Amazingly, this new $500,000 drug is the cheaper option

A new drug is to hit the US market imminently and there will be ructions for it costs $500,000 for a treatment. Don' expect to see NICE approving this on the NHS all that soon and do expect to see huge wailings and moanings about the immorality of the profit motive in saving lives.

At which point, two things one minor one major.

The minor being that this is actually cheaper than the current treatment for the same disease. It's for a form of leukemia,  the standard treatment for that if chemotherapy has failed is a bone marrow transplant which costs, in that US system at least, some $800,000. Still on this minor point about costs is the usual one about development costs. Depending upon who you believe a new drug costs $800 million to $2 billion to develop and that's without paying for the failures. It's expected that some 600 people a year will use this drug, at least in this manifestation of it. The patent will, roughly speaking, run for another decade or so.

Those just are the sums - and it's even worth noting that this isn't just some drug with minimal manufacturing costs either, it's specifically formulated, taking several weeks each time, for each patient.

The approval of Novartis AG’s breakthrough therapy for a deadly form of leukemia opened the door to a new class of treatments even as its $475,000 price tag reignited the debate on how to value potentially life-saving drugs.

And now to the major point.

Yet the almost half-million-dollar price tag on the Novartis CAR-T drug is a new benchmark, and more are likely to follow, with similar new therapies for blindness, blood disorders and other cancers. Spark Therapeutics Inc.’s gene therapy for a genetic disorder that causes childhood blindness is expected to get an agency decision by January.

There are two entirely different things going on in health care costs. As human knowledge advances there are more things we can do and cure. We also have more older people around, meaning more at that peak time of life for consuming health care. Both of those push up costs, significantly.

But we've also got this other thing going on. Something that's entirely analagous to automation itself. One way of looking at this drug/treatment is that it uses a variation of HIV to get the altered white blood cells to kill off the leukemia (no, do not take that as anything other than a very dodgy analogy) instead of the older method of killing all the marrow off and mechanically pumping new back in. We've in a sense, automated.

In the same way that an aspirin automates the previous treatment for a headache of a cool damp clothe bathing the brow in a cool dark room for some hours.

The total cost of health care, the change in it, is obviously the balance of these different effects. 

Which brings us to this oft repeated fact that the NHS has a higher inflation rate than the rest of the economy. Thus the NHS should be getting ever more money of course, even standing still as a percentage of GDP is to constrain it too much. Except, as above, we do have a process, that automation through innovation, which brings health care costs down. We also know how to encourage innovation, that happens in markets and doesn't in planned systems. Therefore.....well, we can see where the political problem is here, can't we?  

We'd just like to point out to Giles Fraser that capitalism already provides a citizen's income

Giles Fraser is musing over in The Guardian about salaries, stipends and the idea that capitalism might end up providing a citizen's income to all:

But I do know a little about how it might feel to live on a citizen’s income because the nearest real-life comparison I can think of is my own situation. I am not paid a salary by the church. I am paid a stipend. And the crucial difference is that a stipend is not supposed to be a payment received for services rendered. Rather, it is a way for the church to support its clergy so that they can do their thing without a concern for basic material welfare. There is no bonus for more bums on pews. There is not a quota for souls saved. Being a priest is not really a proper job – it’s not something that can be measured in terms of task. The stuff I absolutely have to do, task-wise, is pretty minimal. Even so, the church gives me a place to live and pays me every month.

Entirely fine, of course, how other people organise their lives is no concern of ours. We would note though that people who write a regular column in The Guardian, yes, even in The Guardian, do gain an income thereby, it being quite tightly linked to the work done to produce a column at the requisite intervals. Several of us have been paid by the newspaper for producing irregular such pieces in fact.

But it is here that we would really like to point:

Optimists argue that new jobs will be created, just like they were during the Industrial Revolution and the computer revolution. After all, if no one has a paid job, who will be buying all the stuff that the robots are busy making? Others suggest that with all this robot-led productivity, societies will become rich enough to pay their populations a citizen’s income – that is, provide everyone with an unconditional sum of money to live on, irrespective of whether they work or not. This is an idea that may be approaching as fast as the driverless car. From the Trump-supporting tech CEO Elon Musk to the lefty Greek politician Yanis Varoufakis, the idea of a basic citizen’s income draws support from across the political spectrum.

