (6) regulators to our definition, and we take Thoreau’s point and add (7) property protection (which may actually be the same as #6), then I think we have a nice model of the Canada-US drug-importation problem, and we can discuss why there is or isn’t a free market in place, and whether it would or wouldn’t harm one nation’s market—one of those little protected bubbles in the international wilderness—if it were to combine with another.

    Given those elements, it’s clear that between Canada and the US, the regulators are the only difference between the two markets, including patent regulations. If that’s the case, then I think it’s clear that the FDA and the patent process are indeed the right topics to discuss.

  22. Twistedmerkin-

    I think we agree then. Even though the ideal free market requires the right environment to flourish and yield its full splendor (including respect for the rule of law, i.e. contracts and property rights), the manner in which people behave in market environments is a ubiquitous phenomena.

    One need only look at Communism, where governments tried to pretend that the laws of supply and demand don’t exist, and that every aspect of human economic behavior can be made to conform with rules. Despite the most oppressive efforts imaginable, people went on buying and selling in black markets. If there’s a chance to make a profit, somebody will seize on it.

  23. Kevin – if I write a book or create a song though, shouldn’t I have the right to control and take credit for my works? If I write a book, clearly the contents are my own – the idea is my creation and it would seem massively unfair for someone else to claim credit from my work.
    Thus so far, you’ve presented us an idea of property based only upon scarcity. That is, if I dig up something in my back yard or build something in my garage, you can’t build another one without parts.
    That’s fine if I’m in the process of selling a device that already exists – but what about new devices, much less literary and artistic works?
    Put bluntly, how can you expect an individual inventor or artist to profit from their works if it can be stolen wholesale right out from under them?
    This doesn’t mean that there isn’t significant room for improvement in the realm of IP (certainly the patent process is massively abused), but to condemn the idea of intellectual property outright simply because it doesn’t work off of scarcity seems absurd.
    Looking at this from say, a Lockean point of view – property as what one creates value in (that is, via improvement). Isn’t the view of property you’ve implicitly endorsed also a government-sponsored monopoly? For example, laws against tresspassing allow you protect your property against squatters. Yet arguably, how do you establish claim to your undevelopped land short of force or government fiat?
    So it goes with IP – by what means outside of scarcity do you argue that individuals should not be allowed the same protection to their creative works as their material ones?

  24. twistedmerkin:

    I’d say that even without copyright, the creator of a work of art would have an initial advantage in being the first to get it out, and would collect scarcity rents until competitors could get a production run going. The idea would be to take advantage of these revenues while you could. After that, you’d go for a competitive advantage in quality, author’s introductions, etc.


    No–I was arguing that genuine property is closely tied to the ability physically occupy and defend it. You can do that with land or tangible property by the very fact of possession alone. “Protecting” intellectual property, on the other hand, requires actively intervening into other people’s lives to regulate what they do in their own spaces. There’s no way to “occupy” the right to a monopoly on using words in a certain order.

    And since I take a mutualist occupancy-and-use approach to property in land, I’d say that the squatter–the person who occupies the land–IS the owner. This position, held by individualist anarchists like Tucker, is admittedly much more marginal in the libertarian community than the anti-copyright/patent position.

  25. I thought Crane and Pilon gave a nice case-specific response to Epstein’s contractual argument, but they missed a more general response that I would think obvious for a libertarian. Namely: is it really good to give government a general power to step in with statutes whenever the costs of ordinary contract enforcement are too high?

    It is true, as Epstein says, that there are instances where socially-beneficial contracts have enforcement costs that make them unprofitable under the traditional contract rules, even though the benefits exceed the enforcement costs; and differential pharma pricing may be one such. And if we had a government that could actually be trusted to act in the interest of overall social benefit, in theory it could be good for that government to enact a statute enabling the benefits of those contracts to be realized.

    But we don’t have such a government; instead, we have a real government composed of real people. Moreover, there are other instances where contracts are hard to enforce by traditional means and the benefits of enforcing them arguably do *not* exceed the costs (*cough* music piracy *cough*). And in these instances, if government has the power to help the enforcement along statutorily, it can use that power to socialize inefficiently high enforcement costs for the benefit of politically well-connected industries (*cough* DMCA *cough*).

