Beyond Patent Protection

PillsOne of the big arguments against libertarianism is the threat of monopolies. If there is no government, what will stop all markets from becoming noncompetitive? What stops a big company from using its resources to sell below cost for long enough to drive the competition out of business? The answer to these questions is hardcore. If one company gains a monopoly and doesn’t keep prices down, another company will see an opportunity and enter the market. This is a perfect libertarian answer because it is (1) perfect in theory and (2) hopeless in practice.

The way this situation would work in the real world is that most businesses would not enter the market because they would know that the current monopoly would simply force them out of the market by selling below cost. The only business that would enter the market would be another behemoth that was only entering the market to destroy the current monopoly and take over the place themselves. Doing anything else would have too high an opportunity cost.

One particularly interesting aspect of this situation is that it would cause prices to be highly variable. Today, the price of sugar might be 50 cents per pound but next week it might be $5.00 per pound. Libertarians are generally very concerned about price stability. As you can see here, government bonds are not the only thing that affects price stability. What’s more, libertarians are fond of pointing out that inflation is a kind of tax. And that’s true—a tax with many advantages. But monopolies are their own kind of a tax—but a tax that does no good.

I bring this up, because the Supreme Court just found in favor of free markets in FTC v. Actavis. In a 5-3 decision, the Court found that the FTC could sue drug companies for paying other companies to not produce generics. This brings up our entire broken patent system, but this particular case has to do with the time after the patent is over. Suppose Company A just lost its patent on a drug. Company B is going to start producing the drug at a much cheaper price. So Company A pays Company B to not produce it. According to libertarian thinking, there is nothing wrong with that. And three justices agreed: John Roberts, Clarence Thomas, and Antonin Scalia. Samuel Alito recused himself, but he certainly would have voted with them.

This is all funny when you look at it the right way. The libertarian argument here is that two companies ought to be able to enter into their own contracts and it has nothing to do with the rest of us. In fact, there are other companies that could start to make the drug, right? As I’ve indicated, this is nonsense. But what’s funny is that the very same libertarians who would argue that the government shouldn’t get involved in the market in this way think that the government should get into the market in a very big way by allowing patent monopolies.[1]

The idea for allowing patent monopolies was always to encourage innovation. But at least when it comes to new drugs, the government spends as much as the drug companies do on research. What the drug companies spend a lot of money on is advertising. They spend almost 20 times as much on marketing as they do on research. Clearly, we would be doing better if we got rid of patent protection and provided more public funding of research. It would also have the advantage of providing better drugs and not just the newest boner pill that’s only advantage is that it is still covered by a patent.

The problem with libertarians or communists or anyone who is dedicated to an ideology is that they limit their options in solving real world problems. To libertarians, patents aren’t about creating a dynamic marketplace; they are about some theoretical notion of freedom. But the truth is that freedom is not an absolute concept. There is the freedom of companies to subvert market forces so they can keep drug price margins high; and there is the freedom of individuals to buy drugs at a free market price. The fact that we have patents at all indicates that we understand this freedom trade off. But libertarians and like minded conservatives seem to think that the only freedom that is in need of expansion is the freedom for businesses to increase their profits. Thankfully, in this case, five members of the Court came down on the side of individual freedom—the kind that is increasingly fragile in this country.

[1] There are some libertarians who don’t believe in patents. They are rare, however.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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