I have management problems* with this blog and, until I can find someone expert on WordPress who can help me out, I will be blogging at:
Thanks for your support. If you know about databases/WordPress and can help please contact me.
* The WordPress software needs updating – now very outdated – but attempts to update fail and leave me with the inevitable need to restore the blog. I have tried disabling plug-ins but nothing seems to work.
Xmas is a celebration of what is guessed to be the approximate birth date of Jesus Christ. It is an important occasion in almost all civilised societies for both Christians and Non-Christians alike.
In Australia the number of people who describe themselves as Christians has fallen from 71% of the population to only 64% in the 10 years to 2006. I have been a non-believer for my entire adult life so I am gradually acquiring more companions. As Kevin Rudd said recently, Christianity faces the prospect of being a minority belief – part of the ‘counter-culture’ – in Australian society. But Christianity remains by-in-large an important positive force in our society and Xmas remain important to many of us – both the secular and the religious.
I lack empathy with multi-culturalists and those from other religions who see the widespread respect paid to Xmas as something offensive to atheists and non-Christians. Given my early Christian upbringing I still feel comfortable celebrating the message of hope, forgiveness, friendship and kindness that Xmas brings to us. I have a long-standing respect for the values that the man Jesus Christ espoused. Most of all, the birth of a baby indicates the hoped-for possibility of living in a better world. The materialism associated with Xmas does make me reflect – but most of us enjoy giving and receiving gifts. One can be too puritanical about such matters. Most of us enjoy some of the incidentals of Christmas – carols being sung, food and wine being imbibed and homes being brightly decorated. At the very least these are a valued part of our cultural traditions.
The idea of hope associated with Xmas and the belief that the world can be a better place because of the birth of a boy is a beautiful parable. I do not believe that to appreciate the beauty of this notion that one, in fact, needs to accept the idea that the young boy is the ‘son of God’ or our ‘saviour’. It is enough to think about our prospects for renewal and for trying to live a life that reflects Christian values of kindness and forgiveness even if not of Christian theology.
No religion – Christianity included – should ever be seen as having the last word on anything. One of the great advantages of living in Australia is its openness and the freedom of choice it offers with respect to religion. But the wisdom of many religions, freed from their bigotry, can guide us towards living happier, more fulfilled lives. Whether you are thinking about what job you should take, what partner you should live with or how you should deal with the neighbours and with outsiders, the message of Christianity has something to teach us all. God might be irrelevant in all this – we are after all human beings – but the core message of Christians and the hope of Xmas is not. (478)
Sinclair Davidson and Ashton de Silva argue in the current issue of Agenda (here) that there is no evidence that the plain packaging legislation works. They base this finding on an inspection and analysis of data from 2001 to quarter 1 2014. The legislation was introduced in December 2012 so there are 4 (or 5) quarters of data post policy to consider and about 90 before the change. They try various techniques but the only statistical results they find is some evidence that consumption increased. This they rationalise by supposing that if people get less utility from cigarette smoking that they will smoke more to gain the same utility level and somehow try to link this up with Lancaster’s “characteristics” theory of consumption. They also adapt the standard “compensation” argument of the smoking literature – if people smoke lower nicotine cigarettes they will smoke more.
The second argument is correct but irrelevant here as there is no data suggesting a switch to lower nicotine products after the introduction of plain packaging. The first argument seems wrong for reasons implied in the correct though misplaced first argument. Smoking is an addiction and smokers adjust their consumption habits to maintain desired levels of the addictive compound (nicotine) their brain seeks. It is highly doubtful that increased nicotine consumption can substitute for ugly packaging.
What have these authors shown? Well really nothing at all. They don’t have a satisfactory theory and can only record that they can’t detect any relationship. They try to fudge the fact that they have shown nothing by titling their article “The Plain Truth About Plain Packaging” which suggests a big expose. But the truth is they have shown nothing at all. They seem to admit this in a penultimate sentence “Establishing the efficacy of the plain packaging policy will take painstaking econometric analysis over a long period of time”. I agree but my priors are that making a product less attractive in a marketing sense will reduce its appeal not increase it as these authors suggest is possible.
