Month: December 2011

Medical Patents Must Die

Prometheus gave man fire, thankfully he didn’t charge every time man lit a match. Prometheus Labs in contrast wants to charge patients for a rule that says when to increase or decrease a drug in response to a blood test. Quoting Tim Lee:

The patent does not cover the drug itself—that patent expired years ago—nor does it cover any specific machine or procedure for measuring the metabolite level. Rather, it covers the idea that particular levels of the chemical “indicate a need” to raise or lower the drug dosage.

Even this is not quite right for suppose a physician notes that the patient’s metabolites are within the range where a change in dosage is not necessary; although the physician takes no action she still has used the patent and thus must pay Prometheus Lab a fee or infringe.

We already have significant incentives for producing pharmaceuticals (and thus the instructions required to best use those pharmaceuticals), we support medical research through universities and non-profit hospitals, and there is plenty of opportunity to profit from the manufacture of tests. Will we really get enough additional innovation to justify the monopoly prices and deadweight losses when we enforce patents on medical rules? Remember, we have to pay the higher prices on all the rules not just the ones brought into being by the patent.

And if medical patents why not economic patents? Will Scott Sumner now patent a rule for adjusting the money supply in response to metabolites the futures market? 

Patents like this are a logical consequence of the extension of patentable matter to software and business methods but extending patents to software and business methods has created huge legal costs without any increase in innovation.

Most importantly, patents can reduce innovation and are especially likely to do so in fields where innovations build on innovations. In fields of cumulative innovation, previous patents owners become veto players who can threaten to holdup the new innovation unless they are granted a share of the proceeds. In theory, bargaining can result in an efficient outcome. In practice, it means lawsuits, delay, waste and reduced innovation.

Since a smartphone may rely on many thousands of previous patents, the smartphone industry has heretofore been considered a classic case of how too many veto players can impede innovation. But now consider human metabolism, one of the most complicated systems known to man (just a tiny fraction of that system is shown at right), and note that if Prometheus is successful in this lawsuit that any correlation in that system can be patented. This is a recipe for disaster.

Addendum: Scotus Blog has a roundup of links. See  Launching the Innovation Renaissance (Amazon link, B&N for Nook, also iTunes) for more on patents and their problems. Hat tip also to E.D. Kain who writes:

The world, it appears, is determined to turn me into a full-fledged libertarian. What with SOPA, PIPA, the NDAA, software patent trolling, police violence, and now patents on how doctors provide treatment to their patients, it’s becoming more and more clear how pernicious the law can be when it’s designed for powerful special interests, national security hawks, and big corporations.

Stephen Williamson on inequality and taxation

It is an excellent post.  The first part deals with Robert Frank, the second part deals with the recent Diamond and Saez paper, excerpt:

Finally, I have no idea where that “behavioral elasticity” is coming from, and I don’t trust it. My best guess is that it includes none of the factors that I think are important in addressing the problem. What we need here is a dynamic general equilibrium model that can take account of the short run and long run effects of a change in the income tax schedule. My best guess is that “behavioral elasticity” means that Diamond and Saez are measuring the effects of tax evasion and the intensive margin of labor supply, and that’s all. If so, I think they miss most of what is important:

1. There’s also an extensive margin. Tax people at a higher rate, and some drop out of the labor force.
2. Taxes affect occupational choice. Some work by Manuelli/Seshadri/Shin says that the effect of taxes on human capital is big time. Why do I want to undertake a costly and risky investment for a very small payoff?
3. Entepreneurial activity has to be very elastic with respect to tax rates at the top end. Why would I want to risk my own wealth or that of my close family for a very big payoff with very low probability, if that big payoff is taxed at 73%?
4. The United States is highly dependent on highly-skilled labor that migrates here from other countries. With a top tax rate of 73%, the Indian engineers might prefer to work in India, and the Canadian professors might prefer Canada.

Thus, I think it is likely that tax revenue is much more elastic with respect to the tax rate, particularly in the long run, than Diamond and Saez are letting on. To evaluate this properly, you need a serious model, and they have not provided one.

Will there be a charter city in Honduras?

