Elements of socialism part of free enterprise economy

Vijay K. Mathur

Published in Standard-Examiner, February 28, 2011, Ogden, Utah

We hear a lot of negative talk about socialism from Utah legislators and other conservative groups like the Tea Party Express. However when it comes to their actions and/or proposals for legislation, they forget that their agendas can also be deemed socialistic.

Let me first explain socialism. In socialism the government controls means and quantities of production, as opposed to communism where, in addition to production, government also determines quantities of consumption. Just like the U.S. economy, Utah is a mixed economy where private markets, by and large, function in most private goods (a generic term which includes services as well), but the government plays a significant role in the provision of public goods and in other areas. For example, it fosters competition in markets, regulates damage and promotes beneficial spillover effects.

Private goods are those goods in which consumption primarily benefits the consumers who pay for those goods (no externality of benefits in consumption). But public goods, if provided in the market by some, benefit all, even those who do not pay for them (externality of benefits in consumption); hence no one will have the incentive to provide those goods. Therefore, economic efficiency requires that public goods be provided collectively (by government) using taxes to pay for them. That is not socialism, because the price system in markets fails to allocate resources and output. National defense and environmental quality are examples of public goods.

Even the 19th century intellectual and a classical British economist John Stuart Mill, the greatest defender of free markets, liberty, property rights and a severe critic of socialist thought, recognized the important role of government. Robert Ekelund, Jr. and Robert Hebert, in their book on the history of economic thought, state that Mill considered administration of justice, establishment and enforcement of property rights including environmental protection, protection of interests of minors and incompetents and provision of public goods like roads, canals, dams and other infrastructure projects as necessary functions of government. Mill also favored equal distribution of wealth (not income). In his view people are entitled to the income they earn from their own labor, but wealth is not an "end of itself."

Even Andrew Carnegie, according to David Nasaw in his book on Carnegie, an ardent supporter of capitalism, believed in and practiced wealth redistribution. Warren Buffet, Bill Gates and many others are also following the footsteps of Andrew Carnegie. Perhaps lawmakers, working on estate taxes, should read "Gospel of Wealth II," an article by Andrew Carnegie published in 1906 in North American Review.

In modern times, as Ekelund and Herbert state, "Every capitalist economy today possesses some socialist elements or institutions and vice versa." In fact we even have some programs that do not meet pure free enterprise test. For example, subsidies to ranchers, farmers, oil and gas producers, as well as many other spending and tax incentive programs do not meet the pure free market test, but we have them, supposedly, for the general welfare of the people. In fact, Article I, Section 8 of the Constitution even recognizes the role of government in promoting general welfare of the people.

In Utah, legislators are proposing legislations to control curriculum, giving control of public schools and higher education to the governor, to teach that the U.S. is a constitutional republic and not a pure democracy, and to eliminate tenure at public universities. Are these examples of socialism? In one sense such legislations do interfere with freedom of thought of educators and organizations, which Mills strongly defended. The irony is that the same politicians and conservative groups cry socialism when the federal government passes regulations that the state has to comply with, while ignoring socialistic leanings of state regulations.

Appropriate rules and regulations are a significant part of the free enterprise system. Food safety regulations benefit both producers and consumers, drug regulations are essential part of markets in pharmaceutical products, patent laws and enforcement protect innovations and hence businesses, financial regulations protect financial industry and consumers from fraud, environmental regulations protect people and businesses from health hazards and environmental damage. There are a host of other regulations that are essential for smooth operation of markets. Bloomberg Government Insider, Winter 2011, reports, "In a Bloomberg poll in December, that found 70 percent said government regulation is needed 'in most cases to protect public interest'..." But surprisingly 53 percent "of the respondents agreed that 'most American businesses' can not be trusted to act in public interest."

It seems that many media pundits, political leaders, bloggers, and media talk show hosts misguide the people when they label federal and state programs as products of socialistic agenda without understanding socialist thought and intent of regulations and laws in a mixed economy. Perhaps they need to be educated in the workings of the market economy, its limitations and the role of government.

Mathur is former chairman of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He also posts original blogs for the Standard-Examiner at http://blogs.standard.net/economics-etc/ .

