It Takes Brains!
Wednesday, October 03, 2012

Drugs: The Good, the Bad, and the Ugly

Mark Thornton

[An MP3 audio file of this article, narrated by the author, is available for download.]

The senseless Batman killings in Aurora, Colorado, as well as those that occurred years earlier in Columbine a few miles away, have something in common with the number one cause of overdose deaths in the United States and an important potential cause of teen suicide: prescription drugs approved as safe and effective by the Food and Drug Administration (FDA).

PillsAs an Austrian economist, I am not saying that FDA-approved drugs "caused" these problems. The people who took those drugs and did those things are the people who "caused" those bad outcomes. What I am saying is that the FDA is guilty of manipulating information and people's choices and thereby contributes to all these negative outcomes.[1] I am also not saying that all FDA-approved drugs are inherently harmful, ineffective, or should never be used.

Most importantly, FDA-approved drugs and products help to make Americans fatter, weaker, dumber, sicker, poorer, and in general less healthy. We have been lulled into substituting prescription drugs for healthy lifestyles. "You don't need to correct unhealthy conditions in your life, just take this pill everyday for the rest of your life. The experts at the FDA have approved it and your doctor has advised you to take them." Collectively, this process is unconscionable, even though it is now considered normal.

As the pharmaceutical and medical industries pile up cash, the health crisis grows and spreads across the country. This is the irrational world created by the FDA. This powerful government bureaucracy, coupled with massive government monopolies (e.g., the American Medical Association, drug patents, certificates of need for hospitals), direct government subsidies such as Medicare and Medicaid, and indirect subsidies for comprehensive health insurance, etc., have combined to give America the most expensive medical industry and the least healthy population in the advanced world.

The FDA is a government bureaucracy, which Mises showed must be a rule-driven, rather than market-driven, institution. "Bureaucratic management is management of affairs which cannot be checked by economic calculation."[2] Hence the affairs governed by bureaucracies grow increasingly irrational and out of synch with human wants over time. As Mises demonstrated, the rule-driven bureaucracy is all about violence, not progress: "The ultimate basis of an all around bureaucratic system is violence."[3]

For example, we recently saw the FDA fined GlaxoSmithKline (GSK) $3 billion for illegally marketing their drugs for unapproved uses. They have fined other drug companies for similar practices. But do they ever get the job done?

No, the FDA is habitually slow to react, and even when they do, such fines are just part of the cost of doing business with the FDA. No people have actually been punished; GSK's stock rose significantly when the fine was announced, and hardly anyone even noticed the event. How unlike the free market, where a few tainted pills of Tylenol unleashes weeks of cable-television news coverage, billions of product recalls, crashing stock prices, and billions spent correcting the product-safety issue and assuaging the fears of consumers.[4]

When it comes to drugs, there are the good drugs that are produced and regulated by the real free marketplace. There are the bad drugs that are created as a result of government prohibition. Then, with the FDA, things get ugly. Here there are no social mechanisms to generate solutions, only a bureaucracy concerned with protecting itself and its power. The Big Pharma–FDA nexus is just one giant conflict of interest against the general public.[5] Let us now try to make economic sense of all this FDA chaos.

Drugs have been used for thousands of years. We now consume more goods that are considered drugs than ever before. There is no denying the benefits and economic value of drugs. However, the subject does raise an often neglected consideration of "harm." Unexpected harm is the result of underappreciated dangers from the consumption of a good.

In other words, everyone expects to receive more benefits than costs when buying a good. Our expectations include some known uncertainties (Is this going to be a good or bad avocado?) and other possible risks (Is this a potentially dangerous genetically modified avocado?). For our purposes, "harm" comes from the unknown risks of consuming a good. In the case of drugs and drug-like products we can see large systematic errors by consumers who are harmed as a result. For example, the American Medical Association and doctors, as well as the US government, helped promote cigarette smoking, increasing the number of smokers and cigarettes smoked, and thereby increased the amount of lung cancer and heart disease.[6]

Systematic errors in the case here are the choices made about pharmaceutical drugs where the physical or psychological harm are not properly anticipated because of the FDA's seal of approval. This would include the use of these drugs as prescribed by doctors, as well as the illegal use by those not under medical supervision. In recent years the harm from prescription drugs has caught up with and surpassed the harm from illegal drugs. This suggests that more people perceive prescription drugs to be far safer than their black-market counterparts.

By 2008, more than half of the overdose deaths (55 percent) were related to prescription drugs. Opiate pain relievers such as Oxycontin accounted for 73 percent of prescription-related deaths. Additionally, in 2009 there were 1.2 million emergency-room visits related to prescription-drug overdose, compared to 1 million related to illegal drugs such as heroin and cocaine.[7]

The link between antidepressant drugs and teen suicide is murky and the research seems inconclusive, but this is typically the case with FDA-approved drugs. The drug companies conduct tests that are reviewed by the FDA, but what really counts as "safe and effective" is illusive for the ultimate consumer and even the doctors who are doing the prescribing. Despite inconclusive evidence, an FDA advisory panel recommended a "black box" warning for all antidepressants. This is most the most serious action taken by the FDA short of outright prohibition.