Paul Romer hopes so, here is an update:

Much will depend on the transparency commission. The first batch of members appointed this week comprise George Akerlof, another economist and Nobel laureate; Nancy Birdsall, formerly at the Inter-American Development Bank, who now runs the Centre for Global Development, a think-tank; Ong Boon Hwee, a former senior executive at Temasek Holdings and Singapore Power; and Harry Strachan, an investor who used to run INCAE, a leading Latin American business school, with Mr Romer himself in the chair.

The article is interesting throughout, the pointer is from Michael Clemens.

The economics of Moneyball

At, I have a new piece up with Kevin Grier, excerpt:

Here’s something funny about the Moneyball strategy: It is bringing us a world where payroll matters more and more. Spotting undervalued players boosts their salaries and makes money more important for the general manager; little did Billy Beane know that in the long run he would be strengthening the hand of the large home-market teams, such as the Yankees. From 1986 to 1993, payroll explained 2.2 percent of the variation in team winning percentage, and that meant spending more money yielded little return in terms of quality on the field. In the 2004 to 2006 seasons, after the Moneyball revolution was under way, payroll explained 27.1 percent of the variation in team winning percentage, which means a stronger reason to spend more.

One of our sources you will find here, a very good paper by Jahn Hakes and Skip Sauer.

What is the difference between LOLR to banks and LOLR to governments?

Draghi says yes to loans to banks, for a three-year period and with weak collateral, and no to loans to sovereigns, in accord with current EU law.  (Admittedly his remarks require further parsing and so this interpretation is subject to revision.)  What does the Modigliani-Miller theorem say?

A cash-strapped government will start a bank.  A cash-strapped government will induce a domestic bank to lend more to it.  A cash-strapped government will force a domestic bank to lend more to it.  Remember the era of “financial repression”?

To some extent governments will internalize the value of this guarantee to banks.  If you don’t think this guarantee to banks somehow transfers to governments, won’t ECB-guaranteed claims on the bank become the new safe domestic security, knocking out the market for the riskier sovereign stuff and thus mandating some kind of risk equalization to keep the whole show up and running?

Is this transfer of the subsidy to the sovereign a bug or a feature of the plan?  Perhaps this is how the EU/ECB, viewed for a moment as a consolidated entity, will circumvent EU law to finance troubled governments.  Is it possible that by changing collateral requirements they can alter the flow of funds to governments in a discretionary, ever-changing, and relatively non-politicized fashion?  Does this satisfy the “too complicated for people to complain about” provision?

Three years.  Given recent events, that feels like a very long time horizon.  So as long as the available supply of collateral allows, banks would seem not so unwilling to advance funds to their governments, directly or indirectly, and that’s assuming they have a choice in the matter.  The new game will be to generate lots of usable collateral, because the overall credit demands are going to be very high.

Will the “not very tough cops,” namely the ECB-backstopped domestic banks, help the national governments avoid reforms and avoid IMF-enforced toughness?

What does the endgame look like when the three years is up?

All of this is subject to revision, but it is my preliminary take on what happened today.  The market doesn’t seem to have liked the announcement.  Here are other reactions.

I thank Garett Jones for a useful conversation related to this post.

Predictions about the eurozone

Charles Calomiris wrote in 1999 that the euro is doomed (pdf).  Milton Friedman had some pretty good predictions about the euro.  Here are my 2004 predictions about the euro, and here is my bit from 2003 (“The three percent rule is effectively dead…The real question is what will happen when one of the smaller nations thumbs its nose at France and Germany…and then claims exemption from the relevant penalties.”)  I have been worried about euro-like arrangements since the late 1980s.  Here are Paul Krugman’s 1998 remarks, though I am not sure which are his predictions and which are the scenarios he is distancing himself from; in any case he has been critical of the euro on numerous occasions.  In the German language there is Theresia Theurl, among others, and add to that list some number of millions of Brits and Swedes.

How about the course of the eurocrisis?  Here is my piece, “Last Man Standing” (jstor), published in The Wilson Quarterly in early 2009, written in 2008:

It has become increasingly clear that the problems in European governance are severe – and I am referring to the wealthier nations, not Bosnia and Albania. The European nations are tied to each other through the European Union and the euro, but they don’t have a good method for making collective decisions in contentious times.

…Spain, Italy, and Greece, which have all lost their premier AAA credit rating, may require some form of financial aid.  The Germans might look to spread this burden around Europe, but there are few places to turn. France and the Netherlands could chip in, but the hat cannot be passed very widely.