For years I have struggled to understand the idea that clearance rates are a useful indicator of the demand dynamics of the home auction market – this is an example of this type of story. A house will be sold when the minimum acceptable price to the seller (vendor price) is exceeded by the maximum price a buyer will pay (the buyer price). Then a trade occurs and the house is sold. The difficulty of course is that this condition requires the vendor price to be low enough as well as the buyer price to be high enough. Clearance will not occur if vendors have unrealistic price expectations (e.g. the situation in a boom) as well as when demand is weak. Likewise I struggle to see why agents are praised for selling a highly desired set of apartments almost instantaneously – it seems to me they should be condemned for not doing the right thing by a vendor and charging a higher price. I have asked real estate people I know about this but I never get an explanation that makes total sense – typical efforts include: The agency got it wrong, selling constraints imposed by financiers, vendor wanted a quick sale etc. Does anyone have a half-decent reason for this?
Enjoyed this article - and the video – by Steven Pinker on the history of violence both from ancient times through to the “Long Peace” after 1945. In almost every respect the world has grown less violent through history and the decline has been most marked after 1945. Conflicts and wars within countries, between countries, within families and violence involving marital partners, rapes, children and towards animals have all shown steady decline. Modernity and “progress” have, on balance, been a good thing and they have not – as much popular opinion contends – involved a price in terms of increased violence. The institutions of civilisation and the development of abstract thinking about ethical issues have been worthwhile. We should be grateful for the progress made and not look romantically towards a distant past when things were simpler. I am interested in the idea that the breakdown in tribalism and in the exclusive focus of individuals to family and clan have been a positive and worthwhile development.
Pinker a flexible and interesting thinker.
I enjoyed the piece on Rock, Paper, Scissors (RPS) in today’s AFR (paywalled but it it was featured in the British press a while back). Recall the kid’s game - two parties simultaneously call “Rock”, “Paper” or “Scissors” with the mnemonic “Rock breaks Scissors, Scissors cuts Paper and Paper covers Rock” – so “Rock” beats “Scissors”, “Scissors” beats “Paper” and “Paper” beats “Rock” while the same call of each is a tie. This game is normally repeated over a series of trials. Game theory suggests that a randomised strategy of calling each alternative with probability 1/3 outperforms any other strategy because it gives your opponent no predictability advantage. But how would you play this game (as a “one-shot” game) if you wanted to win? There are many suggested strategies on the internet and there are “expert players” who have skills at detecting non-random responses from their opponents.
Men play “Rocks” most and women apparently play (painful!) “Scissors” most so playing against a naive man a good initial call is “Paper”. Overall however “Rocks” are played more than “Paper” which is played more than “Scissors”. Naive players don’t like to make the same selection more than two trials in a row so a “rock” “Rock” is likely to be followed by a switch so, after such a sequence the best option is to choose whatever signal the doubled signal would beat – here “Scissors”. The US RPS champion starts with a predefined strategy (call this, then this etc depending on whether he won or lost etc) but then switches to improvisation based on pattern recognition and perceptions of an opponents emotional state in playing. Trash talk is allowed in most tournaments and honesty can be a good policy – I tried this tonight with my son and it worked – I called what I said I would play and then played it. Fooled him as he assumed I would lie. Facial expressions and the way you pump your hand when starting off (1, 2, 3 , call…) can signal your opponent’s intention.
