Austrian School of Economics Blog by Damon Douglas

What Zune's Failure Says About Microsoft's Innovation Management

2008-12-31T09:10:00.000-08:00

Today (12/31/2008) Microsoft's Zune froze for its customers owning the 30 GB Ipod knock-off. We have all experienced Microsoft related technology failures, the ever infamous "blue screen of death" not withstanding. Why can't Microsoft seem to innovate well?

An annoying technological glitch reveals something deeper about Microsoft's corporate culture. McShane and Glinow write in their work Organizational Behavior, that the spirit of Microsoft captures "A tremendous work ethic; Bill Gates is always right; an us-versus-them mentality; and Bill Gates is always right.". Does anyone imagine how employees may freely share their ideas and foster an open environment of innovation?

Pascale, Millemann and Gioja's Self-Organization and the Corporation write that corporations that apply principles of self-organization can “exploit opportunities and improvise in highly advantageous ways.”

It is not surprising then that much of Microsoft's products capture the personality of its boss, Bill Gates, rather than the aggregate self-organized open environment of innovation that captures the spirit of Apple and Google.

Healthcare's Fatal Decoupling

2008-04-09T20:42:00.000-07:00

Most innovative markets employ the following system of invention and devlopment. A would-be entrepreneur derives an idea by which existing resources might be newly combined to create an innovative product or service. Alternatively, they may innovate to discover errors in how resources are currently utilized for existing production. Kirzner writes in Discovery of Error, "entrepreneurship is evoked by the presence of as yet unexploited opportunities for pure profit".

This would-be entrepreneur takes this discovery to market. They set out to argue that their new combination of society's resources is better than existing combinations, i.e. existing products and services. Society then casts its ballot through a voluntary transfer of wealth if they believe that this entrepreneur did better than existing candidates.

Thus, there is a coupling of entrepreneur to the beneficiary of their efforts. Those whom derive their benefit of the entrepreneur's efforts anonymously and voluntarily cast their vote through the ballot of cash communicated through prices. Prices thus serve as that measurable entity by which society communicates to the entrepreneur that they agree with their stewardship of society's resources. This entrepreneur and other would-be entrepreneurs thus continue to bear the incentive to continue in their innovation efforts.

Most important in this coupling is that the prices of society's basket of products and services reflect the benefit society derives through this coupling. As Hayek writes in Use of Knowledge, "prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan". Without this coupling, prices can only reflect the costs of production inputs and not the value of the final product.

Health care lacks this coupling. A would-be entrepreneur in health care discovers a new procedure, service or product that might have a benefit to society. However, those whom may benefit do not make that coupled transfer of cash for benefit. Albeit the cost of health care prohibits such, as is pedantically argued. This cost of care is not due to the nature of health care itself, but the original decoupling of benefit to cash transfer that continued its exasperation to higher and higher costs.

To understand this, we have to consider how prices in such a decoupled economy operate. Without this voluntary transfer of wealth, prices must reflect the costs of production. In the absence of coupling, a separate entity must decide on behalf of another the benefit of that resource to the beneficiary. They then decide through some cost-effectiveness analysis those combination of resources that provide the greatest benefit at the lowest cost.

Without this coupling, this separate decision maker is not punished nor rewarded for this process. They neither receive a benefit, aside from some merit, nor are they punished for this process. It is not their funds of which they allocate to acquire those resources. Nor is it their benefit they are estimating. Therefore, the prices they attribute to those resources only reflect their costs, and the benefit is simply a metric subject to bias, confounding, and error in measurement.

This is health care's fatal decoupling. Health care's resources of input reflect their cost, not their value. The entrepreneur is not rewarded for their actions. Thus, we have a never ending cycle of rising costs and slowing innovation.

Inside The Hayek Equation

2008-04-08T20:18:00.000-07:00

Cost Benefit Analysis - A Tool In The Hands of A Planned Economy

2008-04-03T20:25:00.000-07:00

It should seem common sense that something is wrong with an economic order when it is plagued with inflation and blunts in innovation. Hayek writes in Use of Knowledge,

prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan

What is chiefly wrong with health care? To what shall we owe its sickening inflation and its frailty of innovation. When we perform cost benefit analysis we take macrostatistical values that may or may not apply to our population of interest. We then assess their impact on a subjective score of quality of life determine through surveys. Then we crunch those numbers through a simulator through which we input prices. Mind you we assume these prices will not fluctuate through our 10 year horizon. Then we finally discover that magical incremental cost effectiveness ratio. This number tells us that introduction of a medication, procedure or diagnostic test is worthy of its cost. We use these methods to allocate resources on behalf of the whole. We decide what medications are right for others given our estimation of their quality of life. This is none other than a planned economy.

Econometrics and Its Zero-Sum Game

2008-02-23T17:51:00.001-08:00

Hayek writes in Cosmos and Taxis,"There exist orderly structures which are the product of the action of many men but are not the result of human design". Econometrics concerns itself with the measurement and relationship of these components to derive an economic order either a priori or a posteriori.

In order for an econometricist to subscribe to a Cosmos order, they must conceive its reality in a measurable and deducible manner. By stroke of habit in constructing their economic and social worldview through its components, they begin to see the world in Taxis. To the econometricist, they seek to measure the components in order to manipulate and achieve in their mind a desirable economic order.

In the measurement of population behavior, an investigator cannot measure with simultaneous certainty, the movement of a population and its position. By measuring any component's movement, you by nature fix its position. By measuring its position, you by nature fix it's movement. By fixing, one component's movement or position, you by nature fix another component. A Taxis construct contains less dimensions of reality than its larger Cosmos reality. The Taxis reality is true and reasonable, but merely a snapshot of a fixed component measurement of the larger Cosmos reality.

