Pilon on Patents

I blogged elsewhere the “Palmer on Patents” post below a couple years ago. In the post, I mention a minor scandal back in 2003, when some of Cato’s scholars (Doug Bandow and Michael Krauss) came out in favor of restrictions on free trade based on the notion that reimportation of drugs would allow consumers to avoid some of the monopoly price charged due to the US patent system. Cato’s adjunct scholar (and utilitarian) Richard Epstein has also argued in favor of patents, especially in the field of pharmaceuticals, and on this ground also opposed reimportation. Thus, as I had noted previously, support for intellectual property rightsleads once again to the undermining of genuine private property rights, such as the right to trade.

The call for restrictions on free trade caused an outcry in the libertarian community, prompting Ed Crane and Roger Pilon to meekly disavow¹ Bandow’s and Epstein’s protectionism. As I noted previously, it was interesting that this piece apparently endorses ‘the need for drug patents to encourage R&D’. Once again, I am struck that Pilon could author such words. How could Pilon endorse such a utilitarian, wealth-maximization approach to policy, given his principled, deontological, non-utilitarian, rights-based libertarianism? (as evidenced in his 1979 Georgia Law Review article ‘Ordering Rights Consistently: Or What We Do and Do Not Have Rights To’ and his 1979 University of Chicago Ph.D. dissertation, ‘A Theory of Rights: Toward Limited Government.’)

Palmer on Patents

Tom Palmer’s recent comments about patents are interesting in view of his previous publications about intellectual property.

First, around 15 years ago, Palmer published two law review articles (Intellectual Property: A Non-Posnerian Law And Economics Approach and Are Patents And Copyrights Morally Justified? The Philosophy Of Property Rights And Ideal Objects) arguing against patent and copyright and also critiquing the wealth-maximization ‘law and economics’ approach of Richard Posner. Note that he opposed patents on principled grounds, and rejected the wealth-maximization approach. E.g., as he noted in the first article (p. 303),

A jurisprudence that claims to be based on “law and economics” but that would constructively assign or rearrange rights as part of a strategy to achieve some pre-determined outcome (maximization of utility or of wealth, for example) overlooks the analogy between the spontaneous order of the market and the spontaneous order of a legal system.

I.e., according to Palmer, Posner’s wealth-maximization framework would lead to the rearranging of property rights to try to maximize wealth. Something he presumably opposes.

Anyhoo, back in 2003 some of Cato’s scholars (Doug Bandow and Michael Krauss) came out in favor ofrestrictions on free trade based on the notion that reimportation of drugs would allow consumers to avoid some of the monopoly price charged due to the US patent system. Cato’s adjunct scholar (and utilitarian) Richard Epstein has also argued in favor of patents, especially in the field of pharmaceuticals, and on this ground also opposed reimportation.  Thus, as I have noted previously, support for intellectual property rightsleads once again to the undermining of genuine private property rights, such as the right to trade.

This call for restrictions on free trade caused an outcry in the libertarian community, prompting Ed Crane and Roger Pilon to meekly disavow Bandow’s and Epstein’s protectionism. Interesting, this piece apparently endorses ‘the need for drug patents to encourage R&D’–this apparent endorsement of a utilitarian, wealth-maximization approach to policy seems to conflict with Pilon’s principled, deontological, non-utilitarian, rights-based libertarianism–as shown in his 1979 Georgia Law Review article ‘Ordering Rights Consistently: Or What We Do and Do Not Have Rights To’ and his 1979 University of Chicago Ph.D. dissertation, ‘A Theory of Rights: Toward Limited Government.’