There is a book length treatment of these issues that I have just purchased from Amazon. Could I validly include this in a course on game theory? Skilled strategists should outperform those who have studied game theory so there is some a priori benefit from studying the actions of the winners. (867)
An interesting feature of the proposed Australia China free trade agreement is that so little is at stake. Most of Australia’s exports to China and most of China’s exports to Australia are tariff free. The catch is the restriction on Chinese purchases of Australian housing and land and Chinese foreign investments generally which are subject to discriminatory restrictions. But if Australia reduced these restrictions what could China offer in return? Well, not much. So a few weeks ago China imposed tariffs on Australian coal and, as a major “concession” yesterday announced they would be removed as the negotiations over the FTA enters its final week. One wonders what Australia has given away to achieve this remarkable concession. Some dumb politics here. There just isn’t much in this FTA for Australia given that (as I have pointed out in the past) it is highly unlikely Australia will remove the restrictions on Chinese foreign investment. (786)
I have been thinking about empathy and reading the psychologist Paul Bloom on this. Empathy is a type of bias – it evokes compassion for those close to us and to a lessor extent to those we can see but who need not be at all close to us in terms of actual ties – e.g. asylum seekers. It leaves unconsidered those facing peril in other countries (or awaiting resettlement in refugee camps in other countries) even though these people may face greater peril than asylum seekers. Of course we need to add reason and principles to considerations of empathy if we are to be truly ethical. Empathy can be a negative in terms of ethics – if I assign a high market to a friend in an exam or give them undue preference in a job interview that is a negative. If I have a serious illness and visit my doctor the last thing I want is empathy – I want the doctor to use his/her brains to help me not to sob in sympathy with my problem.
The negative side of empathy is the reason I cannot take the “Care Ethics” due to Carol Gilligan and the feminists very seriously. These thinkers do identify important determinants of individual ethics – close relationships – but, by themselves they are insufficient as a basis for ethics because of the implied biases.
Continue reading Empathy & sound ethics (613)
I am doing the Professor Paul Bloom course “Moralities of Everyday Life” for credit from Coursera. This is an approach to ethics based on psychology. Paul is a very talented lecturer (and author) based at Yale. Weekly assignments are online and students are identified from their typing style and using photographic imaging. A 70% average score across the assignments is required to get a certificate – the assignments themselves are challenging and test not only the lecture content but also knowledge of the set reading and the extra required videos. The general approach is based on a “gut instincts” theory of ethics that I am finding attractive.
Maybe this is one way university teaching can go. It costs $49US to attempt to gain credit for this subject and the teaching and materials are better than anything I have experienced in Australia. The first week consisted of 7 lectures ranging between 12-25 minutes each (that’s a good idea – not operating oppressively long lectures) and there are several readings, some excellent video clips, a text and a multiple choice assignment. The lectures have quizzes in them that are not for credit but they do keep you on your toes. There are discussion groups although I have not participated mainly because the reading takes quite a lot of time.
The reading itself in the first week involved extended newspaper articles by Steven Pinker and Peter Singer and video clips of quite different approaches to ethics by Sam Harris and Jonathon Haidt both of who are experts in this area. Fascinating.
Incidentally it was interesting for me to be a student after 35 years of teaching in a university. Looking at course design and designing reasonable work loads as well as incentives to do the required work was much easier to see from a student’s perspective. The idea of using newspaper surveys to introduce students to new materials makes more sense than plunging directly into academic journals. And there is nothing “low level” about the approach at all – real effort is required.
I am speaking on “Australian Asylum Seeker Policy: An Economist View” at an Amnesty International meeting 8th October, 2014 at John Scott Meeting House, La Trobe University 6-00pm. This is an earlier paper I drafted on this issue. Comments welcome.
“Rational argument can be conducted with some prospect of success only so long as the emotionality of a given situation does not exceed a certain critical degree. If the effective temperature rises above this level, the possibility of reason’s having any effect ceases and its place is take by slogans and chimerical wish-fantasies. That is to say, a sort of collective possession results which rapidly develops into a psychic epidemic.” (C.G. Jung, 1957, pps. 4-5).