In fixing the economic order, there is a constant in its total value. When one component variable gains, another must lessen. The net sum of the movement or position of its components converges to zero. Therefore, a Taxis reality is by nature a zero-sum economic game.

Implications? Econometricists are slaves to limits. By advising policy makers, they map for government a world that cannot exist larger than what is measured. Thus by nature, society converges to a Taxis order and a zero-sum game.

An Evaluation of Obama's Health Care Plan - Part I

2008-01-06T21:54:00.000-08:00

The following is an evaluation of Barack Obama's Health as transcribed from the candidate's website (see video).

Obama: "The system's broken, I think people all across the country recognize that."

He is correct. We spend more of our GDP on health care expenditure's with less return on life expectancy.

Obama: "I don't accept the idea that in the richest country on earth we should have 47 million people without health insurance, and millions more being bankrupt from medical bills."

Herein lies Obama's first failed assumption regarding economics. Riches and resources do not lead to economic welfare. The protection of that property of resources leads to welfare. He views economics as the job of distributing scarce resources. Economics is rather mobilizing a market aggregate such that existing resources of production, however abundant or scarce, are combined in news ways to create new value.

Yet, he is also right. It is unacceptable. Many remain without access to a regular health provider. Many remain without access to needed medications. But you have to ask to what degree to individuals reap what they sow? The American College of Preventative Medicine (ACPM) estimates that 90% of current diseases are preventable, most of which are caused by a lifetime of smoking and obesity.

So is it acceptable, that individuals who take personal responsibility on their health then pay through tax dollars for individuals that abuse their bodies through smoking and poor eating?

Obama: "And I know something about this personally. My mother died of ovarian cancer when she was 53. And in the waning months of her life, she was not spending time thinking about how to get well or even how to come to terms with her own mortality. She was spending time thinking about how the insurance company was going to cover her expenses, because she had gotten sick just before taking a new job. It wasn't clear whether this would be considered a pre-existing condition. And that's wrong. There's something fundamentally wrong about that."

First, allow me to say my respects for Sen. Obama and his family for their loss. His mother would be proud of her son at this time. The risk-factors related to cancer in general, and ovarian cancer specifically still argue for the need to stimulate the economy of health care toward preventative health measures.

Cancer is still a medical mystery, but we are learning its risk factors, namely ovarian cancer. Despite uncontrollable factors such as age and genetic predisposition, obesity remains as an important risk factor for developing ovarian cancer, as well as the use of fertility drugs and oral contraceptives.

In a system of health care outlined by Sen. Obama, people do not own their own risk. They transfer that risk to someone else, namely the government. Therefore they do not bear the incentives to adopt preventative health measures in order to lower that risk.

Obama: "Which is why as President of the United States, my goal is to adopt a health plan that covers all Americans. The very first promise I made on this campaign was that as President, I will sign a universal health care plan into law by the end of my first term in office. The key to making this happen is to overcome the resistance we will see from drug companies, insurance companies, HMOs..."

The graph below illustrates the consequence of this reform and the reason why several entities in the health care market resist this plan.

As the quantity of enrollee's, Q, increases, the cost (the bottom curve) rises exponentially for insurance providers to manage the cost. The erroneous assumption is that costs per member will decrease as members, Q, increase. Yet, the current model of health care lacks an economy of scale allowing such an effect. What a comprehensive coverage entails is that Q is fixed at some value (the right red dotted vertical line). This, presumably above equilibrium would force the prices of health provision by the plan higher.

This alone argues against the proposal. However, there is a deeper problem, having to do with innovation. Individuals do not entrepreneur on property they do not own. In this case, we are dealing with the property of health risk. When an individual enrolls into an insurance plan, they transfer their risk to the insurer. The insurer owns their risk. There is a loss of incentive for reducing that risk aside from the rise in premium.

A consumer health participant could entrepreneur on their own bodies to envision measures for themselves to lower risk in collaboration with their communities and health providers. Without bearing the cost of this risk, they lack the incentive toward this innovation.

Obama: "Over the last ten years alone, the drug and insurance companies spent one billion dollars in preventing health care reform from happening."

Companies perform actions to increase the wealth of owners through profits. I do not condone nor have intimate knowledge of all the details of this expenditure. However, Obama paints a picture that it is the people vs. the insurance/drug companies. The real picture is freedom versus advocacy and reform of any nature. We live in a health care system rot with bureaucracy that taxes the system billions of dollars. We don't need more government. We need less government.

Obama: "That's going to require then a mobilization of the American people to insist on a Congress and a White House that are actually going to deliver this time. It is also going to have to have someone with the capacity to bring people together across various divides - getting business, getting labor, getting doctors, getting nurses, consumers joined together to craft this kind of legislation. I think it is going to be difficult, but I think it is going to be possible. The time is right, because nobody is satisfied with the system."

In 2006, there were 633,000 physicians and surgeons according to the US Dept. of Labor. There were 2.5 million Registered Nurses, including Nurse Practitioners. There were 66,000 Physician Assistants. There were 99,000 Occupational Therapists. There were 173,000 Physical Therapists. Finally, there were 243,000 Pharmacists. There are currently 25 million individuals with chronic illness. Consider then, the logistics of getting "doctors, nurses, and consumers joined together to craft this kind of legislation". How many would have to agree in order to adopt such a reform? In 2006, it would require 28,714,000 individuals to join together to make such a reform.

Obama: "My plan begins by covering every American. If you already have health insurance, the only thing that will change for you is the amount of money you will spend on premiums; that will be less than what you are spending now."

