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Pascal-Emmanuel Gobry on the fact that free markets fundamentally depend on government structure:
As much as I’ve enjoyed Megan [McArdle’s] spirited defense of pharmaceutical and medical innovation — and as much as I agree with her on the merits — at times she does sound too much as if the pharmaceutical industry as it exists today is an unadulterated free market. In her Bloggingheads with Mark Schmitt, even though I was hootin’ and hollerin’ when she excoriated Schmitt’s attacks on Big Pharma as crypto-socialist, I couldn’t help but take Schmitt’s point that Big Pharma as it currently exists was created and is made possible by the government. Leave alone the FDA approval process — the pharma business is based on patents and copyright, which are government created and enforced institutions if there ever were. When pharma companies pay off generics companies not to bring generics to the market, that is a voluntary transaction between private entities, and yet it is the opposite of a free market. It is, in fact, cartel formation. And it begs for big bad government to come in, perhaps with black helicopters, take people to court and slap big fines.
The question of health care reform vis à vis the healthcare and pharma markets is not whether to leave the market intact or not. It’s how do we structure a market so that the incentives are aligned in a way that serves consumers best.
Right now, it’s arguable that government ground rules give pharmaceutical companies too little incentive to innovate. If FDA regs forced them to demonstrate more than just superiority to a sugar pill, drug company incentives might be aligned a little more strongly toward finding genuinely effective new therapies instead of yet another statin or ED pill or a slightly different heartburn formulation.
Or maybe not. It’s an argument worth having. But the current system is by no means the free market juggernaut conservatives like to pretend it is. Changing the ground rules might very well increase innovation, not stifle it.