Abstract: Economic reasoning is applied to Australia’s asylum seeker policy problem. Australia has a managed migration program based on quotas but has ratified the UN Convention on Refugees that is not quota-based. To control asylum seeker numbers successive governments have sought to increase the generalized price that asylum seekers must pay to gain Australian citizenship. This has led to policies that involve Australia in high enforcement costs while imposing significant hardship on asylum seekers. A policy reform of abandoning the Convention and enforcing greater selectivity with the processing of asylum seekers onshore improves both Australian and asylum seeker welfare without increasing overall levels of asylum seeker intake. Continue reading Australian Asylum Seeker Policy: An Economist View (1420)
The Harper Competition Review has again raised the case for road pricing. It is frustrating to me that after 20 years of working in this area many economists don’t get the economic basis for road pricing right. The article in The Australian today is a case in point. Roads are not priced for user pays equity reasons but because congestion externalities arise on them. A road is a fixed asset with substantial fixed and low marginal costs. If a road is not congested (and undamaged by heavy vehicle use) there is no sensible efficiency reason for pricing it. Why would you price in this situation since adding an extra vehicle using the road leaves social costs unchanged? Ignoring heavy vehicle charging the case for road pricing stems from possible congestion externalities. Now adding an extra vehicle increases the travel costs of other users and this is unpriced.
Again too I am weary of arguments for congestion pricing given the lack of political will in this area. Even the much easier issue of pricing heavy vehicle road usage seems to have been put on the back-burner despite support for it in COAG. The last thing our free enterprise Coalition parties want are some efficiency-promoting reforms in the transport sector. They will duck the road pricing issue and avoid too real reforms in the taxi sector which the Harper review also discusses, yet again and again…… (735)
This measure – discussed in today’s AFR – is (apart from its cost-recovery role*) is effectively an export tax on housing. As such it will diminish the gains from international trade in Australian property markets. It will however (in accord with the standard theory of export taxes) reduce the price of property to Australian consumers. Currently the economic effects here will be small since the size of the charge – at maximum it seems to be $1500 – is small but a much larger charge could be considered. There are at least two reasons for this. While export taxes penalise property owners by reducing the size of the market they can sell into they also distributionally advantage local purchases on property at the expense of relatively limited deadweight losses. Second, a large enough charge would take some of the heat out of a overheated local housing market and limit the likelihood of adverse macroeconomic externalities associated with possible banking and other corporate failures. I’d consider this move as a reasonable (very partial) policy response toy the problem of ridiculously expensive Australian real estate that to some degree owes its origins to the limited possibilities for buying decent land and housing in China.
* Partly these charges are intended to reflect costs of Foreign Investment Review Board applications by foreigners and partly to cost a crackdown on illegal purchases. (687)
Lectures at my university almost by obligation need to be presented in Powerpoint format* and almost all are aurally recorded. In a few cases a video is taken and that distinction seems to be the fairly arbitrary dividing line used by administrators in classifying courses as being presented in “face-to-face” format or “online”. In fact student attendance at almost all lectures is so low these days that all subjects taught are, in terms of student numbers, effectively almost all online. Students simply do not attend lectures. A few years ago attendance rates were around 30-35% but my guess is that these levels have now about halved. Only about 1/6th of students enrolled in most courses actually attend lectures and attendance at tutorials is about on a par with this. If continuous assessment is conducted in tutorials many students do not attend these forms of assessment and either claim “Special Consideration” status at the end of the course or just sacrifice the marks. Administrative pressure is now being applied by university administrations to allow student choice over assessment procedure that will presumably facilitate such strategies. Continue reading Near irrelevance of university lectures (1579)
A snippet that interests me. The Ray White Group (one of Australia’s largest real estate brokers) is to move into the financial planning industry. They earn commissions on real estate transactions and I assume they will earn commissions on the advice they give. They seek ASIC approval and expect to get it. My devious, perverted, economist mind asks some obvious questions which I am too modest to articulate.
