Let me start with Dr. Friedman. You are the ultimate free market pro-capitalist economist in the world. I think that is not an understatement. Some people say that if something is cheaper somewhere else, let’s import it into this country. But the question of price controls does complicate matters. Do you favor the importation or re-importation of pharmaceuticals from Canada?
Friedman: My initial reaction when I first was asked this question was to say yes. But the more I’ve thought about it, the more I’ve come to the belief that it’s not an issue of free trade at all, and that the right answer is not re-importation.
Glassman: I know you signed a statement with 140 other economists in opposition because of this issue of price controls. Maybe you could explain that, why you feel this is a different case and is not a case of free trade.
Friedman: Oh, it’s not a case of price controls, that isn’t the issue, either. The issue is patents. The issue is a government-granted monopoly and whether that, how extensively the rights that are granted for that purpose extend. The real issue is not really re-importation. The real issue in my opinion is the Food and Drug Administration. The FDA in the United States has followed policy, which means that it costs roughly $800 million to bring a single new drug entity to the market. And the question is where is that $800 million going to come from? The answer that we have given, whether the right answer or the wrong answer, the answer we have given is that it’s going to come by giving the producer of the drug a patent, a monopoly privilege to sell that drug, to exclude others from the sale of that drug.
And the question is, are you going to enforce that exclusion? The only way in which that $800 million can be raised is by charging very high prices to some people. Now, the question is given that you’re charging those high prices to some people, is it okay to charge low prices to some people? This is a standard case of a monopoly which engages in price discrimination as a way of maximizing its income. It charges high prices where the elasticity of demand is low, it charges low prices where the elasticity of demand is relatively high to the citizens of other countries.
Consider the following case: Suppose somebody in Canada simply counterfeits a patented drug. Does free trade require that the US accept importation of that drug? I think the answer’s no, if you’re going to enforce the patent, you have to keep out such counterfeits. Well, fundamentally and from an economic point of view, essentially when drugs that are purchased in the United States under a contract that they will be sold in Canada, or instead shipped to the United States, that’s the same thing. That’s violating the patent law. And the question is should the US government enforce one aspect of the patent and not another? That’s the real issue.
There’s no denying the fact that prices are cheaper in Canada. But the purpose of the law, the purpose of the patent was to enable the patent owner to make enough money to pay for the cost of producing the drug. And that’s not going to be possible unless you have price discrimination. And price discrimination adds to human welfare, it permits a larger number of people around the world to have the drug than it could otherwise do so.