The graph below illustrates the consequence of this reform and the reason why premiums would actually INCREASE rather than remain or even decrease.

As the quantity of enrollee's, Q, increases, the cost (the bottom curve) rises exponentially for insurance providers to manage the cost. The erroneous assumption is that costs per member will decrease as members, Q, increase. Yet, the current model of health care lacks an economy of scale allowing such an effect. What a comprehensive coverage entails is that Q is fixed at some value (the right red dotted vertical line). This, presumably above equilibrium would force the prices of health provision by the plan higher. This is happening currently in Massachusetts with their state comprehensive health coverage.

Obama: "But if you are one of the 45 million Americans who don't have health insurance, you will have health insurance available to you."

If you hurt yourself or need care, better bring a good book because you are going to wait a long time.

Obama: "No one will be turned away because of a pre-existing condition or illness. Everyone will be able to buy into a new health insurance plan, similar to the one that every federal employee from a postal worker in Iowa, to a congressman in Washington currently has for themselves. It will cover all essential medical services including preventative, maternity, disease management, and mental health care. It will also include high standards for quality and efficiency."

How will the 28,714,000 individuals described above, not including other stakeholders, agree on "essential medical services"? Every special interest will vie their piece of the pie in argument for what service or product is "essential". In addition, there is difficulty in agreeing on standards of care and standards for efficiency of delivery.

Obama: "If you can't afford this insurance, you'll receive a subsidy to pay for it. If you change jobs, your insurance will go with you."

In health disparities research, it is a continuing question of what came first. Did the burden of illness and disease arrive in individuals prior to their poverty, or did their poverty beset their chronic illness? People today on medical assistance, in the form of medicaid, still fail to rise out of their poverty. They don't necessarily abuse the system. However, there is a lack of cognitive awareness with regard to their inherent life value. They cannot translate the quality of their health with the ability to increase their earning potential. My suspicion is they will remain on subsidies forever.

Obama: "If you need to see a doctor, you will not have to wait in long lines for one."

Britain's National Health Service is notorious for waiting times.

A Misnomer About Resources

2008-01-02T07:14:00.001-08:00

What drives an economy? Is it technology? Is it government? Many say resources. Many in China, for example, view their over-population as a drain on the economy, inspiring the one-child policy. Consider also the Simon-Ehrlich wager. Here, Dr. Ehrlich's work, "The population bomb", predicted a catastrophe of resource limitation because of population explosion. However, he was proved wrong in the wager by Dr. Simon who showed the prices of selected resources decreasing instead of increasing.

It is not technology. It is not government. It is not resources that drive the economy. People drive the economy; and not just one or few. The late Dr. Julius Simon in his work, "Ultimate Resource", argues this. Raw resources such as oil, copper, paper, etc. are never destroyed; they are transformed, albeit into unusable forms. However, humans are innovative creatures, if owning their own resources, are able to entrepreneur to discover new uses for their economy.

What are its implications? Many view the goal of economics as the distribution of scarce resources and hence adopt a view toward its equal distribution. Economics is rather the inspiration of many toward the utilization of existing inputs of production toward the creation of new value.

(This is inspired by an unpublished lecture by Professor Howard Baetjer)

Equalization, The Road To Poverty

2007-11-21T05:27:00.000-08:00

Most view equalization as a solution to poverty, but it is in fact a source of poverty. Consider the above trade schemes. They show the affect of comparative advantage on trade between two parties blue and red as they trade products A and B. The upward bulging red and blue curves represent their respective production possibilities curves. The downward bulging black curves represent their indifference utility curves. They represent the welfare of consuming products A and B. Production and consumption occur where the production possibilities curve intersect.

Focusing on the left graph, notice that the individual parties red and blue producing alone only intersect the first utility curve. Yet, notice as they agree to specialize in producing either A or B in a free trade agreement, together making up the purple production curve they produce more than their individual contributions alone. Notice by acting as the purple curve they intersect the third utility curve. This is a classic principle in economics in the advantage of trade.

What if some policy reduced red's ability to produce A and blue's ability to produce B so they are both equal. The right graph shows the consequence of equalizing A and B. If red and blue decide to then specialize, they never reach a sum greater than their individual contributions.

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Viewing this in the above graph's context (see A Map of The Austrian Economics Framework), we see how comparative advantage is an essential component of the economic cycle. Tariffs, quotas, subsidies, social justice, equity and any government intervention that attempts to put players on equal footing merely inhibits comparative advantage.

The result of equalization, while attempting to eliminate poverty, actually creates poverty.

Clinical Trials versus Online Health Information - A Case In Cosmos Versus Taxis

2007-10-12T09:28:00.000-07:00

In the Economist's recent article entitled, "Health 2.0", it explores the merits and risks of online health information. Dr. Daniel Hoch, quoted in this article states, "[Many doctors] don't get the wisdom of the crowds". Hayek writes in Individualism, “[Reason] is a product of an acute consciousness of the limitations of the individual mind which induces an attitude of humility toward the impersonal and anonymous social processes by which individuals help to create things greater than they know, while the latter is the product of an exaggerated belief in the powers of individual reason and of a consequent contempt for anything which has not been consciously designed by it or is not fully intelligible to it.”
According to Hayek, the aggregate or the whole has greater knowledge than any individual, including an expert. Critics argue the potential inaccuracy of online health information. Health 2.0 cites a 2004 study in the British Medical Journal that showed 6% of online information posted by an epilepsy support group was inaccurate.
As clinicians, we make clinical decisions based on clinical trials. However we all know the limitations of these trials, particularly in safety information. The challenge of every clinician is the answer to what degree our particular patient in question is represented in a given clinical trial population. This is key particularly in assessing the risk of adverse events.
Online health information is a form Hayek would describe as cosmos. It captures the local knowledge, disbursed in the aggregate, embodying the complex wisdom of the aggregate. Clinical trials represent Taxis, whereby a limited number of experts dictate the relevance of central knowledge not necessarily applicable to the whole.

