Free Market & Economics*
While I am a physicist by background, my current job requires a basic knowledge of a great many other subjects, which is exactly the way I like it. My boss, despite being a scientist by background also, is a very clever economist, which proves that one really needn't limit one's self to just the one field of study. You'll often find that people trained in more than one field, have an unusual and often interesting perspective on things.
To do my job well, it would be handy to have a better grasp on the basic principles of economics. So I've decided to spend a few weeks studying the subject in my spare time. And I have to say, I find it fascinating.
I'm guilty of participating in many a naive student protest against globalisation and free-market economies. While my peers and I undoubtedly had our hearts in the right place, I think few of us really knew what we were demonstrating against. And if we did, we certainly didn't have any alternatives on offer. These days, I firmly believe that it is pointless to argue something's rebuttal until you have a solid alternative. Which means you should study hard to find one.
In reality, there seems to be no such thing as a free-market. At least not a working example of it. Authorative regulations are strewn throughout the global market. And I believe this is neither a good nor a bad thing.
To me, it seems that our current economic model is first a reflection of our human nature and second, an endpoint of an intricate system seeking its natural balance. Those who know a little about Complexity Theory, will know that when many small components (like humans, businesses, governments) interact, some regular and predictable patterns emerge, often evolving towards some statistical state of balance (or in mathematical terms: towards an attractor).
To clarify my viewpoint, an example:
There are many rules in place to regulate the approval of new medicines. Before a drug can be put onto the market, it needs to go through a lengthy approval process. A patent needs to be applied for, the Company needs to prove that it is safe and efficient by means of extensive clinical data and if it wants to be reimbursed by the state, it will need to prove that is differentiated from other existing products and provides a substantial benefit for the patient... and so on.
Not only is this process lengthy, it is a costly investment too. While the government has put these regulations in place to protect society, it has led to a predictable downside: Because the cost of bringing a new product to market is high, it is justifiable only if there is a big market for it. In other words, unless Companies know that the product will be bought by a large group of individuals, it's hardly worth making it. They want a big profit margin, and a large return on investment.
As a direct result, Companies stopped trying to find medications for rare diseases. Fairly logical and predictable, if you think about it. Not enough people will buy it, so the return on investment is too small to even be considered as a viable option.
But our system keeps itself in balance: The Authorities came up with a new way to counter this downside. It created the status of "Orphan Drug". An Orphan Drug is a drug designed to treat rare conditions, generally with a prevalence of less than 5 per 10,000 people. If a company invests in making an Orphan Drug, the authorities reward the company with an extra 10 years of Market Exclusivity for that product.
Basically, products are standardly protected by a 20-year patent. This gives the Company up to 20-years of market monopoly, in which they can try to make enough money to regain their investment. After those 20-years, the patent generally expires (unless legal action is taken to extend it), and other companies can start making their own versions of it. But if you have invested in an Orphan Drug, the Authorities will grant you an extra 10-years of Market Exclusivity and this makes it more appealing for drug Companies to develop medicines to treat rare diseases. This new rule ensures that the general public gets what it needs and that the companies are happy.
Many would argue that this proves that a Free Market doesn't work, because the Authorities had to interfere. But this situation (in which companies stopped investing in rare diseases) was created by Authority interference in the first place, so it wasn't a Free Market to start with. At least, that's what I think. I believe the idea of a Free Market is a utopic idea. It'll never exist.
Instead, I feel that the current Market is an excellent example of action-reaction at work between many small components and a fairly balanced system emerging as a result of that interaction. I also believe, and I may be very wrong about this: that the Authorities are an intrinsic part of that economic system. It's not an external meddler, but an intrinsic part or our current economic model. I don't think you can think of the Market and the Authorities as individual systems entirely. They constantly feed on and into eachother and without the other, they wouldn't exist. The Market represents our human nature. So do the Authorities. They are driven by the same underlying principles (albeit with differing motives, humans have conflicting interests after all) and are simply smaller parts of the whole.
And like many dynamic complex systems, the balance will continuously shift. It's evolving. The recent move towards organic food, is a good example. It's due to an interplay between people's wants (healthy food) and people's needs (new money-earning products).
We are the key-players in this. It is our intrinsic nature that drives the economy. Our choices, needs and nature drive the economy. So I find it highly simplistic to pronounce our current economic model "bad" or "good".