Part of the problem for Europe is that its biggest banks are very large relative to the economies of their host nations – in other words, its component national economies are too small…It’s not widely recognized that Europe because of  its systemic weaknesses, already has required implicit bailouts from the United States.

…Ideally, the ECB should take on a stronger role as lender of last resort in Europe, but the EU does not make such decisions easily.  Fundamental alterations would be needed in the bank’s charter, which was written precisely to make change very difficult, in part because Germany…insisted on biasing the ECB toward conservatism and inaction.  Even if the bank’s charter were amended, the member nations would surely impede any action by bickering over who would pay the bills for new initiatives.  If the ECB is going to run bailouts, decision making will have to become a lot more fluid, and that would require Germany to give up control and the bank to move away from price stability as its sole objective.  Since the EU member states have not been able to agree on a reform of the Union constitution, it’s not obvious they will be able to agree on changing the bank’s charter. They’ve had time – and good reason – to do so, yet have taken no serious action.

Roubini predicted the course of the current Italian financial crisis in 2006.  And so on.

It is sometimes asserted that the economics profession should lose some status because so few economists predicted the U.S. financial crisis.  I’m not sure economists should be judged by their ability to predict asset price movements, but grant the point.  The euro crisis is now here, and it seems our profession should win some of its status back.

Organ Donors for Compensation

Today Alexander Berger will donate a kidney:

NYTimes: On Thursday, I will donate one of my kidneys to someone I’ve never met. Most people think this sounds like an over-the-top personal sacrifice. But the procedure is safe and relatively painless. I will spend three days in the hospital and return to work within a month. I am 21, but even for someone decades older, the risk of death during surgery is about 1 in 3,000. My remaining kidney will grow to take up the slack of the one that has been removed, so I’ll be able do everything I can do now. And I’ll have given someone, on average, 10 more years of life, years free of the painful and debilitating burden of dialysis.

Alexander doesn’t want any praise or talk of “heroic sacrifice,” that is part of the problem. He wants to normalize donation and he argues for compensation in a regulated market.

The people waiting for kidneys aren’t dying because of kidney failure; they’re dying because of our failure — without Congress’s misguided effort to ban organ sales, they would have been able to get the kidneys they desperately needed.

…There’s no reason that paying for a kidney should be seen as predatory. Last week, the Ninth Circuit Court of Appeals issued a ruling legalizing compensation for bone marrow donors; we already allow paid plasma, sperm and egg donation, as well as payment for surrogate mothers. Contrary to early fears that paid surrogacy would exploit young, poor minority women, most surrogate mothers are married, middle class and white; the evidence suggests that, far from trying to “cash in,” they take pride in performing a service that brings others great happiness. And we regularly pay people to take socially beneficial but physically dangerous jobs — soldiers, police officers and firefighters all earn a living serving society while risking their lives — without worrying that they are taken advantage of. Compensated kidney donors should be no different.

Here are further MR posts on organ donation and here is Jon Diesel on Do Economists Reach a Conclusion on Organ Donation.

Primate and pigeon nationalism

Even sillier than horse nationalism:

A monkey, which had crossed the Indian border, was arrested by wildlife officials in Bahawalpur, Express News reported on Monday.

As soon as the monkey entered the Cholistan area of Bahawalpur, locals tried to capture it but failed as the monkey dodged past them.

The residents of the area then informed the wildlife officials, who after some investigation and struggle, managed to capture the monkey.

The monkey was later placed at the Bahawalpur Zoo and has been named Bobby.

This is not the first case of such cross-border animal arrests.

Last year, Indian police held a pigeon under armed guard after it was caught on an alleged spying mission for Pakistan.

The link is here and for the pointer I thank Matt Gnagey.

Assorted links

1. How the sellers of wedding dresses limit arbitrage, and is the Target 2 debate all screwed up?

2. How to reemploy some ZMPers (an epistolary romance), and British royalty adopt ZMP Greek donkeys.

3. No one has a good theory of collateral.

4. Markets in everything, at two different levels, British royalty edition, via Bob Cottrell.

5. Blog with Perry Mehrling and others.

6. What the Khan Academy is really up to, namely measuring when learning occurs or not.

Rewarding Altruism: Blood for Money

Do pecuniary incentives increase blood donation or do extrinsic incentives crowd out intrinsic incentives? In Rewarding Altruism (NBER, free) an important and impressive new paper Nicola Lacetera, Mario Macis and Robert Slonim analyze a field experiment involving some 100,000 donors and find that pecuniary incentives significantly increase blood donations. The field experiment covers a wide geographic area and the donors are tracked for a significant period of time after donating so the authors can look for geographic and temporal spillovers. The authors offered potential donors gift cards of $5, $10 and $15.