Monopolization and the costs of drugs

Vijay K. Mathur

 Standard-Examiner, February 11, 2011, Ogden, Utah

 The patent system in U.S. has existed since 1790, but it has expanded substantially since 1836. It is designed to protect new inventions by establishing property rights to holders. On one hand the patent system is designed to encourage inventions, but at the same time it confirms monopoly power to the inventors. Since uncontrolled monopoly power is an inefficient market structure, Congress has to balance it with the incentive for inventions. At present this right is generally granted for 20 years.

After the 20-year brand-name monopoly is over, pharmaceutical companies have to face competition from generics. A recent news story in The Wall Street Journal, Jan. 13, points out that, "Brand-name drug companies are fighting to weaken a provision of the health care overhaul that was designed to open up generic competition in biotechnology medicines and save billions."

Biologic drugs are biologically synthesized, as opposed to chemically based drugs. The health care law of 2010 made the entry of generics relatively easy in the market place for generic biologics (biogenerics) to provide effective competition to brand-name biologic drugs. Biologic drugs are very expensive and thus have a very high profit margin. A February 2008 study by economist Dr. Robert Shapiro (Chairman of Sonecon, LLC, a private consulting firm and former undersecretary of Commerce for Economic Affairs) and his co-authors, shows that across all treatments the average cost of biologics is $16, 425, which is 20 times the average cost of traditional drugs. Therefore, drug companies like Genentech, Amgen, and Merck are very much concerned about losing their market share and profits with the advent of generic biologic drugs.

At present, fortunately for brand-name drug companies, Food and Drug Administration has not come up with an evaluation process for biogeneric drugs. Hence, in the meantime, biologic drug companies, who control close to 20 percent market share, are working on two fronts to maintain their monopoly power and profits. They are partnering with other companies to develop "biosimilar" drugs, which are copies of their brand name drugs. They are also engaged in intense lobbying efforts to convince FDA to grant them exclusivity rights for 12 years; it is a cheaper way to preserve monopoly power. Sens. Orrin Hatch of Utah and Kay Hagan of North Carolina, both Republicans, sent a letter to FDA requesting, " to interpret the law in ways favorable to the brand-name makers." These efforts to block the entry of biogeneric drugs is in addition to barriers to entry posed by complexity and cost of developing bioglogics as opposed to developing traditional drugs.

Biologic name-brand companies are asking FDA for 12 years of exclusivity rights to market their drugs, as opposed to five years pushed by counter groups like insurance companies and generic biologic companies. Drug companies argue that exclusivity rights will permit more inventions of these complex drugs. However, this argument is not supported by convincing evidence on their research and development efforts in relation to profits. Supporters of generics would argue that the development of generics would save patients billions of dollars. At present many patients cannot afford these lifesaving drugs. The research by Dr. Robert Shapiro and his co-authors shows that competition from biogeneric drugs across 12 treatments will result in an average price discount of 35 percent and will save a total of $378 billion over 20 years. Sen. Hatch, who claimed that health care legislation would be very costly to the nation, is now trying to push FDA to maintain the monopoly power and profits of these large biologic drug companies. Government action is the cheapest way to acquire monopoly power to control output, prices and profits.

According to Kaiser Family Foundation Americans spent $234.1 billion on prescription drugs. The pharmaceutical industry is the third most profitable industry. Prices of prescription drugs have increased at the average rate of 3.6 percent per year, much higher than the general inflation rate during 2000-2009. The average brand-name prescription drug price was four times the average price of a generic and manufacturers received almost 78 percent of the retail price. A Congressional Budget Office study in 2006 found that median return on assets of pharmaceutical companies was close to 12 percent, almost double the return for other Fortune 500 companies.

It is about time that politicians, including Sen. Hatch, pay attention to their voter-patients' concerns about high drug prices, health insurance cost and medical care cost. Protecting exorbitant profits of drug companies by promoting monopoly power does not benefit this nation, given the very high fraction of spending on prescription drugs by private and public sectors. Efforts should be made to open the drug market for all types of drugs for more competition, including importation of drugs from Europe and Canada.

Mathur is former chairman of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He also blogs for the Standard-Examiner at http://blogs.standard.net/economics-etc/.