Arnold Kling  

Regulation and Industry Structure

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Milton Friedman argues that the drug-approval process is the problem.


On the drug side, what seems to me to be the most serious situation is the extent to which the Food and Drug Administration makes it extremely expensive to produce a drug, and you can understand why. The FDA is required by law to certify the safety and the effectiveness of new drugs that are offered for sale on the market. Now, you're an employee of the FDA. If you turn down a drug which might've saved millions of lives, nobody's going to know about those millions of lives, nothing's going to happen to you. If you on the other hand approve a drug which turns out to have bad effects, the classic case is one of Thalidomide, you're going to be the subject of reproach, your job's going to be lost, etc.

...In my opinion, the one big development you could make would be to go back to what the situation was before, to have the FDA certify safety, which itself raises difficulties. But not efficacy. And let the market itself work in determining efficacy. And that would change the situation altogether. It would lead to a much larger number of small pharmaceutical companies, it would lead to much more innovation and development and to much lower prices for pharmaceutical drugs.


The symbiosis between heavy-handed regulation and big business, to the detriment of small firms, is also the subect of a post by David Masten.

We have a marginal company that faces a regulatory burden and needs to make a profit. They have accepted that the "people" want regulation, so they are going to be "reasonable" and "responsible" corporate citizens and help develop regulation. Preferably regulation that costs more to the competition than themselves. Do you see where I am heading? By actively working for regulation they can get good PR while locking out competition. As a bonus, the quality of product is fixed at the level specified by the regulation, and the company has reduced costs associated with legal claims about the safety of their product.

The end result is a huge company that would not be able to exist at all in a free market that is now able to dominate the market because of regulation. This has occured in automobiles, banking, insurance, and aviation amongst others. Big business requires big government to exist.


Actually, there are many small businesses that have become reconciled to and dependent on regulation. Real estate brokers, pharmacists, doctors, and others use licensing rules to capture rents.

For Discussion. What other articles have you seen on the role played by regulation in affecting industry structure?


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COMMENTS (1 to date)
Bernard Yomtov writes:

I don't agree that letting the "market" determine efficacy is such a great idea. As so often, the libertarian solution overlooks significant information costs.

How, exactly, will the market determine efficacy? Presumably by giving the drug to people and seeing whether it works. So the patients are being used, without their consent, as experimental subjects. The ones who get an ineffective new drug instead of some better treatment are harmed. So much for the FDA certifying "safety." And where does this cost appear in the calculations?

A further issue is the quality of the information the market will generate vs. that generated by controlled clinical studies. There will be no careful, organized, gathering and analysis of data. Instead, physicians will have to rely on their own experience and various sorts of anecdotal information. This is not a recipe for good decisions about the value of a drug. It probably means more patients than necessary get treated with ineffective new drugs or, alternatively, do not get treated with effective new ones because their physician does not have reliable data to go on.

Let's drop this idea.

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