Right in the Short Run

Dean Baker has something to say about Thailand’s decision to invalidate patents on certain AIDS and cancer drugs:

Newsweek has an article this week about Thailand’s decision to issue compulsory licenses for a number of important drugs. By eliminating patent monopolies on several AIDS drugs, as well as a few other medications, Thailand was able to reduce prices by close to two-thirds.

Naturally, the drug industry is furious over the possibility that their patent monopolies may not be protected. Newsweek apparently shares the drug industry’s anger, telling readers that “advocates of free trade see Thailand’s move as a big threat.”

Actually, any real advocate of free trade, almost by definition, would have to applaud Thailand’s action. After all, the Thai government is eliminating a government imposed monopoly and allowing drugs to sell at prices that are much closer to their free market level.

Dean is right that free trade and patents have nothing to do with each other. If anything, patents inhibit free trade by restricting the legal flow of generics. But so what? Advocates of free trade rarely advocate that everything should be traded freely. By Dean’s logic, free traders are hypocritical if they think hard drugs should be illegal. And that would make for a lot of hypocrites.

As for the utility of invalidating patents, there are problems with this method of making treatment cheaper. Holding the selection of drugs fixed, invalidating a drug’s patent enables a nation to produce the drug cheaply and treat its citizens better. But what about over time, when the potential profitability of drugs drives research decisions, and ultimately the selection of drugs available to treat diseases?

The expected profits of research come mainly from the developed world, where countries are rich enough to pay the high prices that pharma charges for its medications. Developing countries are usually too poor to pay very much, and even if they might be able to pay, they may invalidate patents to avoid pharma’s markups. (To pharma, the possibility that countries refuse to honor patents simply reduces expected profitability.)

I’m sure Dean would agree that some relatively inexpensive research could provide enormous benefits for the developing world. For example, research might find AIDS drugs that were better suited to environments with few doctors, or medication that did a better job of protecting children against malaria. But these drugs would have no market in the developed world. Pharma sees no profitability coming from developing world specific treatments, and so pharma doesn’t bother spending money on research that would alleviate developing world problems.

Dean would probably respond that the government should be doing this research. Actually, I agree with Dean that having the government doing R&D could be an avenue of getting cheap new drugs for the poor. But invalidating patents doesn’t help the government do research, and it hurts the long run usefulness of the private sector in producing life-saving medication.

(PGL at AngryBear has some commentary as well.)