Democracy Is No Safeguard For Free Markets

2007-10-01T06:36:00.000-07:00

Hayek writes in True Individualism “[Reason] is a product of an acute consciousness of the limitations of the individual mind which induces an attitude of humility toward the impersonal and anonymous social processes by which individuals help to create things greater than they know, while the latter is the product of an exaggerated belief in the powers of individual reason and of a consequent contempt for anything which has not been consciously designed by it or is not fully intelligible to it.”

Here Hayek contrasts reason in the singular and Reason in the aggregate. The anonymous movement of the whole to reason on its own behalf far excels over any one individual. Consequently any individual assuming commanding heights over how the whole distributes its resources elects the economy into destined failure.

We learned in the 20th Century the failure of such economies governed by a single or elite few of individuals. This is due to limits every actor in an economic process bear in assessing the position and direction of markets. Hayek writes in Use of Knowledge In Society, “[the economic process is the] problem of the utilization of knowledge which is not given to anyone in its totality.” The failure of single or few individuals commanding market movements rests in this failure of comprehensive knowledge.

What of any sum of individuals commanding the distribution of resources for the whole? What if a majority in a democratic process voted to command the distribution of resources for the whole?

More members deciding the fate of markets likely bears more knowledge as a whole than the single or elite group. However, history shows that the parliamentary or legislative process embodies individuals who lack relevant knowledge regarding the market process.

A democratic process is just as prone to market assessment errors as dictators and elite governing bodies. Markets fail to be markets when individuals either in singular, minority, and majority take rein of the commanding heights of the economy on behalf of the whole.

A Map of The Austrian Economics Framework (Public Scheme)

2007-08-10T08:19:00.000-07:00

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The above cycle diagram is a map of the Austrian Economics Framework. This diagram attempts to capture all the aspects of the Austrian Economic view. Working as a cycle, an interruption as indicated by the red connectors, illustrates a blockage of the entire economic cycle. The implication of this cycle demonstrates reform of any economic system must involve this cycle as a whole. The following reviews each of this cycle's components:

Private Property:

Private property serves as the initial substance of the Austrian Economic Framework. Rothbard in Justice and Property Rights argues how private property is the root of all human economic activity. Without private ownership there is no incentive to gain more property and the whole economic system slows down.

Comparative Advantage:

Private property produces inequality. This inequality produces differential opportunity costs. Hayek writes in Social or Distribute Justice, "The greater productivity of [the Great or Open Society] rests on a division of labour extending far beyond the range any one person can survey." It is our inequalities that attract human beings toward enterprise and trade relationships.

Entrepreneurship:

Kirzner discusses in Uncertainty, Discovery, and Human Action how discovery of error and alertness to opportunities for pure profit inspire entrepreneurial activity. Comparitive advantage fosters errors and opportunites. If all prices were fixed their would be no opportunity to arbitrage. If all beared the same opportunity costs there would be no incentive to profit from the goods and services of others.

Trade:

Entreprenuership inspires all manner of trade. Trade is the activity resulting from entrepreneurial awareness. They are inseparable. Without trade there is no incentive to entrepreneur. Trade capitalizes on the comparative advantage of two parties so that both can acheive greater together than the sum of their individual production.

Profit/Loss:

Profit and loss discplines and teaches the entrepreneur the appropriate use of society's resources. Von Mises writes in Profit and Loss that the role of profit and subsequently loss is to reward the entrepreneur for their efforts in creating products and services that the consumer values.

Profit results in a creation of value of existing inputs of production. Society communicates to the entrepreneur that it agrees with the entrepreneur's use of existing resources. Losses, conversely, punish the entreprenuer for using existing resources in a wasteful manner.

Welfare:

Profit increases the ability of a party to acquire more resources for their welfare. Conversely, loss reduces this ability. Welfare is the end to the means of human commerce and economic activity. Increase in welfare incentavises a gain in more private property which feeds more into the cycle.

Modulators of the Economic Flow Cycle

Rule of Law:

Property right protection nurtures and protects the entire cycle. Without property right protection the entire system breaks down.

Common/State Ownership:

With common or state ownership, there is no incentive to utilize property for greater profit or value creation.

Tariff/Quota:

Tariffs and quotas reduce previously existing comparative advantages.

Subsidies:

Subsidies affect comparitive advantage. They communicate to society that certain products and services are more valuable than their real market appraisal.

Social Justice/Equality:

Equalizing all members of a market reduces differential opportunity costs between potential traders. This reduction in differential opportunity costs reduces differences in comparative advantage which serves to reduce trade.

Taxation:

Taxing profits reduces their value.

On Humility In Human Progress - Implications For Entrepreneurial Awareness

2007-07-02T08:14:00.000-07:00

Entreprenuers often fail. Most envision ideas of invention or theory in their own sphere of grandeur, ignorant of how the rest of the world fails to attribute their value. To what should entreprenuerial awareness focus? Kirzner in Action and Alertness writes of awareness to error and discovery as a source of entrepreneurial activity. I propose an additional source. Successful entrepreneurial awareness arises from awareness to economic orders developing en masse.