    In short, the fact that a contract is hard to enforce traditionally is a fairly good, though not a perfect, signal that it’s not worth enforcing. Allowing government “experts” to overrule that signal with statutes is an open invitation to abuse and inefficiency.

  26. The article implies that the current Canadian plan is one of price controls and not subsidy. If this is the case then it is inaccurate to say that Canadians would be subsidizing Americans if we allow reimportation. If it uses price controls then it would be accurate to say that Americans are currently subsidizing Canadians. It is also a little confusing to say that the drug companies are selling drugs in Canada below true cost. It might be true that they are sold below average cost, but from the companies’ perspective it is only important that they are sold above the incremental cost. I say this only to point out that the companies’ decision to sell in Canada or not is following market forces. I therefore think that, if the companies are allowed to respond appropriately, reimportation would be a positive, market friendly response.

    I’d also like to state that I think this issue and the one of patents are two seperate, different issues. You may think that drugs are artificially high due to patents, but that has nothing to do with free trade, subsidies and price controls. By the way, Jesse, when ARE you going to open Pandora’s box? I’m feeling randy and am anxious to meet her.

  27. I’d imagine the best legislation, or at least the least disruptive today, would be to allow re-importation, but only for FDA-approved drugs. Given that experiment, we can make further refinements thereafter.

    Next, with apologies for shifting the debate to IP, I view with extreme suspicion any claims that intellectual property is “not really property,” or that patent protection is antithetical to free markets. There are three actors in a free market: consumer, producer, and developer. Are developer’s rights inconsequential to free market construction and stability?

    Third, with or without IP, Phill makes a good point [July 29, 2003 09:32 PM] when he says IP is no more than a substitute for regulatory burden. I disagree in theory (I believe IP is indeed property, and probably always will, no matter what the genius ideological intellectuals of libertarianism may argue), but I’ll agree for the sake of argument. If Phill’s assumption allows us to continue the discussion, and allows us to discuss the competitive or anti-competitive role of the FDA as well, then it’s all the better.

    Finally, Kevin Carson mentions the seizure of German patents after WWI [July 30, 2003 12:44 AM], and the ignorance of British patents during the Industrial Revolution, making perfectly the case that patent seizure is an intentional and malicious act, if not an act of war. It also points out that a “free market” does not exist in theory until all nations act in concert. Until then, a “free market” is a small protected bubble of activity within the borders of a particular country. And any claims that free market theory makes ideological demands on the real world must be treated with attention, but challenged as to their true value in reality.

  28. Hovig:

    I’m all for the legitimate rights of developers, as well as everyone else. But taking a spurious right and assigning it to the group it benefits, as “the rights of x,” does not make it a right. You could just as well say, “what about the rights of muggers,” since the “right” to mug certainly benefits muggers. But it’s begging the question of whether mugging is a right.

    On the patent issue, the point I was trying to make was that the current dominant powers in the global economy BECAME the dominant powers by ignoring the very rules they now want to enforce.

    And I strenuously object to the idea that free trade requires some set of rules or legal/regulatory regime enforced by multilateral bodies. Free trade, for the U.S., simply means allowing Americans to buy and sell from anybody in the world they see fit–period.

    Check out Joseph Stromberg’s Article “How to Have Free Trade,” from which the following is excerpted:

    For many in the US political and foreign policy Establishment, the formula for having free trade would go something like this: 1) Find yourself a global superpower; 2) have this superpower knock together the heads of all opponents and skeptics until everyone is playing by the same rules; 3) refer to this new imperial order as “free trade;” 4) talk quite a bit about “democracy.” This is the end of the story except for such possible corollaries as 1) never allow rival claimants to arise which might aspire to co-manage the system of “free trade”; 2) the global superpower rightfully in charge of world order must also control the world monetary system….
    The formula outlined above was decidedly not the 18th and 19th-century liberal view of free trade. Free traders like Richard Cobden, John Bright, Frederic Bastiat, and Condy Raguet believed that free trade is the absence of barriers to goods crossing borders, most particularly the absence of special taxes – tariffs – which made imported goods artificially dear, often for the benefit of special interests wrapped in the flag under slogans of economic nationalism….
    Classical free traders never thought it necessary to draw up thousands of pages of detailed regulations to implement free trade. They saw no need to fine-tune a sort of Gleichschaltung (co-ordination) of different nations labor laws, environmental regulations, and the host of other such issues dealt with by NAFTA, GATT, and so on. Clearly, there is a difference between free trade, considered as the repeal, by treaty or even unilaterally, of existing barriers to trade, and modern “free trade” which seems to require truckloads of regulations pondered over by legions of bureaucrats.

