[Random-bits] Remembering Galbraith: Paying for goods that have a zero price, on the margin

[James Love]

http://onthecommons.org/node/892

Published on On The Commons (http://onthecommons.org)
Remembering Galbraith: Paying for goods that have a zero price, on
the margin
By James Love
Created 05/14/2006 - 8:19am

Markets are often incredibly efficient, at least in terms of
stimulating the production and consumption of goods and services.
Most of us own more than we want or need. We have closets stuffed
with cloths we never have time to wear, garages and attics filled
with things we bought but don't have any real use for. We eat too much.

In a country like the United States, most of our private consumption
goes way beyond anything we need to get by. And, it is hard to see
that it really contributes that much to our happiness. Many people I
know fondly recall periods of their lives when they were much poorer
in material terms, but richer in terms of freedom, the quality of
personal relationships, and a sense of community -- such as the time
spent in college, graduate school, doing voluntary or semi voluntary
work, participating in team sports or finding time to bond with nature.

We definitely under-produce what Galbraith broadly defined as public
goods. Galbraith focused on goods that might be supplied by
governments, and which also addressed the appalling inequalities of
incomes.

Today we are discovering new ways of thinking about knowledge goods,
including an astonishing provision of goods that are produced to be
freely shared.

Yoachi Benkler and others have focused on the importance of networks
[1] and communities that produce knowledge goods that are largely
produced without an expectation of earning wages or any commercial
reward. In areas where the Internet has reduced transaction costs,
this has led to an amazing production of goods.

There are other important public goods that will not be produced
without sustainable income for the people who create the goods, or
sustainable incomes for critical services that support voluntary
efforts.

In some cases, financing for such projects is feasible from
governments. But often non-government solutions are important, in
order to avoid bureaucracy, inappropriate political control, or a
number of other problems. Decentralized decision-making, the freedom
to try unconventional solutions, or to challenge incumbent
managements, are quite important.

Competitive markets for private goods benefit from powerful
mechanisms that harness the efficiency and creativity of dynamic
decentralized decision-making by consumers and producers of goods.

There is renewed interested in methods to create parallel markets for
public goods. In some cases, the economic incentives used in markets
for private goods are adopted for the production of public goods. In
other cases, entirely new ways to financing public goods are invented.

The proposal for rewarding medical innovations with large prizes,
tied to medical outcomes, rather than 20-year monopolies on
inventions, is one such effort. In Representative Sanders' HR 417,
the annual funding for such prizes would come from the federal
government -- at least .5 percent of US GDP, and awarded to
successful drug developers on the basis of incremental health care
benefits. Payments from the fund would be awarded once yearly for the
first ten years a product was on the market, based upon an evaluation
of the relative benefits, when compared to all competing products
that were introduced in the previous ten years.

When applied to medicines, the prize fund approach would have the
government value the medical outcomes, but leave the decision making
on which R&D projects to fund to entrepreneurs. Any project that
would deliver positive health care outcomes, possibility measured by
Quality Adjusted Life Years (QALYS) or other pharmaeconomic metrics,
could be rewarded from the Prize Fund.

Another, different but possibly complementary approach to medical
innovation would be competitive intermediaries. Under one proposal
[2], employers would contribute a minimum amount per employee, to
intermediaries that funded R&D projects. These projects could include
open source databases, research tools, or translational research, as
well as later stage drug development projects, such as clinical
trials with human subjects. The employers (or employees themselves),
would have to contribute, but could choose who they gave their money
to. The intermediaries would compete against each other for the
employee contributions -- not on the basis of a shareholder return,
but on the basis of the impact of the investments on solving health
care problems.

In these models, sustainable and competitive systems of finance are
designed for cases where the final product -- the development of a
new medicine, enters the public domain. Generic competitive for the
products would lead to low prices, and largely eliminate price based
rationing of access to the medicine.

The market for the invention is effectively separated from the market
for the product that uses the invention. For consumers (and
taxpayers), the prices for the invention would be zero, on the
margin, while the price for the product that uses the invention would
only reflect the costs of manufacturing and distribution.

Could the Prize Fund or competitive intermediaries approaches be
generalized to other goods? There is increasing interest in designing
prize funds to reward innovations in agricultural science. The NIH is
considering holding a workshop on the use of prizes or competitive
intermediaries to reward open access scholarly journals. There may be
applications for projects involving software and other goods.

Much of this could expand the relevance and scope of Galbraith's
earlier observation that we are investing too much in private goods,
and too little in public goods. If we can create markets for public
goods, we can do more than we are doing today to address a wide range
of important social needs.
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Links:
[1] http://www.benkler.org/wealth_of_networks/index.php?title=Main_Page
[2] http://onthecommons.org///www.cptech.org/ip/health/hr417/
lovehubbard-code.pdf

---------------------------------
James Love, CPTech / www.cptech.org / mailto:james.love@cptech.org /
tel. +1.202.332.2670 / mobile +1.202.361.3040

"If everyone thinks the same: No one thinks."  Bill Walton