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Innovation

Some more on Leif Wellington Haas' ideas from Brad Plumer who really just starts riffing on the theme of medical innovation and makes some good points. I've read enough Hayek, though, to get wary when I hear things like "Where and how should we be steering medical innovation?" Market mechanisms are almost always satisficing strategies that don't really produce the optimum result. It's easy enough to look at a set of outcomes and say, "but really it would be better if we had this and this." You can even dust off the classics of market failure like the QWERTY keyboard. The question, however, becomes not "would really, really smart, benevolent government agents have done better?" but "would an actual public sector system run by actual people and subject to actually existing political controls do better?"

For example -- having big swathes of forests controlled by a federal agency sounds like a good idea when it's being proposed by an administration that's proposing it because they sincerely want to conserve trees. It starts looking less good when you consider that every once in a while, George W. Bush becomes president and uses public sector control of natural resources to provide his corporate supporters access to them at sub-market prices, thus leading to more-rapid depletion than you would have had under a property rights plan.

May 25, 2005 | Permalink

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Comments

Careful Matt,
Your libertarian is showing.

Posted by: WillieStyle | May 25, 2005 9:53:53 AM

While your points are well taken, surely the history of medical research suggests that the market is much worse at *important* innovation than the actually exiting state (or other non-market bodies). If it's not a condition that affects rich Americans, the market isn't interested. The vast majority of new (as opposed to reformulated or repackaged) medicines and vaccines come from state funded research, and the market has been hopeless at coming up with treatments for the "poor people's plagues" of malaria and AIDs.

Posted by: Ginger Yellow | May 25, 2005 10:02:14 AM

The question, however, becomes not "would really, really smart, benevolent government agents have done better?" but "would an actual public sector system run by actual people and subject to actually existing political controls do better?"

I think you are underestimating the role of apolitical technocrats here. Basic research funding (the vast majority of which comes from the government) is run by a technocratic beurocracy with little by way of market forces to infulence it.
The same can apply to medical innovation if the appropriate institutions are given adequate autonomy. The public sector system need not be subjet to the whims of every administration. Much as a bipartisan consensus has arisen that the Autonomy of the Federal Reserve Bank is a good thing, so too could a consensus arise that the New and Improved NIH should be free from manipulation by politicians.

Posted by: WillieStyle | May 25, 2005 10:19:34 AM

every once in a while, George W. Bush becomes president and uses public sector control of natural resources to provide his corporate supporters access to them at sub-market prices

This sort of thing was pointed out many years ago by P.J. O'Rourke when he wrote, "The Republicans are the party that says government doesn't work and then gets elected and proves it." I have to admit that the modern Republican penchant for partisan interfering with PBS, using federal land as a means of handing out favors to corporate supporters, etc. is just the sort of corruption that I find so odious in local city political machines and makes me tempted to think, "maybe the government shouldn't be involved here at all." Even in the private sector, who knows how much news organizations were shying away from hard-hitting coverage in the leadup to the Iraq war in order to curry favors with the administration's regulators?

That said, there are many structures in the government bureacracy to insulate many functions of government from the direct influences of elected politicians. On the other hand, Republicans may be inclined to view these structures as a bug, rather than a feature, and seek to strip them away.

Posted by: Constantine | May 25, 2005 10:27:41 AM

That true/false question you linked to on clear cutting a forest is bullshit. The correct answer of course is "depends". Is the cut lumber worth more or less than the land with the standing trees? So you don't have enough information to give an unequivocal true or false answer. That is a real question on a graduate level exam?

Besides, clear cutting of forests under "personal property" theories ignores all kinds of externalities and shifts some of the burdens onto the public (erosion, loss of habitat) that the landowner does not have to absorb.

Medicine is the same way. If the market is allowed to drive medical innovation, then we will always seek solutions that are the most profitable, which means treating sickness, not encouraging wellness. And without a doubt, encouraging wellness is the best policy from a public health standpoint.

Posted by: Freder Frederson | May 25, 2005 10:41:45 AM

Constantine writes:

That said, there are many structures in the government bureacracy to insulate many functions of government from the direct influences of elected politicians.

Such officials have existed in the past. In one era of history they went by various titles like Princeps, Imperator, Caesari, or Augusti, none of which had to care about the elected officials like consuls and the like had to say. Your comment handle is quite appropriate.

Posted by: j mct | May 25, 2005 10:44:03 AM

Such officials have existed in the past. In one era of history they went by various titles like Princeps, Imperator, Caesari, or Augusti, none of which had to care about the elected officials like consuls and the like had to say. Your comment handle is quite appropriate.