The determination of what drugs are safe and effective in the free market would be more open, with greater oversight and review, and subject to third-party approval. We could well imagine that something similar to Consumer Reports or Underwriters Laboratories would emerge to provide a more dependable seal of approval.

Economic Categories of Drugs

In order to make some sense of this FDA-caused chaos let us organize our economic analysis on the basis of economic categories, rather than the chemical or governmental classifications of drugs. As described above, drugs can be classified as good, bad, or ugly. For example, "good" drugs include those that arose on the free market and continue to be produced, distributed, and consumed on the market without product-specific government interventions.

Examples for this category include aspirin, milk of magnesia, Preparation H, and laudanum (i.e., tincture of opium). These drugs are characterized as high benefit, low cost, and little "harm" as described above. This category would also include the large markets for alcohol (i.e., beer, wine, and spirits), marijuana, and tobacco, except that in recent decades these markets have experienced massive government intervention in the United States. Otherwise, these markets would be characterized as high benefit, low cost, and low harm.[8]

The "bad" category of drugs includes those where the free market was replaced by government prohibition and the black market. Examples of this category include crack cocaine, crystal methamphetamine, heroin, and the hand-sanitizer martini. These markets are characterized by low benefit, high cost, and a great deal of harm. It is important to note that some of the "harm" associated with these drugs is "expected" in the sense that they are known to be dangerous.[9]

It is also worthy of note that if these drugs were placed in a "good" environment (i.e., the market) the harm would decrease, the cost would dramatically decrease, and the benefits would dramatically increase. For example, the Bayer pharmaceutical company sold a low-potency, pharmaceutical, pure dose of heroin in pill form that could even be prescribed for infants, although it was still highly addictive. Coca-Cola sold millions of units of its original formula with cocaine as the active ingredient.

The "ugly" category consists of pharmaceutical drugs developed and governed under the regime of the Food and Drug Administration.

The bad and ugly categories are obviously inferior to the "good" category but the judgment as to which one is worse will be withheld for the time being. Rather, the terms should be understood as descriptions of the drugs' environment and the types and sources of harm they bring to consumers.

Bad drugs are those with known inferiorities and hazards. Efforts to suppress such drugs only serve to make them even more inferior and hazardous. For example, with increased prohibition penalties, drugs could have fewer attributes that consumers desire; they could become more potent and contain more harmful impurities. Stricter prohibition therefore reduces quality, increases potency, and makes drugs more toxic and potentially more addictive. Therefore, for our purposes, bad drugs are controlled by economic laws that dictate more or less predictable responses from entrepreneurs operating under black-market conditions.

Ugly drugs are controlled less by economic laws and are more the result of a bureaucratic process. Bureaucracies are driven by rules that are politically determined, although results are certainly influenced by the incentive of bureaucrats.Download PDF The results of this bureaucratic process appear to us as both mechanical in terms of process and arbitrary in terms of results. In other words, things get ugly in the realm of the FDA.

It has already been well established that there are major problems with the FDA's control over pharmaceutical drugs. First, they do not completely prevent the introduction of harmful products into the market (although they are biased in that direction and away from allowing beneficial products into the market).Download PDF Second, they raise the cost of bringing new drugs to market, thereby increasing prices and preventing beneficial products from coming to market. Third, they delay beneficial products from coming to market for lengthy periods of time. This means that sick people suffer more and die more often as a result. Fourth, they prohibit niche drugs that treat rare conditions from coming to market because the high costs and uncertainties of the FDA's drug-testing process cannot be sufficiently distributed among such a small group of patients.

The focus here is not that the FDA approves highly dangerous drugs like thalidomide, or that it stymies the introduction of safe and effective drugs. The focus here is that FDA approval itself makes drugs more dangerous. FDA approval creates a type of moral hazard for drug companies, doctors, and consumers.

A moral hazard causes increased risky behavior to take place. For example, insurance can create a moral hazard if it induces the insured party to take on more risks or fewer precautions. Mobile-phone owners, for example, who purchase insurance on their phone, may be more likely to take the phones into dangerous situations (e.g., the beach) or to take fewer precautions (e.g., not using a protective case).

In the case of FDA-approved drugs, consumers take on increased risks; however, they are not insured against risk, they are assured against risk. The FDA assumes no financial responsibility to consumers. When they collect big fines from drug companies, consumers are not compensated. If the FDA has approved a drug as safe and effective, why should consumers think otherwise? When doctors prescribe these drugs, how are patients supposed to react? They are at a tremendous disadvantage in terms of information. Therefore, it is quite natural for consumers to let down their guard. "Just take your Lipitor and let's go to KFC!"

