Taking Economics Seriously by Dean Baker, started life as an essay in the excellent Boston Review and has been turned into a model of the kind of small book which has recently emerged as a new publishing phenomenon, an updated version of the provocative pamphlet. It's tightly-argued, thought-provoking and the perfect length for a plane or train journey.
Baker challenges us to take the principles of economics seriously and apply them to important markets. There's no intrinsic problem with economic theory, he argues – a rather contrarian line these post-crash days, but I heartily agree. The problem is that when economic principles clash with entrenched and powerful corporate interests, monopoly power has always won. He argues that in some markets and industries which are now heavily regulated in favour of corporate power (specifically finance, software and recording companies protected by patent and copyright law, and pharmaceuticals) the market needs boosting rather than taming.
His central point is that all markets are regulated, and what distinguishes political attitudes to regulation is whose interests the rules favour: “Calls for deregulation have been cover for rules tilted starkly towards corporate interests.” (p2)
This argument is illustrated with the specific examples. The arguments about increasingly aggressive and intrusive copyright and patent protection have become increasingly familiar – James Boyle The Public Domain is an excellent guide to the debate. Baker covers this territory concisely and effectively. When it comes to banking, he convincingly makes the case that financial regulation has subsidized a handful of big institutions to an extraordinary degree, and allowed them to stifle competition. He is scornful about bankers' assertions that increased regulation now will harm enterprise: “The industry wants government regulation, just not in a way that curtails its profits.” (p52) He advocates breaking up big banks so they are no longer 'too big to fail', and suggests $50bn in assets as the point beyond which there are no economies of scale – only the advantages of market power – to be gained. I couldn't agree more, having looked at the role of competition in EU banking with some distinguished co-authors in Bailing Out the Banks? The chairman of the UK's Competition Commission agrees too. And Simon Johnson of MIT penned a biting attack on bang bank power, The Quiet Coup, in last May's Atlantic.
I enjoyed the chapters on these big beasts, but the real eye opener is Baker's chapter on the pharmaceuticals industry. I've always been aware of the regulatory barriers to entry in pharmaceuticals, given the stringency with which new drugs and interventions are tested. But one thinks of this as inevitable. However, Baker points out the extensive regulatory protection the industry gets (and some of this is US-specific – the rest of us are well aware of the inadequacy and inefficiency of the American healthcare system).
Above all, he makes the point that the industrial structure rules out marginal cost pricing. Drug development costs are high but marginal production costs are low. Prices charged for on-patent drugs are much higher than marginal cost to recover the upfront investment. This makes some policy and personal decisions agonizing. Is it worth paying hundreds or thousands or even hundreds of thousands of dollars or pounds for a new anti-cancer drug which might extend the patient's life somewhat, when it will either ruin the family finances or blow the hospital's budget for the treatment of other patients? But these dilemmas would be greatly mitigated with a different regulatory and financial structure. After all, in all countries, including the US through Medicare and Medicaid, the government is paying the bill. So why don't we have systems that allow price to be set equal to marginal cost? Already governments fund a great deal of the basic medical research on which pharma companies piggy-back. Rather than granting patents for specific drugs as the way to incentivize new medicines, why not fund drugs before they are developed? The same logic applies to expensive new equipment and tests. Either way, society pays the costs, mediated through the government health system or a highly regulated insurance system. Better to pay in a way that allows price to equal marginal cost. Only the huge pharma giants would suffer.
Does this strike you as a crazy idea? Prove your intellectual curiosity by reading this book? Does it strike you, as it did me, as an illuminating idea pointing to the possibility of an important regulatory and policy reform at a time when there will be enormous pressure on health budgets? Then read it too. For me economics has always been defined as the subject which embodies in the context of social organization David Hume's application of reasoned scepticism to evidence. Dean Baker's book is wholly in that Enlightenment spirit.