Hayek writes in Individualism, “[Reason] is a product of an acute consciousness of the limitations of the individual mind which induces an attitude of humility toward the impersonal and anonymous social processes by which individuals help to create things greater than they know, while the latter is the product of an exaggerated belief in the powers of individual reason and of a consequent contempt for anything which has not been consciously designed by it or is not fully intelligible to it.”

An individually successful entrepreneur merely stakes claim to the recognition of a newly established economic order, unrecognized beforehand. This is the reason with a capital R, Hayek discusses. True entrepreneurial activity is a humble and anonymous process. There is no fantasy of something new. It is a recognition of an economic, scientific, or social movement already in progress.

The Sickness in Sicko - Part III (I, Tamoxifen)

2007-06-24T13:30:00.000-07:00

This is my final part of my three part series addressing Michael Moore's prescription for health care: Profits of pharmaceutical companies must be strictly regulated like a public utility.

Part II is sufficient to argue against Mr. Moore's point above. However, I want to look at pharmaceutical profit regulation in this essay from the perspective of tamoxifen, the anti-breast cancer agent.

I, Tamoxifen (inspired by I, Pencil by Leonard E. Read)

(information from Wikipedia.org)

I am a selective estrogen receptor modulator familiar to those suffering from breast cancer as Nolvadex, Istubal, and Valodex. Targeting the estrogen receptor is all I do. You would think I am cheap to make, so why would pharmaceutical companies charge an arm and a leg to produce me to help people. That doesn't seem fair.

Well consider all that has to happen in order to manufacture me. First, I need to be synthesized. This synthesis pathway was conceived after hundreds of trial compounds failed to show promising results against breast cancer. Determining my correctly active structure took a team of pharmacologists, clinical scientists, biochemists and organic chemists.

Once my final structure was determined after years of work I need to be manufactured. Specialized organic chemists need to synthesize (Z)-2-[4-(1,2-diphenylbut-1-enyl)phenoxy]-N,N-dimethyl-ethanamine from purely starting materials. I have three benzene rings, one double bond, a phenol group ether conjugated to an amine group. If anything goes wrong, I do not work the way I should. Even worse, I may poison the person who takes me as medicine. Finally, even if all the atoms are arranged in the right order, they have to be arranged geometrically to work. I have to be the right isomer.

Synthesis involves either a stereospecific or non-stereospecific organic chemical reaction pathway (see Synthesis of Tamoxifen). The non-stereospecific starts with a simple Friedel-Craft acylation involving Anisole and Phenylacetic acid. The acylating agent in this process is a mixture of PCl5 / SnCl4. The ketone is was formed in a 78% yield.

Then, alkylation is promoted by treating the ketone with Sodium hydride (NaH). This removes the acidic protons (located on the position alpha to the carbonyl group) to produce the enolate ion. This could be isolated as the sodium enolate of the ketone treatment of this with ethyl iodide resulting in the formation of a compound in a 94% yield. The Ethyl iodide is chosen as the acylating agent probably as it contains the iodide ion, which is an excellent leaving group. It can therefore facilitate an SN2 substitution reaction with relative easy.

There are another four steps of similar complicating reactions. Each one involved hours of analysis, imagination, and work by a team of organic chemists. These organic chemists are human beings who need to be fed and who have families. They need to be paid competitively in order to stay with the company and one day retire to enjoy their families.

Finally, once I am a final drug entity, I need to be formulated as an oral tablet. Since the amount I exist in the final drug form is so small, I need to be mixed with inactive ingredients in order to get to where I need to work in the body. First step is to mix me with filler. Another ingredient is added so that when I'm pressed into a tablet there is no friction on the die wall press. Finally, identifying markers are engraved on the side of my tablet so that health professionals can identify me from other tablets.

All of these manufacturing processes take years of research and time. A team of chemical engineers and technicians guarantee that I remain stable throughout the manufacturing process. They need to make sure I don't degrade as I'm made. They need to make sure I dissolve in the stomach quick enough so I am absorbed. They also need to make sure that manufacturing me doesn't cost too much.

Finally, once I am my final tablet form, investigators need to make sure I am safe. They test me first on animals to see if I don't cause too much harm. Then they test me on healthy volunteers. Finally they test me on patients. All of these tests and investigations require a team of experts, clinical scientists, nurses, and volunteer patients.

As all of these tests are underway, I need to be approved by the FDA. This requires a team of lawyers and clinical scientists to make sure I am presented to the FDA as a safe and effective treatment for breast cancer. Finally, once I am approved, the pharmaceutical company needs to inform health professionals of my existence. Health professionals are too busy to keep up with the newest drugs. So in order to get me to patients, the company needs to market me.

So, you can imagine what all this costs. I am yet not a finished product. I have a black box warning from a side effect discovered after I went to market:

Tamoxifen Black Box Warning
Serious/Life-Threatening Events
serious, life-threatening, and sometimes fatal events in risk reduction setting (ductal carcinoma in situ and high breast CA risk women) incl. uterine malignancies (endometrial adenocarcinoma and uterine sarcoma), stroke, and PE; discuss potential benefits and risks of tx w/ women in these populations considering decr. breast CA risk; tamoxifen benefits outweigh risks in women already diagnosed w/ breast CA

So, pharmaceutical companies need to make better drugs than me. They need to make drugs that are more effective and have less side effects. In order to do so, the profits made from selling me have to make up for the cost of making me so that new drugs may be developed.

IF THESE PROFITS WERE REGULATED THERE WOULD BE NO NEW DRUGS.