Now, I am not an economist, and I don’t know whether the sums will ever add up to make it work.

Our point being that capitalism is already that productive, the sums do add up and we do already have a citizen's income. It not being necessary to be an economist to work this out, just a tad of history and the ability to add up being sufficient.

The history being that the average human income, lifestyle, over the millennia since the invention of agriculture has been about $2 a day (this is, annoyingly, in 1992 dollars, not today's, so adjust up to perhaps $3 if you prefer). This really is saying that the standard lot of people has been to live on what you can buy for $2 (or $3) in Walmart for the day, including food, heating, clothing, health care, housing and saving for that pension you'll not reach. It's also around and about what we describe as absolute poverty in a global sense these days.

Then came capitalism, around 1750 or so. With the result that today we do in fact pay a citizen's income. In the US, for example, the average food stamp payment is $29 a week. That's not the maximum, not at all, that's the average that a recipient of any at all gets. We agree it's not very much but it does, just that food stamp allocation alone, put you into the top 50% of all income earners globally. Yes, properly adjusted for the manner in which things cost different amounts in different places.

Here in the UK the jobseekers' allowance is £75 a week or so. Or, enough to put you, alone and unadorned, into the top 25% of all global income earners. Or, again alone and unadorned, somewhere up at perhaps 5 times that average historical living standard.

And what is that if it isn't capitalism becoming so productive as to provide a citizen's income? 

In which we shoot down a carefully constructed theory with one simple fact

We have another repeat of this idea that CEO pay is just terrible, terribly high that is, and that this leads to all sorts of errors and problems:

This is where the link to excessive CEO pay comes in. These complicated pay packages are structured to produce huge bonuses if share price targets are hit. The majority of shareholders are pretty impatient with businesses that do not deliver regular and repeated earnings increases over the short and medium term. The sort of long-term investment that might raise company performance many years from now, boosting productivity and wages for ordinary workers, is harder to push through. This in part explains why corporate Britain is notoriously sitting on a “cash pile” estimated to be as large as £700bn.

Instead of investing, what do corporate leaders do with all this cash? They pay “special dividends” to their shareholders, or buy back their own shares, thus boosting the share price and ensuring that their bonuses (so-called long-term incentive plans) will trigger a bonanza in two or three years’ time. That’s right: “long-term” is no more than five years away. Welcome to the dysfunctional world of high finance.

While the prime minister is in Japan this week, she may learn something about the patient, long-term support for investment and “continuous improvement” that helped build one of the most powerful economies in the world from the ruins of war. It is a country, incidentally, where the gaps in pay between corporate leaders and their employees are a mere fraction of what they are here.

The first problem with this comes in that middle paragraph. For there is an assumption that that cash paid out to investors in dividends or buybacks somehow doesn't do anything. Once it has fled the corporate coffers then that's it, gone.

Except of course that isn't what happens at all, the investors who receive it can do one of two things with it, spend it or invest it again (the number sticking it in a vault to bathe in being rather small). Investing again might well see it going into new and or small businesses, where more than all of the employment growth is, most of the economic growth and a very large part of the technological advance.

The second problem is in that last para - here is good research showing that Japanese companies do worse precisely because of the method of selection and payment of their CEOs.

The third problem being in the first. A share price is the net discounted value of all future revenue from the ownership of it. Boosting short term results at the expense of the long term therefore doesn't work - or shouldn't. At which point we need to test the idea. And as ever with a theory (let's pretend at least that we're talking about science here, not politics) all we need is one refutation to shoot it down. Do we have an example of a concentration upon that long term, at the expense of current profits and dividends, increasing the value of a firm, not decreasing it?  

At which point our simple fact. Amazon. The company doesn't really make profits, certainly it has never made an economic one (accounting, yes, but the two concepts are a little different, an economic profit is one above the general return to capital), never paid a dividend and as far as we're aware stock buybacks are limited to the need to feed the stock options and awards program, no more. It is also, after a couple of decades of this behaviour, one of the most valuable companies on the planet. Its CEO one of the richest men on it.