Clearly Allen Greenspan is the second coming for Caligula.

Posted by: WillieStyle | May 25, 2005 10:46:36 AM

Greenspan himself is an outlier for the 'independence' of the Fed since he's been in office (since 1987) for so long and gives the illusion he's in the job for life. If you want to see a real unnaccountable to anyone official, even to any notion of the 'law' as has become recently fashionable, you have to look at Supreme Court Justices. In'normal times, since the chairman need be appointed and approved by the Senate, it is far less 'independent' than the illusion Greenspan gives.

Posted by: j mct | May 25, 2005 10:51:25 AM

Greenspan himself is an outlier for the 'independence' of the Fed since he's been in office (since 1987) for so long and gives the illusion he's in the job for life... In'normal times, since the chairman need be appointed and approved by the Senate, it is far less 'independent' than the illusion Greenspan gives.

Better not say that shit around Paul Volcker. I hear he has a mean uppercut.

Posted by: WillieStyle | May 25, 2005 10:57:25 AM

I will say it again: my GP is currently spending a lot of her time "innovating" ways to get her patients the bog-standard tests and medications they need. If she wasn't spending her time doing this, do you think she just MIGHT be able to figure out more innovative methods of primary care?

Cranky

Posted by: Cranky Observer | May 25, 2005 11:14:16 AM

so too could a consensus arise that the New and Improved NIH should be free from manipulation by politicians

lol. You forget that the NIH's work is deeply entwined with issues of the CULTURE OF LIFE--no getting the politics out of that one anytime soon.

****
My understanding is that the QWERTY key board was intentionally designed to be less effective than optimal b/c technicians of the day were unable to create a typewriter that could function as rapidly as a typist could type with a more efficient keyboard. So QWERTY became the standard and that's what everyone learned, making the transition costs of a more efficient alternative high.

It strikes me that a lot of the "failures" we're concerned about strike me as an inability to either accurately predict future developments, or to take obvious future developments into account appropriately in decision making. So in a lot of these cases, it seems to break down to whether governments or private firms/individuals are better at predicting future consequences/events and which has incentives to account for them appropriately (neither too much nor too little).

In the past decade or so, incentives for both policymakers and business seem to be shifting to place more and more emphasis on the short term (next election, quarterly gains, etc) and reduced incentives to consider the longer term implications

Posted by: flip | May 25, 2005 11:21:34 AM

By the way, the QWERTY keyboard is not a market failure in any meaningful sense. Cecil Adams once addressed this, including a link to a Journal of Law and Economics paper by S. J. Liebowitz and Stephen E. Margolis. They review the evidence and find that ocne you filter out Dvorak advertising and rigged studies by a handful of Dvorak boosters, any advantage to that layout pretty well goes away, and also point out active advantages to the QWERTY layout.

Posted by: Bruce Baugh | May 25, 2005 11:25:00 AM

Thanks to Mr. Baugh for knocking down the common nonsense pertaining to keyboards.

Williestyle apparently has never heard of Arthur Burns.

The argument seems to be that purely government- directed medical technology development won't resemble the paradigm of purely government- directed military technology development because we really, really, really don't want it to. Go tell it to a Senator out trolling for votes.

Posted by: Will Allen | May 25, 2005 11:41:06 AM

Williestyle apparently has never heard of Arthur Burns.

I don't think I get your point.

The argument seems to be that purely government- directed medical technology development won't resemble the paradigm of purely government- directed military technology development because we really, really, really don't want it to. Go tell it to a Senator out trolling for votes.


What's wrong with purely government-directed military research? Seems to me that its astronomical contributions to the advancement of scientific research is one of many reasons to laud the defence department.

Posted by: WillieStyle | May 25, 2005 11:47:29 AM

Williestyle, the point is that one cannot use the example of Alan Greenspan to prove that the Fed can be run independent of political pressure, without also accounting for the example of Alan Burns acting as a one-man wrecking crew of the American economy, at the behest of Richard Nixon. Volcker, a Carter nominee, credits Reagan for not attempting to pressure him while he administered the extremely harsh medicine that was needed. There is no reason, however, to suppose that Reagan will be more emulated than Nixon by future elected offcials. The Fed is extremely susceptible to pressure from politicians, if the politicians seek short term political benefits to the detriment of the long term health of the American economy. It is rare that a Greenspan will be in the chair long enough to hold the prestige needed to stand up to determined popular politicians.