The Sickness in Sicko - Part II

2007-06-24T13:29:00.000-07:00

The following is my second part in a series of my objections against Michael Moore's film Sicko, and particularly his 2nd prescription for health care:

Private, for-profit health insurance companies must be abolished.

von Mises writes in Profit and Loss, "Now one of the main functions of profits is to shift the control of capital to those who know how to employ it in the best possible way for the satisfaction of the public. The more profits a man earns, the greater his wealth consequently becomes, the more influential does he become in the conduct of business affairs. Profit and loss are the instruments by means of which the consumers pass the direction of production activities into the hands of those who are best fit to serve them. Whatever is undertaken to curtail or to confiscate profits, impairs this function. The result of such measures is to loosen the grip the consumers hold over the course of production. The economic machine becomes, from the point of view of the people, less efficient and less responsive."

The role of profit and subsequently loss is to reward the entrepreneur for their efforts in creating products and services that the consumer values. What would be the consequence for the removal of for-profit insurance entities? There would be no rewarding of innovation for services that deliver the hedging of risk for the health consumer. By removing for-profit entities and placing insurance provision in the hands of government, you remove the power of the individual consumer to vote via the communication of prices. You remove the power of the consumer to dictate to the insurer entrepreneur the value their products and services has in the marketplace.

I repeat what I stated in Part I. There is no cure for a lifetime of damage done to the body from smoking, poor diet and lack of exercise. What people ill-assume is that more health care is the answer to the failing health care economic system. The innovation needed is before visiting the doctor. We need innovation to align incentives of every actor in the system toward preventive health choices.

Private insurers are beginning to move towards preventive health rewards. By allowing more than one insurer to compete privately, each has an incentive to innovate toward this objective. A single insurer provider as Mr. Moore suggests in his 2nd prescription would remove this innovative incentive.

The Sickness in Sicko - Part I

2007-06-24T12:07:00.001-07:00

This is part one in a series where I challange Michael Moore's Prescription for Health Care. Mr. Moore's first proposal is that every American must have full, uninterrupted health care coverage for life.

"every American"

What determines American? Is it American citizen? What about a visitor who is accidently ill? What about illegal immigrants? Should we deny them coverage? Let's suppose we are generous and say everyone who inhabits our borders is American and should have full, uninterrupted health care. Illegal immigrants do not pay taxes. Is it fair for them to receive health care paid for by some else's tax dollars? Should they get it for free?

"must have full"

Who determines full? If the full health care, Mr. Moore is imagining, was possibly available, there would be no economic system of health care. There would be no need to determine how to allocate a scarce resource. Let's suppose we want to allow full health care available. Let's even suppose government had the funds to deliever that to "every American". How would the distribution be determined? Who could fairly distribute this resource? Health care providers who are experts in their field already dispute regarding the choices of therapy regimens.

"uninterrupted for life"

How would uninterrupted be determined? For example, how would hospital discharge (a big cost saver in health care) be determined? If capped reimbursement incentivized hospitals to decrease hospital stay, how much more would a single government provider?

The urge to implement comprehensive health coverage stems from a belief that the market failures of health care are due to a lack of government regulation. Kirzner writes in The Perils of Regulation, "the urge to regulate, to control, to alter these outcomes must presume not only that these undesirable conditions are attributable to the absence of regulation, but also that the speedy removal of such conditions cannot be expected from the future course of unregulated market events."

I believe the market failures Sicko addresses are not due to a failed government system but to an epidemic of unhealthy lifestyles that cannot be supported economically. Preventable illness comprises 80% of the burden of illness and 90% of all healthcare costs. Preventable illnesses account for eight of the nine leading categories of death. No medicine, surgery or treatment can reverse the damage caused by a lifetime of smoking, poor eating and lack of exercise. By simply increasing treatment that buys time, ignores the inevitable need to align patient's economic incentives toward healthy living. This is the innovation needed in the economic system of health care, not just more health care.

The Make-Work Bias Hiding In The Asheville Project

2007-06-21T12:37:00.000-07:00

Ask a pharmacist in America, what is the seminal study demonstrating the clinical value of pharmacists, they would quote The Asheville Project. Beginning in 1996, Pharmacists in Asheville, NC improved diabetes patients' HgbA1c goal (a measure of improved blood sugar control), improved blood lipid levels and decreased costs of medical care of at least $2700 /patient/year. Pharmacists coined this study as The Asheville Project with hopes of replicating this study throughout the United States. Pharmacists conceived Asheville as America's hope to the rising cost of care, especially from Diabetes, which ranks high on the nation's list of afflictions.

Before discussing the economic issues hiding in the Asheville project, it needs mentioning that this study lacked a control group. In fact many studies in the U.S., spawned off of the Asheville project, likewise lacked a control group. The question remains how much did the exposure to a pharmacist realistically raise patient outcomes? Could simply meeting with a person dressed in a white coat do the same? What unique expertise only a pharmacist may bring provided the incentive for the patient to live toward better health outcomes and increased medication and lifestyle compliance? Without a control group, studies like Asheville fail to illustrate the unique expertise pharmacists bring to patient care.

I believe the make-work bias that plagues all health care disciplines today, not just pharmacists, contributed to the poor study design of Asheville and other similar studies. The goal of health care economics is not so much to design better studies, but to align the right incentives of all actors in the system toward greater outcomes. Bryan Caplan, an economics professor at George Mason University discusses in part of his work entitled, "The Myth of the Rational Voter", America's make-work bias.

The Lexington column of the Economist summarizes Caplan's make-work bias concept (June 16th, 2007). "[A possibly fictitious story] of an economist visits China under Mao Ze dong. He sees hundreds of workers building a dam with shovels. He asks: 'Why don't they use a mechanical digger?''That would put people out of work,' replies the foreman. 'Oh,' says the economist, 'I thought you were making a dam. If it's jobs you want, take away their shovels and give them spoons.'

