Jeff's Lunchbreak

I know very few people personally who think a completely free market is a good thing (in fact, I don't think I know any), but there are some of the more extreme libertarian types who think that way. They believe that supply and demand will make everything turn out okay, and that government intervention will just make things worse. How much easier political debates would be if those people were correct.

The problem is that a free market works much the same way as evolution, optimizing companies for current conditions. Sure, the CEOs, boards, presidents, and others running companies may have their long term goals, meaning that business isn't as blind as natural selection, but day to day operations require that businesses are successful in the here and now, competing against other businesses. Response to global warming is a good example of this. A president of a company may have a sincere desire to cut down on his company's carbon emissions. But if the president of a second company doesn't give a damn about carbon emissions, then he can do business at a lower cost, putting the first company at a disadvantage. Even if the president of the first business knows that carbon regulations are coming down the pike, it doesn't do him any good to try to anticipate those regulations if it means losing out in the short term and going out of business.

The other problem is that a free market doesn't necessarily optimize businesses for what we as a society want - it optimizes businesses to out compete other businesses. A good concrete example has to do with health care - developing new antibiotic drugs. Antibiotics are a modern wonder; they've saved countless lives. Unfortunately, bacteria evolve. After enough exposure over enough generations, bacteria can develop resistance to antibiotics. This problem has been exacerbated by overuse and misuse of antibiotics, but the problem is still probably inevitable.

At first blush, this may seem like a ripe area for pharmaceutical companies. If bacteria evolve resistance to old antibiotics, there ought to be quite a market for new ones. Unfortunately, that's not the case. For one, in order to try to keep bacteria from evolving resistance to these new antibiotics as quickly, doctors are pretty conservative in using them. While the family practitioner may still give out penicillin for every runny nose, the doctor fighting a patient's MRSA infection is going to be very careful with the few remaining antibiotics that might be able to help. So, once the new antibiotic has been developed, there's only a limited return on investment. Even worse for the pharmaceutical companies (and us), bacteria don't stop evolving. Eventually, they'll develop resistance to new antibiotics, as well. So, aside from a limited initial return on investment, the product has a limited life.

Compare this to other drugs that pharmaceutical companies could develop - treatments for high blood pressure, diabetes, depression, impotence, etc. These are medicines that patients take for a lifetime, not just a week or two as with antibiotics. And our bodies don't evolve immunity to these medicines in the same manner that bacteria evolve antibiotic resistance, so a new drug can be used potentially forever. The return on investment for these types of drugs is much higher than for antibiotics.

Now consider further that pharmaceutical companies are working with finite resources. They only earn so much in profits that they can put back into research. And remember that pharmaceutical companies, despite all the good they do, are in business primarily to make money. Presented with the choice of where to spend research money, they're obviously going to favor drugs with the potential to earn them more profit, which means less research on antibiotics.

This isn't mere idle speculation on my part. A new study published in the May 1st issue of Clinical Infectious Diseases documented this very problem. I first heard about the study in a story on NPR, and found another good article here. To quote from that second article:

FDA approvals of new antibiotics declined 56 percent during the past 20 years (1998-2002 versus 1983-1987). Looking to the future, the researchers found only six new antibiotics in the R&D pipeline out of 506 drugs being developed.

And now is where the real political debate comes into play. Obviously, some type of government intervention is needed if we want new life saving antibiotics to be developed. The question is how. Regulations? Tax breaks? Direct investment of public funds? I don't know, but I think it's pretty clear that the free market doesn't always lead to outcomes that are best for society as a whole.

Update 2013-02-18: Looking over this entry again, I realize that I forgot to make the clarification I had in a similar follow-up entry, Another Example of the Free Market Failing Society. So, let me do so now. Do not take this entry to mean that I think the free market is a bad thing. I think there are many ways that the free market provides benefits to the public. But I'm not so naive as to think that it always produces the best outcomes. Some industries or services are best accomplished by being government run (the police force immediately comes to mind). And even private industry requires the proper amount of oversight and regulations. The trick is in determining the proper combination of those things. But we shouldn't argue for the extremes of either libertarianism or communism, because neither of those has a very good track record.