As far as military technology development, if you think it best to have medical technology development contracts awarded on the basis of which Senator holds the committee chair that funds such development, well, I guess you can advocate that. The U.S. is the clear leader in military technology because it allocates capital for such purposes with a firehose, while everybody else uses an eye-dropper, not because it allocates capital for such purposes very wisely or efficiently.

Posted by: Will Allen | May 25, 2005 12:22:50 PM

Williestyle, the point is that one cannot use the example of Alan Greenspan to prove that the Fed can be run independent of political pressure, without also accounting for the example of Alan Burns acting as a one-man wrecking crew of the American economy, at the behest of Richard Nixon. Volcker, a Carter nominee, credits Reagan for not attempting to pressure him while he administered the extremely harsh medicine that was needed. There is no reason, however, to suppose that Reagan will be more emulated than Nixon by future elected offcials. The Fed is extremely susceptible to pressure from politicians, if the politicians seek short term political benefits to the detriment of the long term health of the American economy. It is rare that a Greenspan will be in the chair long enough to hold the prestige needed to stand up to determined popular politicians.[Emphasis mine]

My point is that there is reason to believe that Reagan will be emulated. That reason is that there is now a bipartisan consensus that Fed independence is vital. You overestimate the importance of "prestige". Greenspan wasn't "Greenspan" in 1991 when he tightened monetary policy to the chagrine of political operatives in the GHWB's administration. And one should note that Carter didn't attempt to interfere with Volcker either, despite plenty of incentive to do so. Recent history has shown that it is possible to have important institutions independent of political manipulation. Not easy, not inevitable, but possible, and certainly worthwhile.

As far as military technology development, if you think it best to have medical technology development contracts awarded on the basis of which Senator holds the committee chair that funds such development, well, I guess you can advocate that. The U.S. is the clear leader in military technology because it allocates capital for such purposes with a firehose, while everybody else uses an eye-dropper, not because it allocates capital for such purposes very wisely or efficiently.

Should I assume that you speak from personal experience? Over the past several years, I have had personal experience in with the Defence/Science department and the allegation that Senators micromanage research grants strikes me as sheer fantasy. I currently work for a Defence Department Research Laboratory and individual grant process is overseen by our in-house experts along with the kind folks at DARPA. The process is as apolitical as one could ask for. Perhaps you could give some examples of politicaly influenced research (as upposed to appropriations) funding?

Furthermore, having worked under many eminent minds in Photonics research, I think you'll be hard-pressed to find any experts (whether at universities, gov't labs or private labs like Lucent) who would advocate anything other than more participation by the gov't in research.

Posted by: WillieStyle | May 25, 2005 12:58:45 PM

Even if health-care delivery were completely socialized in every country of the world, medical innovation would not controlled by government bureaucrats. The thing is, there are hundreds of countries. If a drug company invents a useful drug, then there will be a market for it. Maybe not every country will supply the drug, but most will. If it's really useful, then social pressures will cause it to be available in every country.

Posted by: Josh Yelon | May 25, 2005 1:11:52 PM

A+

Posted by: Will Wilkinson | May 25, 2005 1:12:27 PM

Of course, it would be possible for a country to *supplement* market-driven development, by (for instance) giving grant money to universities. As they do now.

So nothing would change at all.

Posted by: Josh Yelon | May 25, 2005 1:16:56 PM

I would also have to question how much innovation is going on at big pharma. Typical cycle is to develop a new drug, market it to the end of its patent life (no problems here), then develop a sustained release version and patent that, then develop a minor variation that does essentially the same thing but 5% better and patent that, then market market market like hell at enormous cost, and finally license to a generic manufacturer just as the sales turn down on the branded product. Of those activities only the original new drug development could possibly be considered innovation - all the rest could be done by the generic companies at minimal cost.

Cranky

Posted by: Cranky Observer | May 25, 2005 1:35:21 PM

Willie, your dilineation between research and appropriations is a false one. The DOD has for two decades been funneling dollars to Boeing for an aircraft that keeps falling out of the sky, for no other reason than the Marines and members of Congress having a mutual narrow interest in maintaining the program, not that the Osprey program is a good use of capital. Los Alamos is a chronic mismanager of capital, but the combination of the University of California having the contract, and a powerful U.S. Senator from New Mexico, protects it from meaningful change.