The stock market rewards that investment for the long term. The CEO having stock seems to increase that focus on the long term, sacrificing current profits and dividends to invest further increases the share price. 

The theory is wrong.

Change minds, change the world!

I’ve often wondered why people want less immigration. Could it be that they believe that immigration will hurt their job prospects or wages? Put too much of a strain on public services? Commit crimes, or change our culture or politics for the worse? 

If you think the sort of immigration rates we’ve had in Britain since the mid-2000s are good, as I do, you want to change the minds of people who don’t. Hell, you want to know if it’s even possible to change their minds. Maybe arguments and ideas don’t really change anything.

I’ve blogged before about a working paper that may show that you can change people’s minds:

We observe that participants in the treatment group update their beliefs about immigrants, and they donate more money to a pro-immigrant charity. These effects are fairly large, and they correspond to a change of approximately 0.25 of a standard deviation. Moreover, these effects persist even four weeks after the treatment. 

However, participants who receive the information treatment do not become more supportive of immigration reform. Indeed, they do not become more willing to sign a petition in favor of immigration reform, and their self-reported policy preferences remain broadly unchanged. Still, they are less likely to state that there are too many immigrants in the U.S.

Furthermore, we find that Republicans respond more strongly to the information treatment, both in terms of their views on immigrants and in terms of their policy preferences. Indeed, Republicans who receive the treatment become more likely to report having signed the petition in favor of immigration, and they become generally more supportive of immigration. Similarly, we observe that people who are initially more worried about immigration react more strongly to the information we provide them, and they update their views on immigrants and immigration more drastically than people who are less worried about immigration.

From Japan, with quite strict restrictions on immigration, we have a paper that finds that information campaigns about the potential socio-economic benefits that come from immigration do shift people’s views quite a lot:

Depending on the treatment, we find that this exposure led to increased support for allowing more immigrants into the country by 12-21 percentage points, or over 70% above the baseline rate. The treatments also motivated citizens to take political action in support of a more open immigration policy. Notably, while smaller in magnitude, many effects also persisted 10-12 days after the treatment.

From Norway, a Master’s thesis based on a randomized experiment investigating ‘framing effects’ (a concept I don’t think is very useful, but never mind) around whether people are told that ‘just’ 60 percent of immigrants are in employment, or that 7 percent are unemployed. (Others may be students, children or retirees.) Does positive-sounding information move people more or less than negative-sounding information? 

In my first hypothesis, 𝐻𝐻1, I posited that it is more likely to find statistical significance for the negative framing than it is to find statistical significance for the positive framing. I found support for this hypothesis in both my regressions, and phenomena of loss aversion, “losses loom larger than gains,” and a negativity bias may explain the results. Other explanations include the fiscal burden hypothesis, that people fear higher taxes or lower benefits, and social identity theory (Tajfel & Turner, 1986). In the latter case, by accentuating certain features of immigrants (work status/race/origin) in a frame, one reminds respondents of the out-group status of the immigrants. This reminder strengthens the in-group mentality, and a negative frame may thus strengthen the disfavor of the out-group.

In 𝐻𝐻2, I asked if it is more likely to find statistical significance for the negative impact framing than it is to find statistical significance for the negative behavioral framing. I found that for views on the cost/benefit of immigration, both treatments were statistically significant, though negative impact framing (p<0.01) more than negative behavioral framing (p<0.05), supporting the hypothesis. However, this variable pronounced weaknesses of experimenter demand effects. 

For immigration liberals like me, this is a sign of the importance of challenging negative untruths about immigrants.

And most recently, a paper by one of the same authors as the first study. This finds that if you do change people’s beliefs about how immigrants affect the labour market (ie, they typically do not hurt natives’ wages or job prospects) with, in this case, information about the Mariel Boatlift, you can substantially shift their views about immigration policy:

we find that a one standard deviation change in beliefs about the economic impact of immigration changes attitudes towards allowing more immigration by between 0.5 and 0.6 of a standard deviations. Through the use of real online petitions, we also find that changes in attitudes affects real political behavior. Finally, we find that the effects persist in an obfuscated follow-up study where differential demand effects across the treatment and control group are of no concern. Overall, these findings challenge the current consensus that labor market concerns are not a quantitatively important determinant for immigration attitudes.