In recent posts Palmer appears to bend over backward to soften his previous principled anti-patent stance so that he does not conflict with other pro-patent Catoites–apparently now including Krauss, Bandow, Epstein, Crane, and Pilon. Writes Palmer:

I’ve been critical of the patent system in the past. Mr. Brady has given me a quiz about whether I conform to his vision of right-thought or have drifted further into thought crime[,] as he defines it. I am not a fan of the patent system and think we could generally live well without it. (I’ve posted a few articles on my web site indicating why.) The one exception to that general hostility to patents, as I have suggested elsewhere, is the system of patents for chemicals, notably pharmaceuticals. Because chemical compounds are relatively easy to reverse-engineer and can be successfully marketed independently of their role in a larger product (unlike, say, innovations in jet engine design, which often are only valuable as part of a kind of engine), patents may indeed generate incentives for innovation that greatly improve human welfare. That’s an argument for them. Since the innovation has the characterstics of public goods (costly to exclude and non-rivalrous in consumption, the latter being the relevant feature here), a good profit maximization strategy ought to be price discrimination, by which those who can pay more do so and others pay less.

Re the ‘public goods comment–note in the ‘Non-Posnerian’ above piece Palmer’s sensible criticisms (pp. 284-85) of the coherence of the very notion of public goods.  As for the ‘suggested elsewhere’ comment, he must be referring to this post, where he writes:

Pharmaceuticals and chemicals offer undoubtedly the best cases for patent protection on utilitarian grounds. In my Hamline Law Review article …, p. 301, I quoted from a study by Edwin Mansfield from the American Economic Review in which he pointed out that ‘patent protection was judged to be essential for the development or introduction of one-third or more of the inventions during 1981-1983 in only 2 industries — pharmaceuticals and chemicals.’ That seems not to have changed. The reason is pretty easy to understand: reverse-engineering in the case of chemicals (which broadly includes pharmaceuticals) is quite easy. In the case of pharmaceuticals, at least, R&D costs are very high and would still be high even without some of the very costly efficacy tests imposed by the Food and Drug Administration. Furthermore, the benefits of new pharmaceuticals are enormous. If one were to make a case for patent law, that’s the strongest industry for which to make it.

Palmer has elsewhere rejected the wealth-maximization approach, so what does it matter that pharmaceuticals is the ‘best case’ that can be made under this approach? Why does he say the case of patents for pharmaceuticals is ‘one exception to‘ his previous ‘general hostility to patents,’ when this case is utilitarian and wealth-maximization based, an approach he has rejected (and presumably he still maintains that even under the wealth-maximization approach the case fails).

Note how snippy he is to Mark Brady’s questions to him about patents–’Mr. Brady has given me a quiz about whether I conform to his vision of right-thought or have drifted further into thought crime[,] as he defines it.’ It is as if Palmer is annoyed that in response to his seemingly pro-patent comments, his previous principled and anti-patent writings are being waved in his face. Given so many of his colleagues’ utilitarian endorsement of patents, is Palmer now embarrassed by his previous opposition to both? Is he trying to say that he is still principled, and anti-patent, but that the dominant pro-patent, utilitarian approach of prominent Catoites is ‘respectable’–or that he has (sort of?) softened his ‘hostility’ to this approach? It wouldn’t be the first time Palmer’s views have ‘evolved‘.

Archived comments:

Max September 29, 2007 at 6:00 am

That all sounds very nice and principled. However,

the development of new drugs costs on average $ 200,000,000. Without a patent, anybody is able to copy and sell the drug without the costs of investment. Who is willing to invest hundred millions of dollars for developing a new drug without a chance for profits? And in consequence, how many people are going to die because medical treatments are lacking for certain diseases?

David C September 29, 2007 at 4:26 pm

Max, new drugs cost millions of dollars to develop precisely because of FDA regulations, and because patents make it impossible for researchers to collaborate without placing incredible risks on the company that sponsors them. (eg, a competitor could get a patent first and lock them out) This forces all pharmaceutical R&D to reinvent the wheel, and creates insane barriers to entry for the entire industry as a whole. In addition, drug patents have a nifty side effect of causing the industry to shun alternative cures and medicine. Since the companies have a vested interest in their patent monopoly, that also means that they must be willing to spend large amounts of money and resources to promote it (eg marketing costs).