As to you assertion that "recent history" establishes that it is "possible" to have institutions independent of political influence, well, yes, recent history establishes that many, many, things are "possible". The problem is that "recent history", being recent, does not provide enough data points to tell us how likely it is, which means that it is just as possible that the trend will not continue. There is no empirical reason to believe that Carter and Reagan will be more emulated than Nixon. It is simply a wish, and, furthermore, the damage that can be done by one unduly influenced Fed Chairman is not simply cancelled out by an equal amount of time served by another Fed Chairman.

The consensus you speak of regarding the independence of the Fed is not a consensus in the way that matters most; that it is broadly and enthusiastically supported by the population. Most of the electorate only has a very, very, vague notion of the Fed, if any thoughts at all. There is a consensus among knowledgeable people that agriculture subsidies are very damaging to the economy as a whole, and to our foreign policy as well. That consensus, however, is meaningless in the face of members of Congress which desire to purchase votes. If purchasing votes can be accomplished by funneling money to employers with government research contracts, regardless of how that money is used, there is substantial evidence, recent and old, to think that is what members of Congress will do.

Finally, I have no doubt that the people you work with would appreciate more government funding, and for all I know, they should get it. I'm not opposed to government funding of basic research, but I think it is naive to think that political bodies can provide the benefit of capital without the costs inherent in that type of capital allocation.

Posted by: Will Allen | May 25, 2005 1:44:36 PM

Why do folks perceive government as some abstract entity when, in reality, it is the sum of multiple influences that can be traced, in one way or another, to individual choices? Sure, government is not perfect, but neither are the so-called free economic markets. And sure, there is institutional inertia and agency, but representative government is the product of social and political markets, so why do government decisions have to automatically be inefficient or somehow inferior to economic markets?

Posted by: hyh | May 25, 2005 1:47:18 PM

The problem, hyh, is that government decisions are backed with the implicit threat of violence, which can compel continued allocation of capital, even if that contined allocation does not serve people well. The shareholders, employees, and vendors of Archer Daniels Midland continue to receive capital from the taxpayers of the United States, not because the taxpayers of the United States are conciously pleased with the benefits they receive from allocating capital to the shareholders, employees, and vendors of Archer Daniels Midland, but only because the shareholders, employees, and vendors of Archer Daniels Midland have disproportionate political influence to the rest of the electorate.

The Bureau of Indian Affairs has been a cesspool of corruption and embezzlement for decades, and has served the people it ostensibly is supposed to directly benefit, aboriginal Americans, very poorly. Because it has the coercive power of government behind it, however, it is a bureaucracy that survives, no matter what.

In contrast, Enron, despite massive fraud, no longer exists, because it eventually could no longer convince individuals to voluntarily supply more capital, and had no disproportionately powerful part of the electorate which forced the taxpayers to do so. Montgomery Wards, because it could not please enough people who bought their goods and services, and couldn't compel anyone to do so, no longer exists.

Does this mean that private eneities are automatically surperior in providing all goods and services? No, of course not. It is inevitable, however, that the state's ability to acquire more capital by force, and not being reliant on obtaining it by voluntary transaction, means that stste-funded enterprises will carry sclerotic costs which must be acounted for, just as externalities must be accounted for when evaluating a good or service provided by a private entity.

Posted by: Will Allen | May 25, 2005 2:20:46 PM

Typical cycle is to develop a new drug, market it to the end of its patent life (no problems here), then develop a sustained release version and patent that, then develop a minor variation that does essentially the same thing but 5% better and patent that, then market market market like hell at enormous cost, and finally license to a generic manufacturer just as the sales turn down on the branded product.

The whole scenario you described is an artificial one, engineered entirely by government patent policy. Where intellectual property is concerned (see also the copyright wars), I'm starting to think there's no such thing as a free market.

Posted by: digamma | May 25, 2005 3:49:57 PM

"I would also have to question how much innovation is going on at big pharma. Typical cycle is to develop a new drug, market it to the end of its patent life (no problems here), then develop a sustained release version and patent that, then develop a minor variation that does essentially the same thing but 5% better and patent that, then market market market like hell at enormous cost, and finally license to a generic manufacturer just as the sales turn down on the branded product. Of those activities only the original new drug development could possibly be considered innovation - all the rest could be done by the generic companies at minimal cost."

That's a distorted market. If you can't get the FDA to approve your drug, you can't sell it at all... every penny you spent on it gets flushed down the toilet. If, on the other hand, you come up with something very similar to something the FDA has already approved, your risk of losing the whole investment goes down and it's a lot easier to justify the project.

Posted by: Ken | May 25, 2005 4:12:49 PM

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