It's simplistic nor simple. But fascinating, if anything.
*Disclaimer: my knowledge of economics is in an ongoing state of flux. My opinions and insights are likely to evolve. Deductions made in this blogpost are mine. As are fallacies in logic. Feel very free to comment and put me right.
To do my job well, it would be handy to have a better grasp on the basic principles of economics. So I've decided to spend a few weeks studying the subject in my spare time. And I have to say, I find it fascinating.
I'm guilty of participating in many a naive student protest against globalisation and free-market economies. While my peers and I undoubtedly had our hearts in the right place, I think few of us really knew what we were demonstrating against. And if we did, we certainly didn't have any alternatives on offer. These days, I firmly believe that it is pointless to argue something's rebuttal until you have a solid alternative. Which means you should study hard to find one.
In reality, there seems to be no such thing as a free-market. At least not a working example of it. Authorative regulations are strewn throughout the global market. And I believe this is neither a good nor a bad thing.
To me, it seems that our current economic model is first a reflection of our human nature and second, an endpoint of an intricate system seeking its natural balance. Those who know a little about Complexity Theory, will know that when many small components (like humans, businesses, governments) interact, some regular and predictable patterns emerge, often evolving towards some statistical state of balance (or in mathematical terms: towards an attractor).
To clarify my viewpoint, an example:
There are many rules in place to regulate the approval of new medicines. Before a drug can be put onto the market, it needs to go through a lengthy approval process. A patent needs to be applied for, the Company needs to prove that it is safe and efficient by means of extensive clinical data and if it wants to be reimbursed by the state, it will need to prove that is differentiated from other existing products and provides a substantial benefit for the patient... and so on.
Not only is this process lengthy, it is a costly investment too. While the government has put these regulations in place to protect society, it has led to a predictable downside: Because the cost of bringing a new product to market is high, it is justifiable only if there is a big market for it. In other words, unless Companies know that the product will be bought by a large group of individuals, it's hardly worth making it. They want a big profit margin, and a large return on investment.
As a direct result, Companies stopped trying to find medications for rare diseases. Fairly logical and predictable, if you think about it. Not enough people will buy it, so the return on investment is too small to even be considered as a viable option.
But our system keeps itself in balance: The Authorities came up with a new way to counter this downside. It created the status of "Orphan Drug". An Orphan Drug is a drug designed to treat rare conditions, generally with a prevalence of less than 5 per 10,000 people. If a company invests in making an Orphan Drug, the authorities reward the company with an extra 10 years of Market Exclusivity for that product.
Basically, products are standardly protected by a 20-year patent. This gives the Company up to 20-years of market monopoly, in which they can try to make enough money to regain their investment. After those 20-years, the patent generally expires (unless legal action is taken to extend it), and other companies can start making their own versions of it. But if you have invested in an Orphan Drug, the Authorities will grant you an extra 10-years of Market Exclusivity and this makes it more appealing for drug Companies to develop medicines to treat rare diseases. This new rule ensures that the general public gets what it needs and that the companies are happy.
Many would argue that this proves that a Free Market doesn't work, because the Authorities had to interfere. But this situation (in which companies stopped investing in rare diseases) was created by Authority interference in the first place, so it wasn't a Free Market to start with. At least, that's what I think. I believe the idea of a Free Market is a utopic idea. It'll never exist.
Instead, I feel that the current Market is an excellent example of action-reaction at work between many small components and a fairly balanced system emerging as a result of that interaction. I also believe, and I may be very wrong about this: that the Authorities are an intrinsic part of that economic system. It's not an external meddler, but an intrinsic part or our current economic model. I don't think you can think of the Market and the Authorities as individual systems entirely. They constantly feed on and into eachother and without the other, they wouldn't exist. The Market represents our human nature. So do the Authorities. They are driven by the same underlying principles (albeit with differing motives, humans have conflicting interests after all) and are simply smaller parts of the whole.
And like many dynamic complex systems, the balance will continuously shift. It's evolving. The recent move towards organic food, is a good example. It's due to an interplay between people's wants (healthy food) and people's needs (new money-earning products).
We are the key-players in this. It is our intrinsic nature that drives the economy. Our choices, needs and nature drive the economy. So I find it highly simplistic to pronounce our current economic model "bad" or "good".
