Friday, October 07, 2005

U.S. Drugs, Canadian Prices

Re: So Much For American Sovereignty

Well, I must say, that was a pretty funny article. Not intentionally so, perhaps, but funny nonetheless.

Let's deal with patents first. Patents are not some sort of god-given right. An application for a patent is a request that the government interfere in a free market by creating an artificial monopoly.

In a genuine free market, there would be no patents, because there would be no enforcement of them. If someone else can, say, grow wheat more cheaply, make hamburgers more efficiently, or produce the same drug you do at half the cost, then they are free to do so.

Patents are established in order to encourage the development of new products - more government interference in the marketplace. They are a recognition that the development costs will not be undertaken without a certain reward. So the government agrees to allow, via the artificial monopoly, the producer to earn more than the free market would normally bear.

Now what has happened is that industry has successfully lobbied for extensions on these patents. Moreover, significant demand for new drugs has allowed them to dramatically increase prices (remember, price is not set according to 'cost of production' but by 'willingness to pay').

In other nations, such as Canada, governments were subjected to similar lobbying pressures. For example, over the last ten years, the pharaceutical industry twice managed to convince the Canadian government to extend patent protection.

But the Canadian government, while agreeing to interfere in the marketplace as requested by the pharaceuticals, determined that the cost of unregulated price increases would impose too much of a burden both on its public health care system, which is funded by the taxpayers, and by individual purchasers, for drugs not covered under the plan.

So they made a deal. The pharaceuticals would get their patents, open research facilities in Canada (a promise never kept), and agree to be subject to a ceiling on prices. Thus, the Canadian government agreed to interfere in the marketplace on behalf of (mostly American) pharaceutical companies, allowing them to recoup their research costs, but held that this reward should not be unlimited.

The pharaceuticals agreed. What choice did they have? Canada has an advanced pharmaceutical industry. Manufacturers in Canada can fairly easily produce the same drugs as their American counterparts; the only thing stopping them are the patents prohibiting production. If the Americans companies rejected the deal (and, remember, nobody is forcing them to sell in Canada) then they would get no sales in Canada.

Canadians look at U.S. drug prices and roll their eyes. Any artificial monopoly, and especially one on a basic service, is subject to regulation. Why the American government would allow drug prices to soar beyond the ability of most people to pay for them was, to Canadians, a matter of puzzlement and amazement.

Perhaps they believe, like the author, that a limit on drug prices is some sort of 'transfer of wealth'. In a way, I suppose, it is a transfer of wealth - just as criminal law 'transfers wealth' from the mugger to the person who gets to keep his own wallet.

It is, in other words, ridiculous to talk about a transfer of wealth in an area where legislation already applies. Were the pharaceutical industry completely free of government regulation, then such an argument might apply. But with extensive government intervention through the creation and protection of patents, if there is a transfer of wealth, it flows from the purchaser to the vendor.

So there we have it. U.S. markets are not 'held hostage' to foreign political pressures. Nobody in Canada cares how the United States prices drugs. If there is importation of drugs from Canada to the United States, that's the Americans' problem. Don't like it? Just add a tariff - U.S. governments have had no hestitation to do so, even illegally, in other areas, such as wheat, softwood lumber, and more.

The fact is, American governments are not willing to stem the flow of imports, because their constituents would not stand for it, and are instead banking on a (well-funded) campaign of lobbying and intimidation in those countries to get them to abandon both price controls and the interests of their own citizens.

Meanwhile, at home they propagandandize in TCS about patents being 'free market' and price regulation being a 'price transfer' - a logically and intellectually dishonest campaign of disinformation.

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