These studies all seem to back the ‘naive view’ of opposition to immigration, which is that it is motivated by what people tell us it’s motivated by– like jobs, wages and welfare – and not the view that people are actually concerned about racial or cultural change but are afraid to admit that to a pollster. And they’re evidence that honest debate is worth engaging in if you want to change people’s minds and public policy. Nice one!

Perhaps the TUC would like to make up its mind here

The TUC has a new report out talking about workers' rights to such tings as parental leave, flexible working and so on. The correct response to this being, well, OK, could you please make up your minds? 

Bosses are punishing parents for taking their sick children to hospital, according to a “shocking” TUC study that finds many low-paid workers are disciplined for taking time off for childcare.

One mother who works in retail said: “My baby stopped breathing and I had to go to hospital – I got threatened with a disciplinary.”

It turns out that "a disciplinary" might be along the lines of "Why didn't you come to work?" "Sick kid" "Hmm, seems like a good reason." 

The report itself is here. And it's in the recommendations that we might want to recommend (sorry) that they make up their minds.

One such recommendation is that employment rights over such things as parental leave should be granted from day 1 on the job. Which is, of course, going to make employers ever so hesitant to take someone on, isn't it? As we actually know from multiple studies of different labour market structures, the more the associated costs of hiring are the less people are willing to take a chance on hiring.

But the one that really boggles our minds is the insistence on both greater flexibility of working hours and also an insistence that hours should be agreed and notified one month in advance. We think that being able to take the day off to take a kid to hospital is just fine, of course, but can't quite see how that is compatible with an insistence upon at least a 30 day in advance commitment to turning up to work. 

That is, we either do have flexibility or we have advance certainty but we can't have both, can we? 

Time for some minds to be made up here.

Is the FCA using the banks’ money to promote itself?

Back in 1998, Which? drew attention to the banks mis-selling personal protection insurance as add-ons to mortgages, loans and credit cards. The topic has rarely been out of the media in the following 19 years. In January 2005, Gordon Brown’s Financial Services Authority became the regulator for insurance and made PPI mis-selling a top priority. In 2006 the FSA started fining small companies for mis-selling PPI and big companies the following year. In the coalition government’s bonfire of the quangos in 2010, the FSA duly perished and was promptly replaced by three new ones. The Financial Conduct Authority, which largely duplicated the Financial Ombudsman Service and other regulators. The FCA, and the others, inherited PPI. In 2011, the banks gave up their fight against paying compensation for mis-selling and the ban on selling insurance jointly with loans.

The PPI claims industry was unleashed. At one point 50% of all nuisance phone calls were from “advisers”, honest or otherwise, offering to recover compensation. This was not policed by the FCA (it still isn’t) and no regard was given to personal data protection or the risks of identity fraud. One of the FCA’s three key roles is to protect consumers: it would be easy enough to ensure that claims can only be made by the individual claimants to the providers (banks) or the FCA itself.

The FCA is not short of staff. The City paid the FCA £554M last year, not counting fines which go to the Exchequer. That comfortably covers the cost of its 3,500 employees and their accommodation. And the Office of Fair Trading, The Competition Commission and the Financial Ombudsman Service have all been piling in too. The last, which is about half the size and cost of the FCA, had received 1.6M PPI complaints by the end of 2016. Add it all up and the regulators policing of PPI is costing the City about £1bn. That’s about 9% of the total cost of Britain’s 43 police forces.

So in this munificent context, it should be no surprise that the FCA bullied the banks into spending £42M on prime time TV to tell us all what we have been repeatedly told for 19 years, namely that if we have a PPI claim we should make it. The ad, possibly the most irritating ever made by M&C Saatchi, is even more annoying than the nuisance phone calls from which the FCA should have been shielding us.

