Drugs and the State

by Christopher Mayer

[Posted April 25, 2000)

Americans are concerned about the rising cost of
pharmaceutical drugs. This has drawn the attention of
writers, politicians, and others who have attempted to
deal with the issue in typical fashion by advocating
the use of government force to implement their plan.

No exception to the general rule, Kathleen Day, a
media fellow at the Kaiser Family Foundation, aired
the usual concerns and wrote the representative
prescription in an editorial that appeared in the
Washington Post titled "The Driving Force."

Day writes that the "extremely profitable" drug
industry lobbies to prevent the government from
limiting drug prices. Among the solutions
mentioned—price controls. This solution reminds one of
Pufendorf’s advice that "it is foolish to prescribe a
medicine far more troublesome and dangerous than the
disease."

Ms. Day has shown that she has little understanding of
how a market economy works. Mises wrote that the
concept of "excess" profits arises from the "popular
superstition that profit is an addendum to the costs
of production, the height of which depends uniquely on
the discretion of the seller." In this view, prices
reflect the cost of production plus some margin
(profit) determined by the sellers.

However, cost is not the driving force of prices.
Rather, consumer preferences drive the prices of goods
and services. The marginal buyer and the marginal
seller determine prices. As Mises noted, prices are
social phenomena brought about by the interplay of all
the subjective valuations of the individuals
participating in the market.

Prices are the result of countless interactions
between buyers and sellers, between non-buyers and
non-sellers. Prices are a necessary consequence of
living in a world of scarcity. It is self-evidently
true that goods are scarce; not everyone can have
them. Prices are the means by which goods are
selectively provided, how goods are "allocated" in a
market economy. This allocation reflects the
preferences of the consumers as manifest by their
actions. In the absence of prices these goods would
have to be distributed according to some arbitrary
will. More importantly, without prices these goods
would not likely have come into existence at all.

Prices also allow entrepreneurs to calculate; to make
rational appraisals of current market data against
their own judgment of future prices. Those who make
more correct judgments, or who forecast the future
state of the market better than their competitors and
shape their actions against this picture, will earn
profits for their efforts. Those who act on forecasts
that later prove to be in error suffer losses.

Mises fully appreciated the social function that
profits serve. Profits are rewards for those who
served the buying public better than others. "High"
prices and profits are signals that a product is in
demand. These profits attract the entrepreneurs and
mobilize capital serving less desired ends to shift to
meet the demands of the consumer.

Mises wrote: "In branding profits as excessive and
penalizing the efficient entrepreneurs by
discriminatory taxation, people are injuring
themselves. Taxing profits is tantamount to taxing
success in best serving the public."

In the same way, penalizing the pharmaceutical
companies by taxing, confiscating, or limiting their
profits in any way inhibits the market process in its
drive toward efficiency and the satisfaction of
consumer wants.

In the real world for pharmaceutical drugs, however, a
free market does not exist. The industry benefits
heavily from the granting of patents and the heavy
government regulation of the drug industry.

A patent, as Murray Rothbard defined it in his book
Power and Market, "is a grant of monopoly privilege by
the government to first discoverers of certain types
of innovations." Like any monopoly grant, patents
confer a legally enforceable privilege to the patentee
and restrict new entrants from coming to the market,
thereby distorting prices and forcibly altering the
competitive pattern of the industry.

Patents are not compatible with the free market to the
extent that they go beyond the copyright (which is a
claim to tradeable property). For patents punish
independent discoverers and violate their right to use
their property as they see fit.

Rothbard notes that "mechanical inventions are
discoveries of natural law rather than individual
creations, and hence similar independent inventions
occur all the time. The simultaneity of inventions is
a familiar historical fact."

With patents, the first discoverer who registers his
patent with some government is given free license to
soak the public for his monopoly privilege. The
independent discoverer is denied the use of his
invention by virtue of the simple fact that he was not
first, or not registered with government.

