David R. Henderson  

Scott Alexander IS an Economist

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So many other bloggers called attention to Scott Alexander's outstanding post about why the price of EpiPen is so high that I didn't feel the need to.

But now he has written another post about drug prices and the harm done by drug price regulation and has hit it out of the park again.

An excerpt:

All of this sounds sort of boring and economics-y when you read it like this, and maybe your eyes are glazing over. So let me put this in context. In 2060 there will probably be 420 million Americans and 523 million Europeans. And suppose that whatever changes we make in drug regulations today last for one human lifespan, so that everybody has a chance to be 55-60. So about a billion people each losing about 0.7 years of their life equals 700 million life-years. Since some people live in countries outside the US and Europe [citation needed] and they also benefit from First-World-invented medications, let's round this up to about a billion life-years lost.

What was the worst thing that ever happened? One strong contender is Mao's Great Leap Forward, in which ineffective agricultural reforms and very effective purges killed 45 million people. Most of these people were probably already adults, and lifespan in Mao's China wasn't too high, so let's say that each death from the Great Leap Forward cost what would otherwise be twenty healthy life years. In that case, the worst thing that has ever happened until now cost 45 million * 20 = 900 million life-years.

Once again, RAND's calculations plus my own Fermi estimate suggest that prescription drug price regulation would cost one billion life-years, which would very slightly edge out Communist China for the title of Worst Thing Ever.


He then continues:
Am I exaggerating or being facetious? I'm actually not sure. Dammit, Jim I'm a doctor, not an economist. I'm not qualified to analyze any of those ten studies above beyond a quick check to see if they're completely ridiculous. I'm not qualified to say if RAND is right or wrong to estimate a cost of 0.7 life-years, or whether I'm misusing their calculation to try to add up exactly how bad it would be. Maybe a real economist will look at this whole essay and say it's really stupid. I don't know.

Nope. It's not stupid.

It took me longer than many of my friends to be a fan of Scott Alexander. But I am now on board.


Comments and Sharing






COMMENTS (14 to date)
Daniel Klein writes:

Nice.

Ronald Coase:

"An economist who, by his efforts, is able to postpone by a week a government program which wastes $100 million a year (what I would consider a modest success) has, by his action, earned his salary for the whole of his life."

quadrupole writes:

I'd be curious to see someone run the numbers on Rachel Carson's "Silent Spring"... my off the cuff guess is that it would dwarf both Mao and drug price regulation...

Robert Thorpe writes:

> But I am now on board.

I am not.

Alexander is comparing lives that were actually lost to something quite different. He's comparing it to potential improvement in lifespan. That's apples to oranges.

To do a fair comparison he should find out how many years of life were denied in other cases too. The number would probably be much higher for Soviet communism than Mao's Great Leap Forward. It would probably be much higher for Chinese communism too. It would be very difficult to estimate, of course.

Julien Couvreur writes:

I'm still uneasy with Scott Alexander's analysis. Although I appreciate that he considers broader effects than the Vox writers (he looks not just the most immediate or visible), his scope of questioning still seems limited (he considers that price controls can have bad effects, but patents not so much) and I get the sense he thinks that allows for designing society.

On that last point, let's assume that price controls on drugs indeed reduce innovation. What is the optimal level of innovation?
How does he know?

HT to Art Carden who raised this question in a lecture and whose insight left a strong impression on me.

J Mann writes:

@Julien

Alexander's analysis is helped by the fact that Vox's article doesn't address that there is any cost of reduced innovation at all.

You're right that it's possible that overall welfare would be improved by a smaller reward for developing new drugs (or a larger one, for that matter), but Vox makes its argument too easy by assuming their are only benefits to price controls and no costs.

Is there any good economic literature on how to calculate the cost/benefit of the patent system in specific cases?

Brian writes:

I agree that the argument is not stupid and that it displays an economic way of thinking, but we also have to be careful with this kind of reasoning. It's too easy to find it convincing on issues we agree on but dismiss it when applied to issues on which we don't agree.

For example, most people here are probably pro-choice. Over 60 million abortions have occurred in the U.S. since abortion was legalized, with much higher rates than before legalization. Let's say that legalization led to 40 million extra abortions. With an average life span of about 80 years, that comes to over 3 billion life-years lost. Is this a calamity far in excess to what Mao did? Is this the new Worst Thing Ever? Is the logic convincing now?

If one can't or won't accept the logic in the case of abortion, why would one accept it in the case of drug regulation?

David R. Henderson writes:

@Brian,
Over 60 million abortions have occurred in the U.S. since abortion was legalized, with much higher rates than before legalization. Let's say that legalization led to 40 million extra abortions. With an average life span of about 80 years, that comes to over 3 billion life-years lost. Is this a calamity far in excess to what Mao did?
Those who think that the entity aborted is a human would probably say it is. This helps explain why many pro-life people are so passionate and look with horror on abortion.
Whether the entity is human, though, is controversial. I haven’t come to a comfortable conclusion myself. But what is not controversial is whether people outside the womb are humans.