  29. Hovig, I agree with everything you said, until,”It also points out that a “free market” does not exist in theory until all nations act in concert. Until then, a “free market” is a small protected bubble of activity within the borders of a particular country.”

    You sound like Trotsky! A think a free market is not an academic construct that needs to be put in place. It is a natural occurance that exists despite the government’s best efforts. I can participate in a market when I buy a quarter bag, even though the drug market is certainly not unregulated. I suggest a free market occurs whenever the entire transaction is free from regulation- maybe like a farmer’s market? I don’t think my ability to trade freely with my next door neighbor is dependent upon what is going on in Cuba.

  30. Kevin,
    I agree that there are a lot of spurious rights being created and I agree that intellectual property is much more difficult to deal with than real property. But I disagree with your analogy of mugging. When someone designs something the public benefits by having more choice. Simply having it available, at any price, allows each individual to make a decision on whether or not the trade-off (money vs. product) is worth it. Eliminating patents would suggest that when an idea is formed, it is automatically the property of everyone. If the inventor of the frisbee hadn’t patented and produced it, if he had just thought about it and discarded the concept, would he be guilty of stealing public property?
    I think you view patents as tools of corporate America. But I think they can also be tools of individuals, tools that can be used to compete against corporate America.

  31. Steve:

    Just because you call something “property,” or attempt to apply property rights by analogy to something that is not property by its nature, does not mean it REALLY IS property.

    Patents are not property; they are a legal monopoly, enforced by the state, on the right to perform certain actions. I don’t expect to convince you of that. But please at least be aware that there is a major libertarian current running from Warren and Tucker to Rothbard that regards the state’s patent privileges as a fundamental violation of free market principles.

    And while we’re on the subject of patent seizure, the U.S. chemical industry was third-rate until A. Mitchell Palmer’s Justice Department seized German chemical patents during WWI and gave them away to American companies. And the American industrial revolution was a lot easier because the U.S. government through the early nineteenth century ignored British patents on industrial processes.

  32. twistedmerkin:

    An idea is my property in the sense that my mind is my property, and the paper I write the idea down on, and so on. And if the idea is a better way of arranging elements in the material world or performing a process, the material elements I manipulate are my property. But once I tell other people about that idea, the new way of doing things itself is not a form of property. To enforce such a form of “property,” in plain English, means acting to PREVENT people from doing certain things with THEIR OWN property.

    Land and other actual physical artifacts are genuine property because they exist in only one place at a given time. Therefore the very fact of occupation serves to maintain one’s property rights against aggression or theft. To defend “intellectual property,” on the other hand, requires invading the actual physical property of other people in lots of places at once, and regulating what they’re doing there.

    And while patents may occasionally help the little guy to get some money out of his ideas, the same result can be achieved to some extent by being careful who you tell about an idea, and making sure you get money up front when you pass the idea on. Remember the “Flaming Moe” episode of The Simpsons? For every time that patents work in favor of the little guy, they probably work ten times to promote concentration and monopoly power. A great deal of concentration of industry has been brought about by patent control, and by exchange of patents between the major players in an industry. For example, GE and Westinghouse partially cartelized the appliance industry by exchanging patents. (This info, along with the earlier chemical industry reference, comes from David Noble’s “America by Design”).

  33. I disagree with a lot of what CATO puts out, but they are honest, intellectually rigorous, and go where the facts lead them. AEI/FRC-type lobbying shops should be ashamed of themselves for trying to suck of the credibility of groups like CATO and Brookings by calling themselves think tanks; what they do is the opposite of thinking.

  34. EMAIL:
    DATE: 01/25/2004 11:11:44
    Give what you have. To someone, it may be better than you dare to think.

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