Teaching the Old Dog Mankiw New Tricks

This is funny. Dean Baker, a lowly economist who works a dreary day job as a working economist for a public policy institute, the Center for Policy and Economic Research, and blogs at TAP (The American Prospect), is obliged to give a lesson in basic economics to a big shot economics prof at Harvard.

Someone Should Sell Gregory Mankiw a $800 Million Laptop

Based on his Sunday column on health care, he would probably buy it. Mankiw touts the benefits of modern medicine, specifically noting how statins may allow him to control the heart disease that took the life of his father. He notes that statins cost a great deal to develop and then asks whether the government would prevent him or some other fortunate person from spending their money to benefit from statins and other great medical breakthroughs.

Mankiw has turned the problem on its head. Once statins have been developed, they are very cheap to produce. The question is not an abstract one of whether anyone would have the government prevent Greg Mankiw or Bill Gates from spending their money on statins, the question is more concrete -- why does the government prevent many low and moderate income people from buying statins in a free market?

In fact, the government has granted patent monopolies to developers of statins. This means that it will arrest anyone who produces and sells statins at their cost of production without the permission of the patent holders.

In the current system patents provide an incentive to undertake research into the development of new drugs, but that doesn't mean that patents are the only mechanism to support this research. The federal government spends $30 billion a year on biomedical research through the National Institutes of Health (NIH). Virtually everyone, including the pharmaceutical industry, agrees that this research is enormously valuables.

The government could increase its funding and support the development of drugs (most of the NIH research is basic scientific research) and then allow all new drugs to be sold at their free market price. In this case, we would not have the sort of tough problems about denying care to people that Mankiw describes.

In other sectors of the economy, like computers and cell phones, technology has brought the price of goods down. It is only health care where it has caused prices to explode.

Mankiw is a clever theorist, but he misses the big picture and the real purpose of economics: providing people with a better life. He is so caught up in his right wing theories that he forgets some basics. In this case, the fact that patents are an impediment to the free trade so beloved by Adam Smith. The purpose of the patent is to reward the inventor. But as Dean Baker implies, sometimes the inventor is so mad for the profits that they forget the purpose of the invention.

Dean Baker is pointing at a very important puzzle that should occupy serious economists: why is technology allowing high tech companies to drop prices but apparently has no benefit in the pharmaceutical industry to drop prices there?

My cynical self would say there is a most interesting inverse relationship between technology bringing benefit to people and the amount of lobbying money spent by a high technology company. Those who stick to their knitting and invent fast and furiously to create a better world, drop prices. Those who decide a better "investment" is lobbying and "shaping consumer demand" keep their prices up and strangle innovation. Mankiw claims to love free enterprise, but he is on the wrong side of the fence on this issue, just as Dean Baker points out.