Government regulation also hampers the ability of
firms to bring new drugs to market. It takes years,
for example, for a drug to go through the FDA’s
approval process. To the extent that the supply of
drugs is kept below what the market might otherwise
produce if left unhindered, the price of drugs for
consumers will be kept artificially high.

Also, this process prevents an individual from trying
a drug, even after accepting the risks. Perhaps this
individual has but a short time to live without the
new experimental drug. This person cannot wait for the
FDA, but under the present system he must. Or he
enters the black market. In this case, society brands
him, and the people who helped him, as criminals. How
many have died because the FDA prohibited them from
using certain drugs?

This is not to say that a free market in drugs will
not have quality assurances. There will likely be a
demand for some sort of quality assurances and these
needs would be met, as all other needs can be met, by
private enterprise. There is no logical reason why
government should have a sole compulsory monopoly on
this useful function.

In the past, statists have argued that government is
needed to provide a host of services such as police
services, the printing of money, and education. And
yet, we have abundant historical and theoretical
evidence that these services and more can be provided
more efficiently by free enterprise.

Private regulation of drugs is no different. Private
regulatory companies could emerge to serve the public.
They would vary in the price and level of their
assurances reflecting the diverse preferences of their
customers.

Moreover, these companies would be more responsive to
their customers than government regulators for the
simple reason that they would lose their customers and
go out of business if they didn’t. Government
regulators have no threat of bankruptcy for lack of
customers. Their customers are forced to pay for their
services by coercive levy whether they want these
services or not.

As for price controls, we know by economic theory and
historical illustration, that any attempt to set a
price for a good or service below the market price
will result in shortages of that good or service. It
will be no different with drugs. Perhaps the capital
that would have flowed to the drug making industry now
will find other havens, like microprocessors or
software, where prices are not (yet) regulated.
Moreover, price controls violate one’s fundamental
right of freedom of contract.

Beyond these considerations there are other moral
questions. Who should decide how much to pay for
drugs? Apparently lacking any systematic rational
ethic, Day is baffled by the question. However,
underlying her essay is the assumption that this
decision is to be made collectively.

Her piece is littered with questions like these: "How
much are we willing to pay for the medical technology
that we Americans are so adept at developing?…Do we
want to decide how much we are willing to spend to
keep an 83-year-old man alive?"

These are all difficult questions. The answer in each
case is clear for the natural-rights-based libertarian
equipped with the proprietary theory of justice, which
is rooted primarily in the self-ownership axiom. This
axiom, simply stated, asserts the absolute right of
each individual to control over his or her own body,
free from coercive interference.

Viewed through the libertarian lens, Day’s questions
don’t seem as difficult and we can formulate a general
reply: these questions should be decided by the
individuals involved, and, if they wish, their
families and any others they want to involve in these
decisions. Morally, what authority does the collective
whole have over its non-invasive members? Why should
government make the decision whether an 83-year old
man lives or dies? Similarly, how can it be morally
right to force others to bear the medical costs of
strangers?

Similarly, the injustice of price controls becomes
apparent. If you are going to impose price controls,
how are drugs to be distributed? How is this moral or
just? Let us say a man wants to pay a certain sum for
a certain drug and he finds a willing seller. The
transaction takes place. What is "society" to do now?
Is the man now a criminal? Is the seller? Are these
men to be imprisoned or fined?

The fact is that any attempt to regulate the drug
market is an infringement on the liberties of the
buyers and sellers so regulated. Additionally, this
infringement will have to be enforced to be at all
meaningful. Government will have to prevent consumers
from doing something that they want to do and have the
means to do. Government will have to force sellers to
do something they would rather not do. Worst of all,
those who break these arbitrary rules will have to be
treated as criminals. Something seems amiss in a
country that pays lip service to freedom and yet must
treat peaceful citizens as criminals.

* * * * *

Christopher Mayer is an MBA student at the University
of Maryland. A version of this article appears in the
May 2000 issue of The Free Market.

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