Deriving sound asylum seeker policies is partly a moral issue. It is also a concern that analytical disciplines like economics can throw light on. I have been asked to provide views on asylum seeker policies as an economist. The views below are preliminary and I welcome polite comment. What I want to do is to think about are what most people would agree are reasonable objectives for policy and then use economics to think about how these objectives might be met. Continue reading An economist views asylum seeker policies
I have been reading my favourite work on investment – the most recent edition (2011) of Burton Malkiel’s “A Random Walk Down Wall Street” – for some advice on managing wealth in retirement. I first read Malkiel in the mid-1970s and find him to be a perceptive and balanced advisor on investment strategies. These issues become important to me now as I am very likely to leave full-time employment over the next few months. The trick with investment planning for retirement is to try to “live as well as you can without running out of funds if you live longer than expected” – this is the “drawdown dilemma” or “longevity insurance” . If you have a bequest motive for your progeny this needs to be restated to be “living as well as you can without leaving a grossly depleted inheritance”.
Malkiel favours an overall investment strategy for individuals that reflects the stage they have arrived at in their life cycle – young worker, middle aged, about to retire, retired. Obviously as one ages there is less time to work through a sustained equity market collapse so that risk-aversion suggests a higher proportion of wealth being placed in bonds and in stocks that pay high dividends but have less prospects for capital appreciation. For those aged in their late thirties -early forties Malkiel recommends 5% of one’s portfolio in cash (money market funds) , 20% in various bonds , 65% in equities and 10% in real estate investment funds (REITs). For ages from the late 60s and beyond he suggests 10% in cash, 35% in bonds, 40% in stocks and 15% in real estate investment funds. In the sort of superannuation scheme I am a member of these allocations can be easily made online at low or zero cost while with other private asset holdings some selling and buying is necessary.
Malkiel does support the partial use of annuities for retirement. Annuities guarantee that you will not outlive your income although such a service is expensive unless you can find them provided without sales commissions. This seems a moot discussion in Australia given the negligible size of the local annuities market although for some an effective annuity arrangement is via the “defined benefit” option of their superannuation scheme. Unless this is backed by a government guarantee (as it is for the case of civil servant superannuation) it is unclear how secure such “defined benefit” provisions are – employers such as universities no longer agree to finance gaps in funding needs*. But beyond the use of such annuity arrangements anyway Malkiel recognises retirees will want to manage at least a portion of the assets themselves when the allocation rules above apply. How much should you spend from the optimised portfolio each year?
Malkiel suggests using a “4% solution”. In simple terms spend no more than 4% of the value of your asset nest egg annually. Thus you would need a nest egg of about $2.5m to yield $100,000 annually. 4% sounds low since the total return on an equity portfolio should exceed this (more plausibly in Australia long-run returns will be 8-11%) but inflation reduces the real value of holdings (by about 2% I suppose) and there will inevitably be “bear” markets that could endure for quite a while. Spending at 6% of value during a bear market could markedly cut into financial staying power. A slump like 2008 would impose real difficulties.
Following Malkiel literally a person of my vintage should keep about 8% of wealth in the money market, about 30% in bonds, 13% in REITs and about 50% in equities. That is a couch more conservative portfolio than I currently hold which has always been (apart from the family home) heavily geared towards equity. I’ll think about it. A shift to bonds and money market holdings might make sense given uncertainties about current equity and residential real estate markets – the latter are part of my wealth through my fully-owned family home. That isn’t the motivation for the Malkiel prescription but it adds weight to my adopting his prescription.
I need to state that I have no qualifications as a financial advisor and am thinking aloud about my own fate rather than suggesting advice to others. Of course I am (as always) grateful for views from others on the reasoning.
* I didn’t join such a scheme myself as my guess is it will under-perform simple accumulation schemes. A residual must be retained from savings simply to help assure that the scheme will remain viable. (1099)
There are competing claims about the current stance of Australian monetary policy and attempts by the Reserve Bank to balance the desire for a lower Australian dollar by lowering interest rates against the problems that would be created by creating an asset price bubble. Ross Garnaut suggests lowering interest rates still further and dealing with consequent effects on housing markets in other ways – presumably by “talking up” the risks as the RBA has been doing and perhaps even evoking quantitative restrictions on the private banks. These last suppositions are guesses since Ross doesn’t point out what precisely he wants to do. Garnaut assumes the economy faces real dangers because of the collapse in mineral (specifically iron ore) prices but I think this is an exaggeration.