This make-work bias that pushes a market toward inefficiency is what drives today's health care business model. A make-work bias hides inside the Asheville project. Pharmacists are eager today to market their skills as clinicians. While I share this drive, I don't believe Asheville was the effective market solution. The desire to expand the pharmacists' turf blinded the Asheville study away from a proper study design. In other words, the investigators of Asheville were more interested in demonstrating a job rather than demonstrating economic value.

The Dangers of Advocating Pharmacy Reimbursement

2007-06-18T13:05:00.000-07:00

Pharmacists' advocation of prescription filling reimbursement may cause what Kirzner writes as, "[ a failure] to understand that the market has not yet discovered all that it will surely soon tend to discover”. When government protects inefficiencies by creating price flooring, it blocks future innovations yet to be discovered by the entrepreneurial market process.

Many pharmacies through America advocate for government intervention to promote higher dispensing fees. The California Pharmacists Association reacted recently to the June 1st, 2007 California State Legislature Budget Conference Committee. They claim that independent pharmacies face the danger of closing their business. This advocacy is not new of America's pharmacies nor of America's businesses in general. The formula typically adopts the following format. "X price is not fair, so Y business will fail, leaving Z, the American Consumer, without a certain commodity." It follows a "we advocate for the best interest of the consumer" type of terminology that really is a mask for protecting the interest of their businesses.

Do patient's really suffer from these independent pharmacies going out of business? Possibly patients will then lack the special pharmacy services that independents allegedly provide. Realistically, pharmacists at chains or independents rarely spend the time performing the clinical services that raise patient outcomes. There is no randomized clinical trial in America illustrating the enhanced patient outcomes delivered by community pharmacists.

Why should we reward inefficiency in the market? When pharmacies such as CVS or Walmart can deliver patients economies of scale and lower costs prescriptions, why should we protect those pharmacies that fail to do so?

The Challenges of Forcasting In Finance

2007-05-21T08:56:00.002-07:00

Mises writes in Profit And Loss "If all people were to anticipate correctly the future state of the market, the entrepreneurs would neither earn any profits nor suffer any losses. They would have to buy the complementary factors of production at prices which would, already at the instant of the purchase, fully reflect the future prices of the products".

At the recent Derivatives 2007 conference at the NYU Stern School of Business, Emanuel Derman critisized the use of models in the practice of derivatives trading. He stated, "If models can predict prices, there would be no markets!"

Indeed, consistent with von Mises, is that uncertainty is what truly drives market activity. The market for derivaties and securities is driven by the uncertainty of market players. While the original Black Scholes model was able to calculate the price of an option independent of supply/demand factors of the underlying asset, in practice true market activity is driven by the uncertainty.

The True Cost of Compulsory Licensing

2007-05-21T08:56:00.001-07:00

Brazil's AIDS program utilizes 'compulsory licensing' to provide cheaper medications to its HIV positive population in hopes of copying Thailand's strategy (Economist, A conflict of goals, May 10, 2007). What is the true cost of breaking patents in order to provide lower cost medications?

Rothbard defines property rights as two fold: 1) the right to ownership of your own person, and 2) the right to ownership of those resources or transformed resources acquired through investment of your own person. By Rothbard's definition, a breaking of patent, is a breaking of property rights.

The breaking of pharmaceutical patents has been a trend throughout the world, not just Brazil and Thailand. As a consequence, there has been decreased financial return for pharmaceutical companies on their blockbuster drugs. The Economist cites how the pipeline for drug companies discoveries have been decreasing as well as their returns in the market (Dec 5, 2006).

The true cost of compulsory licensing and the breaking of patents is the decrease of new drugs on the market. This is fine if we are satisfied with the current options we have at our disposal for our patients.

The Dangers of Mandatory Comprehensive Health Insurance

2007-05-16T13:21:00.000-07:00

State-wide mandatory comprehensive health coverage is set to be in form July 2007 in Massachusetts. Every resident will be forced to buy coverage or face a $1000 fine. In January, California's governor announced similar intentions. Talks are underway in Maryland as well.

Kirzner writes in The Perils of Regulation, "the urge to regulate, to control, to alter these outcomes must presume not only that these undesirable conditions are attributable to the absence of regulation, but also that the speedy removal of such conditions cannot be expected from the future course of unregulated market events." The urge to implement comprehensive health coverage stems from a belief that the market failures of health care are due to a lack of government regulation.

By fixing a quantity, Q, presumably above equilibrium, regulation forces a premium price of insurance above equilibrium. While this is common sense to assume price increases with comprehensive coverage as the above figure illustrates, other perils of regulation consequentially develop.

When government intervenes, as Kirzner writes, it fails to understand that the market has not yet discovered all that it will surely soon tend to discover”. By setting quantity fixing, through imposing mandatory coverage, this blocks the discovery process that may have taken place in due time.

According to Porter and Teisburg (Redefining Health Care, 2006), health care is driven by competition to increase bargaining power, cost shifting, and defensive medicine. No economy of scale is produced with increased beneficiaries. Mandatory health coverage will only serve to feed into this defective system.

Guan Xi 关系- Kirzner and the Chinese

2007-05-10T22:56:00.000-07:00

Kirzner's writes in Uncertainty, Discovery, and Human Action, "it appears equally plausible to associate entrepreneurship with that aspect of human action in which the alert individual realizes the existence of opportunities that he has up until now somehow failed to notice".

