David R. Henderson  

The Flaw in Heyne, Boettke, and Prychitko

PRINT
Commuting, Chronic Stress, and... Coase on a Plane, or, an Idea,...

In a post on Tuesday, "Find the Flaw," I asked readers to find and evaluate the implicit assumption in the following passage from an economics textbook:

When physicians must be licensed and new drugs approved by the Food and Drug Administration (FDA) before they can be marketed, buyers are spared the cost of evaluating goods whose quality most of them would be unable to assess for themselves, except at prohibitive costs. By compelling sellers to obtain certification, government agencies can enable us all to make satisfactory exchanges at lower cost.

A number of people did so successfully. First was Fred Foldvary, who wrote:
The statement assumes there is no demand for information that can be supplied by consumers reports, Angies list, WebMD, and other sources. Also FDA could approve drugs without banning non-approved drugs.

Also, following him, Paula C, raja_r, MikeP, Terrier, RPLong, and Aaron Zierman got it. Aaron's answer was particularly succinct.

Moreover, it's not just that private organizations could do this certifying. It's better than that. Private sources of information, such as U.S. Pharmacopeia and the Physicians' Desk Reference, already do do this certifying.

Brad D asks:

First, why would a passage like this come from your favorite economics textbook?

My simple answer is that it does.

The textbook from which this passage is taken is The Economic Way of Thinking, 12th ed., by Paul Heyne, Peter Boettke, and David Prychitko.


Comments and Sharing





COMMENTS (10 to date)
Keith writes:

Many commenters on the earlier post (including "Kevin", the very first one) pointed out that the buyers may not actually be spared the cost, because the cost may simply be passed on to consumers in other forms. Is this not also a flaw?

Stephen Hicks writes:

Two quick questions of clarification.
1. Since I doubt that Heyne, Boettke, and Prychitko agree with the argument, I wonder: In context, are they merely reporting the argument or endorsing it?
2. Does the argument as stated above exclude the private marketĀ“s providing that service? I read it as saying the government *can* do this, not that *only* the government can (though the argument does imply the government can do it at lower cost).

BigEd writes:

So you think Angie's List and consumer's reports can evaluate the qualifications of medical doctors and do drug testing better than licensing boards and the FDA??

How about airline pilots?? Should we let the markets and advice websites decide which are qualified and which are not?? This creative destruction can go a long way.

David R. Henderson writes:

@Keith,
Many commenters on the earlier post (including "Kevin", the very first one) pointed out that the buyers may not actually be spared the cost, because the cost may simply be passed on to consumers in other forms. Is this not also a flaw?
I don't think it's a flaw. To some extent, buyers are spared the cost of evaluating. And if their argument were correct that the only way to evaluate, other than have the government do it, is to do so themselves, then the authors would be right. You're right that there's still a cost, but their argument seems to admit that but say that the cost with government is lower than the cost of individuals evaluating drugs themselves. That's the big hole I noticed: no recognition that private certifiers do this kind of thing.
@Stephen Hicks,
In context, are they merely reporting the argument or endorsing it?
They are endorsing it. Like you, I don't think they believe it. But they don't surround the argument with the usual ways of signalling that: "It could be argued," "Some argue," etc.
Does the argument as stated above exclude the private marketĀ“s providing that service?
It does exclude the private market's providing that service at lower cost than government.
@BidEd,
So you think Angie's List and consumer's reports can evaluate the qualifications of medical doctors and do drug testing better than licensing boards and the FDA??
Possibly, but as I noted above, we have better certifiers than Angie's List and Consumers' Reports. I listed two.
How about airline pilots?? Should we let the markets and advice websites decide which are qualified and which are not??
On that issue, I would put a lot of trust in airlines.

allan henderson writes:

When someone evaluates the quality of a product, and does not keep the results of his evaluation secret, he produces a public good, because information is nonrival and nonexcludable. Product evaluation will therefore be underproduced unless nonmarket actors, such as states or charities, intervene to compensate for this market failure, either by evaluating products themselves, or by providing incentives that would motivate market actors to produce more product evaluation than they otherwise would.

If the FDA were abolished, it would cease to crowd out private medical charities; these charities would then be able to offer much more funding for clinical trials than they now do. But I don't know whether the net change would be positive or negative.

More fundamentally, I suspect that the proper market alternative to state regulation is not private product certification, but private product insurance. In a private-law society, buyers and sellers would contract with a private court before undertaking any kind of exchange. It seems natural to me that these courts would begin, for a fee, to offer their clients insurance against counterparty default. Sellers of products that had been subjected to especially rigorous third-party testing would then gain an advantage over their competitors, because their customers would be charged lower insurance fees by the court.

Frank writes:

@BidEd
Typically, private flight schools are mandated by the FAA to deliver pilot licences. Also, insurance companies typically ask for stringier qualifications than what the FAA requires.

James Oswald writes:

I know Pete is against the FDA (at the very least, I'm sure he could think of a reform or two), so I would be surprised if this paragraph had no subsequent qualifiers. What section is the passage from? I'm going to have to get out my copy and see it for myself.

David R. Henderson writes:

@James Oswald,
Page 265.

Jacob Lyles writes:

I thought the answer was going to involve the massive cost of certification.

James Oswald writes:

Thanks a lot. I have the 10th edition, and after discussing how the FDA could improve information available to consumers, it discusses the incentive problems the FDA has with the decision to approve or deny a drug.

People will blame the FDA if an approved drug turns out to have disastrous side effects, and they will applaud the FDA if it refuses to approve a drug that subsequently turns out to have disastrous side effects in other countries. But almost no one will condemn the FDA for lives lost or suffering endured while a drug that eventually proves to be highly successful is being tested. FDA commissioners will consequently find it in the public interest to test drugs beyond the point at which the marginal benefit to patients equals the marginal cost to patients. - p 340

Their section on information focuses on middlemen, financial markets, and profit and loss rather than government. I don't know what happened with the later edition, but I suspect it was pressure from the publisher. I'd hate to think Boettke is going communist on us.

Comments for this entry have been closed
Return to top