Warwick McKibben in this morning’s AFR rejects Garnaut’s view arguing that the risks of a housing bubble are too great and that competitive devaluations elsewhere in the world will make it difficult to devalue the Australian dollar using monetary policy anyway. He suggests not lowering interest rates but improving the real terms of trade (roughly the ratio of export pricers to import prices) in Australia not by devaluing the exchange rate but by lowering domestic prices by cutting costs. This would be achieved by encouraging productivity improvements not by picking winners but through smart innovative ideas. The latter sounds like the sort of economic advice you would never want to reject – we are wealthier if we can engineer the types of productivity changes Warwick suggests irrespective of the state of the economy. I am skeptical of the ability of policymakers to make significant inroads into improving productivity – as opposed to simply getting people to work harder – even in the medium term.
It is true the value of the Australian dollar is determined by both Australian actions and the monetary policies of our major trading partners. The US dollar will almost certainly rise and my view is that responsible monetary policy in bubble-prone China makes appreciating the RMB a good policy also – and consistent with the Chinese Government’s policy of switching expenditures away from exports and investment towards imports and consumption. Longer term the Australian dollar will depreciate for these reasons. The housing market in Australia – and asset markets generally – look prone to make a significant downward adjustment. It is important to limit the size of this adjustment by doing what the RBA is now doing – by “talking up” risks in the housing market.
On balance I don’t think the RBA is doing a bad job. I don’t favour the moves suggested by Garnaut as I don’t want a massive asset market bubble bursting. I am supportive of McKibbin’s policies because who could not support moves to increase productivity. But I doubt these policies will have a significant enough effect to matter much even in the medium term. Like McKibbin (and John Bell in his recent book) I question whether Australia’s future is as Garnaut suggests. The benefits of the mining boom were exaggerated and, even with greatly reduced commodity prices, our miners will do well by exporting larger volumes post the boom.
These are some rough notes. Revisions very likely as I try to think through these issues. (878)
I attended some economics honours student presentations on Friday and what was noticeable in most of the studies was a lack of any economic theory. Yes there was usually a data base and, yes, statistical techniques were applied to that data base (along with (occasionally) some quasi-theoretical reasoning about what might or might not be “exogenous”) but in most cases no economics model or even qualitative economics reasoning was used. Later in the day I heard a faculty member present a seminar talk on “peer group” effects on learning outcomes in schools. Apart from describing such effects as “externalities” there was, again, no economics. Nor, for that matter, was there any appeal to learning theory or educational psychology. Whatever happened to economics? Whatever happened to economic (or any other) theory? I select a couple of instances on particular occasions but it seems to me a trend in much, modern so-called economics “research”.
In principal there is nothing wrong in “letting the data talk” without reference to a priori model but in my experience the insights gained from this approach are meagre – invariably the results are conditional on the quality of the data and fairly inconclusive statistical tests. Often there are no strong insights at all. The core difficulty, as usual, is that the world is complex and letting selected facts speak for themselves won’t work – interpretative a priori insight is a crucial ingredient of understanding and explanation. I doubt any policy maker would be prepared to devise policies on the basis of purely data-driven insights. Of course the immediate question to defenders of this approach is: If the approach is valid why are we devoting years of effort teaching undergraduate students macroeconomics, microeconomics, public economics, international economics etc etc if this is not to be used?