GuanXi (关系, pronounced goo wan shee) is a word in Chinese literally translated as "relationship". What it really means is your social network. Hayek teaches us in Use of Knowledge that the totality of information in a market is limited. No one individual, according to Hayek, can attain comprehensive knowledge about a market condition. Chinese have known this principle for ages. That is why GuanXi is vital. You know in your limited frame, inputs of production that are vital for someone else's pure profit potential. Your neighbor likewise has knowledge that may benefit you. It is through the network or GuanXi, that the awareness of entrepreneurial opportunities of pure profit arise.

So, if you want to do business in China, make sure you bring a strong stomach to eat strange things, and a patience to sit for long hours doing business in a restaurant or tea house.

The Anomaly of Anti-slavery Legislation

2007-05-10T22:50:00.000-07:00

How do we explain the need for government to impose regulations on such an atrocity while protecting free trade? Was William Wilberforce of the English Parliament against free trade by working to abolish slavery in the empire? What is the true role of government in economic enterprise?
This issue brings us back to our discussions regarding private property and the rule of law. It is government's charge to steward the rule of law and protect private property. The issue of slavery abolishment is not an impingement on free trade. It is government's duty to protect private property. Slavery is the most obscene private property violation in human history. Let government lay down its firm hand to abolish it, even if it costs the economy.
I believe the argument in the previous paragraph stands alone sufficient to argue for government intervention in antislavery. However, I would like to propose a hypothesis. If one were to research the archives of economic activity in the West Indies, I believe you would find high cost per unit of sugar production by using slave labor. I suspect that, as my professor, Dr. Howard Baetjer suggested once in a class, that companies utilizing slave labor would suffer from poor productivity. Their prices would not be as competitive as more honorable labor practicing companies. Looking at parliamentary archives would reveal these slave based companies need to protect their product through government regulation. If this were true, I suspect if the regulations favoring the slave based companies were lifted, natural selection would have worked its course. The higher productivity companies utilizing honorable labor practices would have choked out slave based labor. It would have no longer been a viable economic option.

Would You Change Your Opinion on Free Trade If It Harmed You Personally?

2007-05-10T22:47:00.000-07:00

It is easy to talk about free trade in a classroom, however they effect real lives. Mine is one of them.
The last IT job I held was at a start-up company. One day I finished a project and my supervisors were overjoyed over my progress. The next day I had to return home to my newly wed wife and report to her that I was laid off.
We were married not longer than 2 years. We had a mortgage and now only one income. At that time, offshoring had reached its prime. IT companies were sprouting in India, while all the IT jobs in the US were going away.
I had been a researcher and data analyst my whole working life. I knew nothing of economics, globilization or the workings of the outside world. Somehow I knew that this was all for good. You know the phrase "God closes a door and opens a window"? Well for me, God had closed a door, shut all the windows and left me there to sweat a while to realize one thing. I am responsible for my own outcome.
Over the course of two years I had worked as a secretary, a teacher, took close to 10 different standardized exams, was sworn in and discharged as an officer within 1 month from the US Navy, and finally got accepted into the Doctor of Pharmacy program at the Univ of Maryland.
I am thankful no one advocated for the protection of my job. If they did, I would have never experienced the opportunity for this new and rewarding career path.

China's Substantive Property Protection Law

2007-05-10T22:30:00.000-07:00

Hayek defines in Planning And The Rule of Law "formal rules" and describes them "as a kind of instrument of production", meaning the Rule of Law drives economic prosperity. An anomaly of this is the fact that a land rife with human rights abuses, corruption, and bribery has one of the largest GDP growths in the world. You know who - China. Let's assume that China's government officials are honest and report their GDP growth fairly, what do we make of this anomaly?

Surprisingly, Chinese officials have decided to become a modern society and attempt at property protection law (Economist March 10th - 16th 2007). This isn't something to cheer about because a look under the hood shows a substantive law rather than a formal one.
We learned from Hayek that a substantive law serves a unique group and must define the terms and conditions of every situation. As Hayek writes, "It must provide for the actual needs of people as they arise and then choose deliberately between them...It must set up distinctions of merit between the needs of different people."

Hayek's description of substantive law is just what China's property law applies. In fact it serves to benefit a remnant of their society while the pheasant populations do not. However, just this week in the Economist (Apr 7th-13th 2007), there is news of a family who fought AND WON for their compensation over their forcefully confiscated home! They are the first in China who fought for their property rights and won!

I'm not saying Americans are better than Chinese that made us inherently form a formal law system of government. It is something in our history that made a group of human beings who otherwise would accept and perpetuate a central authority, form a rule of law. My question is, why did the rule of law spontaneously develop in America? What made our history special that our country's foundation is stewardship of the rule of law? Understanding this, I think, would help understand how we can translate otherwise non-rule of law cultures into thriving societies.

Market-Based Management - Implications for Patient Care

2007-05-10T22:24:00.000-07:00

Wayne Gable and Jerry Ellig write in Introduction To Market-Based Management, "The power of the market system lies largely in placing decision making power in the hands of those with the appropriate knowledge".

With the increasing medical information available to many and the rising consumption of health care with increasing aging population, there will come a time that our patients will know more about their disease than us as health care providers. I see how Market-Based Management (MBM) can create value in the health care market place. Traditionally patient care is seen in a command control context. I, the health care provider, know better than, you, the patient. Therefore, just do as I say and all will be well.

I would like to propose another viewpoint inspired by MBM. What if we viewed the patient as an integral part in the decision making process. We, as health care providers, are merely servants that help the patient integrate the vast information they have about their disease. We help them because they lack the appropriate "[understanding] because he 'can't see the forest for the trees'". They will know the best for their own contextual situation as to the what medications they should take. We help them with that decision.