Brian writes:

"Whether the entity is human, though, is controversial."

David,

Agreed. I am not arguing either way on that point, nor does it really matter for the argument under discussion. Let's think on the margin. In Scott Alexander's argument, he considers the effect of drug regulations, namely 0.7 years off each lifespan. In the case of legalized abortion, we have some number of fetuses aborted. In the absence of legalization, those fetuses are born and have undeniably human lifespans. The marginal effect of legalized abortion is the loss of those person-years, REGARDLESS OF WHETHER THE FETUS IS CONSIDERED A HUMAN PERSON OR NOT.

Nearly everyone seems to agree that the abortion issue hinges on the personhood status of the fetus, but Scott Alexander's logic would imply that the status of the fetus is irrelevant. That makes me question, or at least be wary of, the validity of the underlying logic.

Aleks writes:

Brian, good point.

David R. Henderson writes:

@Brian,
Scott Alexander's logic would imply that the status of the fetus is irrelevant.
No, it doesn’t. He’s doing a calculation of person years lost by people. If the fetus is not a person (a big “if”) then his methodology does not apply.

Julien Couvreur writes:

@J Mann

"Against Intellectual Monopoly" (by Boldrin and Levine, two Fed economists) studies the net effects of patents in particular.
One striking example in my mind was the development of aviation (the Wright brothers had patents only in the US, which had to be cancelled/suspended later by Congress because the US was falling behind).

My understanding is there is rather little literature on the pro-IP side, to support the oft-repeated argument that it provides incentives to innovate. (Any pointers are appreciated if you know some)
In particular, where do the magic numbers (patent in a certain field is X years) come from (the answer is the sausage factory, not some rigorous knowledge).

Personally, I question patents not just because they create minefields and arbitrary laws ("ownership" limited to X years, how to deal with concurrent and independent inventions, fuzzy boundaries on what is "novel" vs "derivative"), but rather because of principles: they un-necessarily create scarcity and rivalry on ideas and information which are non-rivalrous.
In other words, the norms of IP create conflicts rather than help resolve them.

Steven Finder writes:

Fools rush in where angles fear to tread. That said, I do feel qualified to comment. 20 years ago, I was well known in the world of pharmacoeconomics. I was on the board of directors of ISPOR. My name is still somewhere on the website as a founder.

I also developed a methodology to look at the cost benefit of drug usage. The methodology that I used was very different from the quality adjusted life years approach that is constantly used. The reason I created a different methodology is because life adjusted years is so incredibly easy to manipulate that it can be used to find any result wished for by adjusting the underlying assumptions. People use it because it is so easily manipulated but in a way that is rarely visible. In my years involved in pharmacoeconomics, I never found a study where life adjusted years were meaningful in a practical way. (For reasons unrelated to anything, I left pharmacoeconomics for a different life many years ago).

That regulation costs 0.7 life years is meaningless and irrelevant and I haven't even read the article. But very small assumptions up front will have large effects on the result, because that is just the way life years work. And all the mathematical and quantitative analysis doesn't change that very fact, it just hides those assumptions behind the veneer of respectability.

I'm not saying that regulation doesn't have an impact on lives saved. Millions of Americans died prematurely waiting for ACE inhibitors to be approved in the US. But life adjusted years doesn't properly capture that in any form or fashion. I wish I could suggest a better metric, but I can't because it is impossible to compare the value of different classes of drugs. A new and effective cancer drug that can completely kill a particular kind of cancer (thereby specifically saving an individual life) can not be compared to a better ACE inhibitor with less side effects. Yes, we can create some life adjusted years saved, but again those are truly meaningless because they aren't really comparable. That one may only save a few people and that the other may help many (though just a little) doesn't change the fact that resources may have to be allocated. But there is no comparable scale that can be used as a denominator.

Brian writes:

Scott Alexander's logic would imply that the status of the fetus is irrelevant.

No, it doesn’t. He’s doing a calculation of person years lost by people. If the fetus is not a person (a big “if”) then his methodology does not apply.

David,

The ones who would have been born become people at that point. The years lost occur when they are people, so they are most definitely losing people-years.
Let's look at it with a hypothetical. Suppose humans are only considered to be people once they turn 18 years old. Then any years of a pre-18-year old lost to drug regulation wouldn't count, but any years lost after age 18 would. You can't ignore the years lost after age 18 just because the person started out as a non-person.
The same is true with a fetus who would have been born (i.e., become a person) without legalized abortion. This follows logically from Scott Alexander's argument because he's treating people-years as the sole criterion, without regard for suffering, method of shortening lives, intent, additional consequences, individual productivity, etc.

J Mann writes:

@Julien - thanks, I'll add it to my list.

Somebody on Alexander's comments list pointed to Steve Landsburg's summary of Michael Kremer's reform proposal, which sounds intriguing.

http://volokh.com/posts/1177326127.shtml

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