The sneaking suspicion I have is that the data+econometrics direction that is increasingly becoming fashionable has its own economics explanation – it economises on the need to think, to read and to reflect. The less costly option is to just assemble pre-collected data and apply a technique from a statistical package. This also provides an immediate pseudo-novelty: data bases can be exploited in innumerable ways using nearly as many statistical techniques*. This is important when “low hanging fruit” insights have been pretty well picked over. On the last point I recently acquired a complete set ((back to the 1930s) of an Australian economics publication – the Economic Record. Articles in the 1930s through to the 1960s tackled the big economic issues of the day whereas the modern version of the same journal gets bogged down in minutae with, again, an emphasis on the atheoretical data base + statistical technique methodology. Much more prestigious journal’s such as the American Economic Review are much better in insisting on basing work on a model and some reasonable a priori hypotheses but the drift in even these more prestigious journals is similar.
Don’t get me wrong I am not an opponent of econometrics. I just think that as an approach it has come to dominate economics in ways that are harmful both with respect to providing policy-relevant insights and towards getting students (and economics faculty!) to exercise their brains. Econometrics should serve economics and not be its master.
* Using data and econometrics-intensive technology is also a risk-averse strategy for students seeking a degree (or faculty seeking promotion). It simply becomes more difficult to reject inadequate thinking and a lack of understanding of fundamentals. (1316)
Yesterday I made an application to depart my university of employment and to accept a redundancy. It was an emotional moment for me as I had never contemplated exiting employment in this way. I always thought I would work until I dropped. My decision partly reflects what I want to do with my life in the future (more leisure, greater freedom from obligation) but it mainly reflects my pessimistic assessment of where the Australian universities are going. I enjoy teaching and doing my research but side issues, related to the way universities are being currently administered, provide an overwhelming rationale for my decision. Irrational managerialism and scant regard for academic merit are the order of the day. What is unfolding is a national educational tragedy.
My application for departure may not be accepted but I suspect it will.
Having worked pretty hard all my life the thought of not being obliged to work is daunting. The loss of a regular income is, of course, also an issue. Provided the redundancy goes through I’ll give being retired a trial for a few months and probably then begin to look around for, at least, part-time work. This will not happen until after the sought redundancy decision is confirmed. (1761)
Distortions in the patient market for new drugs mean that drugs are overwhelmingly being developed for people who will die anyway from conditions the drugs are designed to address. There are few incentives to provide preventative medicines and this distortion costs lives.
As the Economist states:
“The data paint a bleak picture. The economists find that pharmaceutical companies conduct 30 times more clinical trials for recurrent cancer drugs than for preventive drugs (the effect persists even after adjusting for market size). The authors also show that firms divert their R&D expenditures away from more curable, localised cancers and focus on incurable metastatic and recurrent cancers instead. The patent system encourages pharmaceuticals to pump out drugs aimed at those who have almost no chance of surviving the cancer anyway. This patent distortion costs the U.S. economy around $89 billion a year in lost lives.
A one-size-fits-all patent system does not cater to the specifics of innovation in the pharmaceutical industry. But tailoring patent law may encourage lobbying and corruption. A careful reform of the patent system is necessary: outright abolition of patents will not be enough to save cancer patients’ lives”.
The paper that provides the basis for these views is available gratis from the Journal of Economic Perspectives. As its authors Michele Bodrin and David Levine conclude:
The case against patents can be summarized briefly: there is no empirical evidence that they serve to increase innovation and productivity, unless productivity is identified with the number of patents awarded—which, as evidence shows, has no correlation with measured productivity. Both theory and evidence suggest that while patents can have a partial equilibrium effect of improving incentives to invent, the general equilibrium effect on innovation can be negative. A properly designed patent system might serve to increase innovation at a certain time and place. Unfortunately, the political economy of government-operated patent systems indicates that such systems are susceptible to pressures that cause the ill effects of patents to grow over time. Our preferred policy solution is to abolish patents entirely and to find other legislative instruments, less open to lobbying and rent seeking, to foster innovation when there is clear evidence that laissez-faire undersupplies it. However, if that policy change seems too large to swallow, we discuss in the conclusion a set of partial reforms that could be implemented.