Subjects who were offered economic rewards to donate blood were more likely to donate, and more so the higher the value of the rewards. They were also more likely to attract others to donate, spatially alter the location of their donations towards the drives offering rewards, and modify their temporal donation schedule leading to a short-term reduction in donations immediately after the reward offer was removed. Although offering economic incentives, combining all of these effects, positively and significantly increased donations, ignoring individuals who took additional actions beyond donating to get others to donate would have led to an under-estimate of the total effect, whereas ignoring the spatial effect would have led to an over-estimate of the total effect.

Some of the increase in supply came from temporal substitution but this is not without value. Incentives are not just about increasing supply but also about increasing supply at the right time, i.e. when blood is most needed so it’s useful to have a lever that can influence when donations are made.

Crowding out did receive some support in an odd context. The authors found that donors who were surprised with a gift card after they had donated were less likely to donate in the future. Thus, the donors did not reciprocate the unexpected gift and may have felt that their altruistic intention was being undermined. Once again we see the overwhelming importance of context when trying to understand incentives. To paraphrase Mises, an incentive is not an objective fact but a subjective interpretation.

The authors did not find any decline in quality ala Titmuss. Indeed, this is to be expected since modern blood donation is not a random shout-out to people on the street but instead relies predominantly on repeat donors with a long donation history.

Gift cards of $5, $10 and $15 are small incentives and the authors suggest that the benefits from the increased supply far exceed the costs. It’s notable that it takes longer to donate blood plasma and as a result the U.S. blood plasma industry (the “OPEC of blood plasma”) has always relied on paid donors.

Here are my powerpoint slides on Incentives to Increase Organ Donation and here is an older post on sperm exports.


The latest rumour is that both ATLAS and CMS have evidence that the Higgs mass is about 125 GeV/C2 at confidence levels of 3.5σ and 2.5σ respectively. At 3.5σ, the measurement could be the result of a random fluke just 0.1% of the time whereas at 2.5σ the fluke factor is about 1%.

If you are really optimistic, I believe you can add these two results together in quadrature to get an overall result with a significance of 4.3σ.

While these might sound like fantastic odds to you and me, particle physicists normally wait until they have a confidence of 5σ or greater before they call it a “discovery”. Anything over 3σ is described as “evidence”.

…Crease wisely cites past experience as the number-one reason for caution. Indeed he quotes University of Oxford physicist and data-analysis guru Louis Lyons as saying “We have all too often seen interesting effects at the 3σ or 4σ level go away as more data are collected.”

As Crease points out, nearly everyone he spoke to in writing his article “had tales – many well known – of signals that went away, some at 3σ: proton decay, monopoles, the pentaquark, an excess at Fermilab of high-transverse-momentum jets”.

Here is more, and for the pointer I thank Ken Regan.  Here are the InTrade markets, which are pricing observation before 2014 at 88.

We now return to your regularly scheduled programming.

The final fate of Basel III?

“There aren’t enough assets in the world that are genuinely liquid and of high enough quality to allow all the banks to meet this ratio,” said Barbara Ridpath, chief executive officer of the International Centre for Financial Regulation, a London research group funded by banks and the U.K. government. “And that’s only likely to get worse because of the changing credit quality of some of the sovereigns.”

The debt crisis also is leading some regulators to question rules that allow European lenders to apply zero risk-weightings to government bonds issued in a bank’s home currency when calculating capital ratios. Under current European Union guidelines, banks don’t need to hold any capital against the securities, even after the cost of insuring government bonds against default rose to a record last month.

Here is more.  One plan is to “to allow banks to use equities to meet the liquidity requirement.”  Get the picture?  How is this as a stunning sentence?:

“The cash sovereign bond market has been less liquid than many would have imagined,” Lakhani said. “At least equities remain a liquid asset class.”

Hat tip goes to @counterparties.