Most FDA-approved drugs have side effects; many have dangerous side effects, some of which are deadly. Taking more than one drug at a time also introduces the possibility of dangerous drug interactions. Many drugs are not effective for the entire population and many drugs do not pass any kind of cost-benefit analysis. Particularly disturbing is that FDA approval helps shield pharmaceutical companies from liability resulting from damages. They are not exempt from liability, but the fact that the FDA approves of both the drug and its labeling makes it difficult to sue drug companies.

However, the most serious problem might be that people rely on FDA-approved drugs rather than applying more straightforward means of addressing health issues, such as lifestyle changes.

Many health concerns like high blood pressure, high cholesterol, heart disease, and type-2 diabetes can be addressed by changes in nutrition, exercise and environment. Even cancer, liver disease, and arthritis can be addressed with these lifestyle changes, although obviously not completely. This is where prescription drugs actually should come into play.

The lifestyle method has the tremendous advantage of not just solving the initial health problem but also of helping to prevent future problems. For example, losing weight to address a blood pressure or cholesterol problem also helps reduce the risk of developing heart disease.

Rather than be responsible for their own healthcare, American consumers have become passive absorbers of healthcare services and products. Worse yet, if they have comprehensive insurance and low copays, they become immune to price as a deterrent. The result is overconsumption of dangerous products. As drugs substitute for healthy lifestyles, healthcare, or rather "health" continues to decline, and hence the high cost of healthcare in America.

The high cost of healthcare is one of the most significant economic problems in the United States. We may have produced what is considered a "high quality" system, but it has not resulted in quality health. In 2010 there were almost 4 billion prescriptions written or more than 12 prescriptions for every man, woman, and child in the country. The moral hazard of FDA approval is exacerbated by insurance, in the sense that less than 7 percent of prescriptions are paid by cash, and copays have fallen to an average of $10, making drugs a cheap substitute for lifestyle changes.[10]

The Pure Food and Drug Act of 1906 was supposed to make our food "pure" and to eliminate those so-called poisonous "patented" medicine products. The FDA was established to accomplish those goals. What they have achieved is a population that eats poisonous food and gobbles down tons of patented medicines.

Mark Thornton is a senior resident fellow at the Ludwig von Mises Institute in Auburn, Alabama, and is the book review editor for the Quarterly Journal of Austrian Economics. He is the author of The Economics of Prohibition, coauthor of Tariffs, Blockades, and Inflation: The Economics of the Civil War, and the editor of The Quotable Mises, The Bastiat Collection, and An Essay on Economic Theory. Send him mail. See Mark Thornton's article archives.

Copyright © 2012 by the Ludwig von Mises Institute. Permission to reprint in whole or in part is hereby granted, provided full credit is given.


[1] The FDA approval process represents a government-created moral hazard and is a violation of the common law doctrine of procedural unconscionability. This doctrine applies to processes that are so one-sided, unfair, and harmful that enforcement would violate the conscience of the court. Courts are very averse to invoking the doctrine of unconscionability in civil cases because the grounds for doing so are vague. Invoking the doctrine in civil cases does itself create a moral hazard because people are not responsible for their actions in similar circumstances. Libertarians are generally opposed to the use of this doctrine and consider it outside the law. However, it is part of the common law and could prove quite useful against government activities if government courts were willing to take on such cases as the FDA approval process or state lotteries.

[2] Mises, Bureaucracy, p. 48.

[3] Mises, Bureaucracy, p. 104.

[4] Authorities have yet to solve the Chicago Tylenol murders of 1982 and the FDA has failed to adequately warn the general public of the dangers of non-adulterated Tylenol and other pain medication.

[5] "Collusion Between Pharmaceutical Industry and Government Deepens,", August 2, 2012.

[6] "What the American Medical Association hopes you never learn about its true history,", June 23, 2005.

[7] "Vital Signs: Overdoses of Prescription Opioid Pain Relievers — United States, 1999–2008," Morbidity and Mortality Weekly Report November 4, 2011 / 60(43);1487-1492.

[8] Harm can rise precipitously because of government intervention. For example, government ownership and management of roads has led to a disastrously high number of automobile accidents involving alcohol consumption and other drugs.

[9] This "expected harm" is the harm experienced by consumers who were fully aware of the risks and took them anyway. Such individuals are extremely high-time-preference individuals, and so the harm should not be fully attributed to the drug or the prohibition but rather to this type of problematic individual.

[10] "The Use of Medicines in the United States: Review of 2011," IMS Institute for Health Infomatics, April 2012.Download PDF

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