Excerpted from the Guardian:
1. The problem
“Why is a 15th century medieval economic system being used to finance R&D in the 20th and 21st centuries? Could there be better alternatives? The problems generated by this system are legion, but only two economists have analysed the costs and distortions in depth and proposed a new system to replace it: Dean Baker, co-director of the Centre for Economic Policy and Research, and Michael Perelman, professor of economics at California State University, Chico.
Take the US. According to IMS Health, US prescription spending totalled $291.5bn (£193.5bn) in 2008. However, it would be a mistake to conclude that monopoly pricing is the only tangible cost facing consumers and taxpayers. This figure doesn’t include expenditures for the patent office, patent enforcement, the judicial system, direct R&D subsidies, tax breaks, university-subsidised R&D, and miscellaneous other forms of assistance. These forms of government intervention are likely to add tens of billions more to the final figure. Also, the National Institutes of Health (NIH) is funded with $30bn annually.
The state-subsidised US industry claims to have performed approximately $65bn in R&D in 2008, yet a majority is spent on duplicative copycats rather than truly innovative medicines that target the most troublesome diseases and illnesses. Without the aforementioned government interventions, it is likely that the industry would perform relatively little research.
This year, prescription spending will probably hit the $300bn mark. Yet, the majority of these medicines cost very little to produce and can be sold openly on a free market for a fraction of current prices. Given a rather generous average cost of production of $10, and at current rates of consumption (an average of 11 per person, per year), then these medicines would cost just under $34bn for the total US population (307 million people) – a mere 11% of the current cost. Wal-Mart has been offering some generic medicines at $4 per prescription.
Numerous intangible costs exist: misdirection of R&D toward copycat and lifestyle medicines, corruption of journals, fraud, transaction costs, litigation, anti-social behaviour, high-pressure advertising, conflicts of interest within the medical profession, counterfeits, and the corporate takeover of universities and regulatory agencies are some of the other costs that need to be considered. There is also a clear conflict of interest when firms perform their own clinical trials.
The deaths caused by the patent system, whether it be the corruption surrounding a drug like Vioxx in the US (89,000 to 140,000 deaths) or access issues in the third world, is likely to number into the millions. This doesn’t include the suffering of billions more on the low- and middle-income scales that have difficulty affording these medicines.
2. The Solution
So what is the solution to this mess? Dean Baker provides the most realistic answer: the government should directly perform the R&D as a public good and let firms produce medicines, as a private good, at competitive free-market prices.
Spending $100bn (to replace the $65bn of state-subsidised private R&D) annually on a newly revamped NIH has potent benefits: affordable medicines, a reduction in corruption of clinical trials and journals, the elimination of distorted advertising and marketing, an increase in the openness of information, and a decrease in the number of deaths and those who suffer.
This system fulfils both conservative and progressive ideals simultaneously: it allows markets a greater role, eliminates government-granted monopoly patents, is anti-inflationary, information becomes more unbiased and rational, while promoting far better public health outcomes and eliminating this destructive form of corporate socialism. If US consumers and taxpayers can fork out $300bn-plus annually, they can surely spend $100bn on R&D and another $34bn on generic medicines.
It is unbelievable that economists have not attempted to analyse the ever-growing costs and distortions of intellectual property rights when it forms a colossal foundation of our modern economies. These problems aren’t just limited to the pharmaceutical industry: the software, journal, textbook, book, game, comic, film and fashion industries also have tremendous distortions present. Intellectual property rights should be at the forefront of economic debate, not languishing on the sidelines.”