Besides, forbidding 15 million people in Africa who are dying of AIDS from making their own generics in the name of patent monopolies is genocidal and unforgivable. Not to mention, millions of seniors in the US who are exposed to “cures” with harsh chemical side effects that have no logical reason to be there accept for the patentability of it. Those mega pharma lawsuits you hear about every few years? There’s a reason for that. “Nice and principled” indeed.

Edgar729 September 30, 2007 at 9:31 pm

Max,

Here is a write up by a value investor who has made 29% returns for 7 years by investing in companies with great fundementals. One of those companies is an Indian pharmecuetical company that has an annual R&D budget of something like 30 million dollars. Yet! They have more drugs in the pipeline than american pharmecuetical companies, their labs are up to FDA standards (for what thats worth, and thier drugs are in american markets. They are also traded at the NYSE.

The average markup on every drug is something absurd (when I find the figure I will post it). This company is a “great” company just becaus they are allowed to create drugs in a less regulated market. They produce many times the drugs of Big Pharma here in the U.S. and their drugs are of comprable quality if not greater.

Remove the regulations, patent protections, and everything else and there will be more drugs to serve more needs than ever before and at incredibly low prices.

God bless! Ron Paul 2008!

BTW, this company seems to merit a fuller description and post in Mises, right?

Edgar729 September 30, 2007 at 9:39 pm

lol I forgot to post the link!

http://www.valueinvestorsclub.com/value2/guests/view-thread.asp?delay=90&id=1621&more=dtrue

Brock October 1, 2007 at 12:02 pm

The Cato Institute’s libertarian advocacy is based on supporting the corporate power structure and not on a pro-freedon ethical system? How absolutely shocking.

Robert M. October 1, 2007 at 5:16 pm

David: “Besides, forbidding 15 million people in Africa who are dying of AIDS from making their own generics in the name of patent monopolies is genocidal and unforgivable.”

Sounds like a utilitarian arguement to me.

“Not to mention, millions of seniors in the US who are exposed to “cures” with harsh chemical side effects that have no logical reason to be there accept for the patentability of it.”

If you believe in the market, then if people didn’t like the side effects, or had heard of bad side effects, they would take an alternative. Oh, wait, the reason that they take those medicines is because they actually work and there is nothing else (patented or not) that works as well. Therefore if there is nothing else like it, there is no need to add any patentability to it.

Good for the Indian company to make huge profits off of selling generic drugs to new markets and using those profits to fund research for drugs to help common conditions. Now for Econ 101: When other people see how much they are making, they will start their own generics, therefore driving the price down. This will eventually lead to a profit-less industry with no left over money to research even common diseases, much less rare ones.

We all agree that the FDA should be done away with, but claiming that all of the costs of research come from the FDA is extremely naive. There is no way that selling a few drugs before the generic comes out will cover all of the overhead that is unavoidable with research.

DC October 3, 2007 at 9:14 am

Robert M writes:

Good for the Indian company to make huge profits off of selling generic drugs to new markets and using those profits to fund research for drugs to help common conditions. Now for Econ 101: When other people see how much they are making, they will start their own generics, therefore driving the price down. This will eventually lead to a profit-less industry with no left over money to research even common diseases, much less rare ones.

You must be talking about Econ 101 from a state university, since that description is falsified by just about every industry out there. Industries don’t become “profit-less” over time, unless they are superseded by something better or the government steps in. There are fewer profits to be made as more people flock to the industry trying to make a buck. . .but this has the net effect of increasing innovation and productivity, not decreasing it. (I think they admit even that in state schools.)

Your implicit argument that artificial scarcity is needed in the drug industry so that people will do what is “best” (and what they otherwise wouldn’t do) is strangely familiar. . .

http://jim.com/econ/chap07p1.html

Also, you wrote this in response to someone else’s argument:

“Besides, forbidding 15 million people in Africa who are dying of AIDS from making their own generics in the name of patent monopolies is genocidal and unforgivable.”

Sounds like a utilitarian arguement to me.

No, sounds like a moral argument to me. Were you equating ‘using a number in the argument’ with ‘utilitarianism’?

Update: see also Cato vs. Public Citizen on IP and the TPP