It's simplistic nor simple. But fascinating, if anything.
*Disclaimer: my knowledge of economics is in an ongoing state of flux. My opinions and insights are likely to evolve. Deductions made in this blogpost are mine. As are fallacies in logic. Feel very free to comment and put me right.
posted by Dr.Pew @ 7:37 am
2 comments
2 Comments:
Completely agree with you, science becomes most interesting when you think beyond the boundaries of one discipline only. Especially concerning stuff like chaos theory, which I believe will become an important framework for many theories in all social sciences (already today and) in the future.
Some remarks:
1) If I remember correctly most theorists agree that today’s market is no pure free market but a mixed market. That doesn’t mean though, that “there is no such thing as a free market” or that “many would agree that a free market doesn’t work”. It only means a free market should be thought about in a relative sense. Similar as when talking about people. Most theorists agree people can not be considered free in an absolute sense. That doesn’t imply however that there is no such thing as human freedom. On the contrary.
2) “They constantly feed on and into each other and without the other, they wouldn't exist.”
Both government and market influence each other mutually. I think there are enough examples to back up this part. But, I don’t understand what you mean by “without the other, they wouldn’t exist.” To use your own example. I can see how absence of government would make people suffering from a rare disease die faster. But how would it make the market collapse?
I found your blog through a Google search accidentally and I'm really glad I have.
I just wanted to clear up a few ideas that you've presented.
The person who replied is correct, our current economic system is considered a 'mixed market economy' -- where the government has some power but not all.
The reason we do not have a working example of an absolute free market economy is self explanatory (I think) based on a few simple economic ideas.
SCARCITY - resources are limited, and wants are unlimited.
COMPETITION - the market works based on competition. If you don't sell for the lowest price possible, someone else will.
SELF INTEREST - You want to make the most money possible.
Without any kind of outside influence (the free market), it becomes a place where people are trying to produce a good in the cheapest possible way, so that you are able to sell it at the lowest price possible. This sounds really great and fair for the consumer, but just wait.
To produce the most product for the lowest amount of money, something has to give. Normally these casualties of free market capitalism include 1) working conditions (who cares, labour is replaceable) 2) wages (a working minimum wage cuts into the bottom line!) 3) the environment (being accountable for pollution is expensive) 4) the rights of a child (free workers with small hands!) 5) a healthy LOCAL economy (why pay someone 12$/hr when you can pay them 2$/day in Bangladesh?)
And that is why the government has to intervene. The free market ends up only protecting the interests of the very rich/powerful, while the working woman or man (as Karl Marx would put it, the proletariat) gets fucked over.
Your argument regarding pharmaceuticals is interesting, but comes to a false conclusion. The government here is genuinely correcting a problem with the free market. If you create a pill that cures obesity (a VERY common ailment) you will make a great deal of money because there is HIGH DEMAND. If you create a pill that cures Field's disease (the rarest known disease in the world) then you will make very little money because there is PRACTICALLY NO DEMAND.
Assuming that the costs involved in production, research and development for each drug are in the same ballpark, you (the capitalist) have the choice of investing the same amount of time, capital, and resources into A: making a huge profit B: losing a lot of money.
This dilemma exists with OR WITHOUT government intervention in the first place, so really the government is correcting the free market after all.
I think it's really interesting when you say "It's due to an interplay between people's wants (healthy food) and people's needs (new money-earning products)." When economists talk about wants and needs, they make no distinction. Economics also assumes that people have unlimited wants (it doesn't matter if I give you ten dollars or ten million dollars, you'll find a way to spend it all). So when you talk about healthy food, you're talking really about a DEMAND for healthy food, and the creation of a MARKET for healthy food (if nobody wanted it, nobody would sell it). That's just a terminology thing, but it's important to make the point clear.
I like how you see the market as a system, like the guts of an atom or an ecosystem or something. I would like to take the stance that the market 'is what it is.' Unlike absolute sciences, however, there may be no 'perfect economy' ...it may just be unattainable or it may lie in how we see perfection. A 'good economy' is seen as one that is constantly growing, but we know through the idea of scarcity (unlimited wants vs limited resources) that constant growth is impossible and unsustainable. What then, IS the perfect economy?
HM?
Post a Comment
<< Home