#principalagent

Note: Not a formal essay. Just (economic) musings of a recovering sick person. 

Being sick for the past two days has given me quite a lot of time to myself to think about certain things. This is God’s painful interpretation of giving a puny mortal an introspective vacation.

First off, I saw the principle of loss aversion in full action. Daniel Kahneman, who proposed the theory, explained it in terms of gains and risks - that if you made a gain, such as getting a free can of Sprite (praise the Lords), it won’t give you as much happiness as the dismay of losing a can of Sprite you bought. This principle bases human behaviour, and our tendency to avert risks (not doing things that could potentially make us lose the can). 

Now in my world, “gains” are measured in the units of work done. And so, being sick for me is that dismal state of losing that can of Sprite. On Saturday, when we had a Maths class, I rushed to it with fever and a running nose, because I was compelled to not “avert” the “loss” in “gain” (units of work). The satisfaction I got from the class is not nearly close to the immense state of worry I would have been had I not attended the four hour calculus lesson.

Secondly, I saw the relevance of the principal-agent problem in my “medical condition”. The principal-agent problem advocates that the “problem” essentially arises when the principal (in this case my parents) has to take decisions on behalf of the agent (me). Had my father not been a doctor or did my parents not fully understood the importance of correct treatment, that problem may have creeped into my little episode of sickness. It occurred to me that many children, and patients in general, must suffer so much if the principal (payers of their healthcare treatment) weigh their own vested interests (for example saving money by employing some inexpensive and ineffective treatment because they do not value the merits of healthcare as much) as more important than the interest of the patient (in most cases to get better as soon as possible). {In short: I love dad.}

But apart from contemplating on applying economic and psychological principles to ma vie malade, I have been thinking about something else - my views on the controversial generic drug production in our country.

Let me explain. 

Last night, my body burned with fever, my throat and nose choked with nasal inflammation and blockade, and in that moment, I knew I’d do just about anything to alleviate the pain. Speaking in economic terms, in that moment, price elasticity for medicine (or anything that’d make me better) was absolutely price inelastic. 

Now in my case, I had access to medicine and the principal-agent problem was non existent, but for many thousands of people, mostly in poor parts of Asia, Africa and Latin America, it is these basic necessities that are non existent. 

The Indian policy on drug production is designed to help these millions in a small way. Party to the TRIPS agreement (a WTO agreement on Intellectual Property Rights), we have amended the Indian Patent Act (1970) in such a way that we do grant patents to mammoth pharmaceutical firms innovating drugs like they’d expect us to. In fact, we encourage the generic (low cost and high volume) production of these drugs by Indian firms such as Cooper Pharma who use reverse engineering processes to do so. Not only does the industry generate employment (there are about 350,000 workers in the industry), but also the industry’s nature makes India the 3rd largest in the world in terms of volume (not value). Logically, what follows is that we are also the largest exporters of these generic drugs to some of the poorest people in the world. 

The world patent regime, dominated by big pharmaceutical firms, is clearly skewed in the favour of the producers and not the consumers. This not-so-market behaviour comes from the inherent power these firms have because of the absolute price inelastic demand from patients, and the immense size of these firms. Arguably, the pharmaceutical sector has an extreme concentration of monopolistic characteristics. While extremely favourable to these firms, this is a clear existence of market failure. The regime greatly favours the rich countries, who clearly capitalise on the inventions of the past. How so? Well, the pharmaceutical industry has not only been accused of abusing its monopolistic power, but also of indulging in a process called “ever-greening”, in which these firms make minor developments to already patented products to extend their patents in order to ensure even longer periods of assured profits. Thus, wealth and patents in the industry are extremely unevenly distributed. 80% of the patents are held in only 6 countries. (USA, Switzerland etc) And while these firms clamour about the need for these patents for further research, most spend about 2/3 of their profits on litigation. 

I am not saying that these firms are “bad”. Corporate investment and research in medicine would’ve rarely reached the heights it has today had community service, and not profit, been the motive of these large firms. Of course exceptions like Jonas Salk, the man who invented the polio vaccine and said “Would you patent the sun?” when asked why he hadn’t patented his brainchild, exist. (Salk was working in a state funded laboratory, so the primary interest was towards the community anyway).

Immense progress was made in medicine after the 20th century breakthrough, penicillin. However, most progress in the 20th century picked the “low hanging fruit”. Investigation for diseases and cures is extremely difficult now as the degree of complexity of research is much more. To carry out such pathbreaking research as is demanded today, these firms need profits to reinvest in R&D. These firms need to be big monopolies so that they can use economies of scale for massive R&D projects. 

However, a balance needs to be struck. Drugs must reach where they are needed, regardless of purchasing power. And that must happen not so much to promote philanthropy in our markets, no, but for the basic protection of the sanctity of the market system itself. Perfect markets provide for the consumer, not fail this way. Unfortunately, the pharmaceutical industry is far from the model market lovers would like. Big monopolistic firms, exclusive healthcare due to high prices, and market failure. 

The main problem here is not that these firms are not providing for the poor, that is not their duty, but that they are being helped by existing systems and governments - who are also averting any responsibility. The problem is that the market failure is so stark that without the models of generic drug production followed by India, Brazil and China, the poorest in the world would continue to die of common diseases. 

Healthcare is a primary discriminator between the rich and the poor. With so much talk about the increasing gap in inequality - be it in the American President’s addresses, on the WEF, or on websites, newspapers and blogs - we need to rectify this gap in healthcare. Inclusive healthcare is the first step to an egalitarian world. Barack Obama has realised this and the Obamacare policy, which has started this year, seeks to provide healthcare for all Americans. This is not a “communist” “anti-business” way of looking at things: it is pro-market, as the market puts the consumer first, not the business. Healthcare is the prerogative of every human being, and rich or not, every one is a consumer.   

The Indian Policy, which stands up against the ever greening of drugs and issues patents with a lot of discretion (unlike the the FDA, USA, where an intensive lobbying culture has taken root), is needed. These models of newly industrialised countries are actually helping in creating a balanced global model. While huge pharmaceutical firms develop drugs in the 6 countries hugely favoured by the patent regime, countries such as India, China and Brazil, with generic production, disperse the drug in the world. The fact of the matter is that despite their complaints, pharmaceutical firms still make money in these “poor” markets, as product discrimination is a reality, so they aren’t truly losing out although they may claim so.