Government Warping Markets
Economist Veronique de Rugy writes at AIER about how markets specialize in finding and fixing failure.
First she quotes Nobel Prize-winning economist F.A. Hayek:
We are only beginning to understand on how subtle a communication system the functioning of an advanced industrial society is based -- a communications system which we call the market and which turns out to be a more efficient mechanism for digesting dispersed information than any that man has deliberately designed.
She continues:
Here are a few of these complaints that we hear on a regular basis: "Everyone should have more access to low-cost health care at low cost!" "All small businesses should be better able to find low-interest loans!" "Wages aren't growing fast enough!" "College shouldn't cost so much!" In view of these problems, the market must be failing, and we need the government to fix the problems.People who issue these and similar complaints don't understand the truth to which these quotes allude -- namely, that the market is a process of exchange through which order emerges rather than a static snapshot or outcome of exchange. A well-functioning market is one in which order emerges out of the peaceful and voluntary interactions of many strangers guided by the information carried by prices. A well-functioning market can't be judged by the outcomes of exchange at a certain point in time and by comparing that outcome against the desires of policy makers or pundits.
In other words, the fact that everyone doesn't have paid leave, or that wages aren't growing as fast as people would like them to, or that college is pricey, doesn't mean there is a market failure. In most cases, it simply means that there is a gap between what people think the world should look like and what it really looks like.
...When any particular outcome emerges from the market process that is not suitable for market participants, the market will adjust and, sooner or later, produce another, better outcome. By contrast, government failures are rarely improved with adjustments.
Government makes our lives worse more than most of us are willing to admit.
For example, here's Scott Alexander at SlateStarCodex on drugs and drug pricing from his trip to the APA (psychiatrists') conference:
The seventh thing you notice at the American Psychiatric Association meeting is that many of the new drugs are ridiculous.It's hard to blame pharmaceutical companies for this. The return on investment for pharma R&D is rapidly shrinking - drug discovery is too expensive to consistently make money anymore.
Rather than give up and die, pharma is going all in on newer, me-too-er me-too drugs. The current business plan looks kind of like this:
1. Take an popular older drug
2. Re-invent it, either with a minor change to the delivery mechanism, or by finding a similar molecule that works the same way
3. Call this a new drug, advertise the hell out of it, and sell it for 10x - 100x the price of the older drug
4. Profit!
Consider Lucemyra®:
It's an alpha-2a receptor agonist used to treat acute opiate withdrawal. Alpha-2a receptor agonists are a fine choice for acute opiate withdrawal, but we already have one that works great: clonidine. Clonidine costs $4.84 per month. Lucemyra® costs $1,974.78. Is there any difference at all between the two medications? Some studies suggest maybe lofexedine can cause less hypotension, but realistically we throw random doses of clonidine at ADHD kids all the time, so it's not like clonidine-induced hypotension is some kind of giant menace which will destroy us all.
I asked the Lucemyra® representative why I might prescribe Lucemyra® instead of clonidine for opiate withdrawal. She said it was because Lucemyra® is FDA-approved for this indication, and clonidine isn't. This is the same old story as Rozerem® vs. melatonin, Lovaza® vs. fish oil, and Spravato® vs. ketamine. As long as doctors continue to outsource their thinking to the FDA approval process, in a way even the FDA itself doesn't endorse, pharma companies will be able to inflate the prices of basic medications by a thousand times just by playing games with the bureaucracy.
"As long as doctors continue to outsource their thinking to the FDA approval process, in a way even the FDA itself doesn't endorse ..."
But the courts do endorse it. And given the costs of malpractice (both suits and insurance against it) that is a reasonable choice to make.
Back on the general topic, one place markets tend to fail is when significant costs can be externalized. Understandably so. If you don't have to pay you don't really care how much it costs. Which is what government support is all about. Why have people taken out huge loans for degrees that can't hope to pay back that loan? And for that matter why did anyone loan them the money knowing full well they never would get paid back? Government. The government doesn't have to care about getting paid back. It doesn't have to care if this is a good idea or a bad one, to make a profit or not. Which is why most government intervention leads to inefficiency and higher costs.
Ben at May 26, 2019 5:51 AM
"...but realistically we throw random doses of clonidine at ADHD kids all the time, so it's not like clonidine-induced hypotension is some kind of giant menace which will destroy us all."
Dumb. No, we don't "throw random doses of clonidine at ADHD kids all the time" - and it's true that clonidine-induced hypotension is not "some kind of menace which will destroy us all".
Clonidine is very effective for lowering blood pressure quickly. That's definitely something to be concerned about, especially when it's a side effect. People going through opiate withdrawal who are dehydrated and hypotensive already, and kids whose blood pressures are already low to begin with, may not be able to tolerate much of a drop in blood pressure. Where I work we check blood pressure before we give clonidine - every single time. If we don't, eventually something bad will happen.
Clonidine is sometimes used for ADHD, but the doses are definitely not random. Guanfacine, another alpha-2 receptor agonist, which is available in an extended release formulation, is way more popular for that.
Lofexidine (aka Lucemyra) doesn't work all that well for lowering blood pressure. Everything else works better. That's probably why almost no one uses it for that, even in the UK where it's been available for almost 30 years; and why they quit using it in Germany 25 years ago. It works better than clonidine for reducing the symptoms of opiate withdrawal; and the side effects are fewer and less severe. So it's safer.
Most healthcare organizations that do opiate detox use clonidine because... well... profit. If an insurance company that pays... or a business that gets paid... to detox an opiate addict... and lofexadine costs $2,000 and clonidine costs $10... it's a no-brainer: the patient will get clonidine.
Eventually the U.S. patent on Lucemyra will expire and lofexidine will be available as an inexpensive generic. And then there will be better, cost-effective treatment for opiate withdrawal.
Ken R at May 26, 2019 11:49 AM
A good example of the market working is the grocery store. There was a market for diabetic foods, salt free foods, gluten free foods, organic foods, weird asian veggies, and now my corner grocery carries all of these.
If you find a true market failure always always (intentional repeat) look to what the gov is doing. In the medical field, the gov provides the $ for the internships that all docs need and thus they cap the number of docs (in a roundabout way) and when there is a shortage prices go up. In addition, there are local regs for "certificates of medical necessity" if you want to open a MRI center or something--on the opposite understanding from how competition works, creating another shortage. As many have noted, elective procedures (nose jobs, liposuction) have risen in price much slower than insured procedures. Gov also imposes all sorts of regs and paperwork on docs and hospitals--costing money.
cc at May 26, 2019 6:24 PM
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