Why is the FCA doing this? The 18 banks funding the campaign communicate regularly with their customers. It would cost them little to remind those customers of their rights and potential windfalls. Indeed it would be good PR for the banks themselves to do so. Instead the FCA takes all the credit and then tells those who go to the website to register claims, and get advice from, the banks. No mention of the Financial Ombudsman Service. Better still, the FCA website says “Today also marks the start of a new basis for complaining about PPI, meaning customers could be entitled to compensation – even if they were not mis-sold.” Yes, you read it right. We are entitled to mis-selling compensation even if we were not mis-sold if we think the bank made too much profit from the sale.

Even by their Alice in Wonderland standards, this is odd FCA behaviour: there are cheaper and more pragmatic options. Might they just be trying to impress their masters in the Exchequer?

No, full expensing isn’t crony capitalism

Writing for Bloomberg View, Tyler Cowen argues that ‘full expensing’, a key part of the GOP’s tax reform plans, is being oversold. I disagree.

Under the status quo firms can immediately deduct labour and running costs (stationary, raw materials) from their total tax bill, but can only deduct capital costs (plants, machinery) as they depreciate. Rather than being able to deduct £1,000 investment in a new computer from my tax bill right away, I must instead deduct gradually over five years as it depreciates. The problem is that £1,000 up front is more valuable than £1,000 in instalments over five years (after all that £1,000 could be collecting interest in a bank). This creates a tax incentive for firms to spend more on labour and day to day expenses, and invest less in new plants and machinery. That’s a problem not only because capital expenditure drives worker productivity and as a result, drives wages, but because it likely distorts investment across regions with areas that would benefit from capital-intensive manufacturing missing out.

The problem’s compounded by the fact that there are numerous different depreciation schedules for investments in equipment, plants and research and development. If it takes 10 years to depreciate a new robot, but only five years to depreciate a delivery van, and both investments will produce the same amount of revenue, then I will choose to invest in the delivery van over the robot. In essence, depreciation schedules end up favouring one kind of investment over another.

Full expensing solves that problem. It allows firms to immediately deduct productivity-boosting investments regardless of asset-class. It should encourage more investment and should prevent the current ‘picking winners’ aspect of the status quo.

Cowen suggests that the benefits of ‘full expensing’ are overhyped for two reasons.

First, Cowen suggests that full expensing won’t stimulate investment by a huge degree because the businesses most likely may be turning losses and thus won’t benefit from a shortened depreciation schedule.

He writes:

“If nothing else, full expensing would benefit businesses by accelerating when the relevant deductions could be taken (right away, rather than over a multiyear period), and for that reason it would boost investment. But that in turn benefits some kinds of businesses more than others. What about businesses that invest a lot today, but earn back the cash slowly and turn a profit only years later? Without a big tax bill, they won’t get a significant tax reduction now, which would blunt the benefits of full expensing. That’s OK, but again it means not to expect a miracle from tax reform.

“As it is likely to be implemented, full expensing applies most easily to companies that already have steady profits. And those are the companies where “getting the expensing benefits now” versus “getting the expensing benefits later” probably matters the least.”

Cowen’s right that full expensing by itself wouldn’t create a tax incentive for loss-making firms to invest. But, he’s failed to mention that the GOP’s tax reform plan adjusts the tax code to fix the existing bias against loss-making upstarts.

Firms are currently able to carry forward tax losses to years where they run a profit. It often causes confusion amongst journalists but it’s a fundamentally sensible system. The problem is that the value of a loss carry forward declines because of inflation and opportunity cost (it could have been in the bank collecting interest after all), the GOP’s tax plan corrects for this by adding an interest factor to carry forwards. (1) As a result, contra Cowen even firms who are not currently running a profit receive a tax benefit from full expensing. 

Second, Cowen’s worried that full expensing would devolve into the crony capitalism that its advocates decry.

He writes:

“Under one pure version of full expensing, the government would transfer funds to companies once those companies have started new investments, even if those companies are not yet making money. For instance, Gavin Ekins at the Tax Foundation has suggested: “In some cases, the federal government could consider refunding deductions above the taxable income of the business or allow larger companies to lease investments to small companies.”

"That I find worrying, because the government would be fronting money to companies and wouldn’t see the money again if those companies failed. Furthermore, companies would end up lobbying for what would evolve into corporate subsidies, no matter how hard legislators tried to write neutrality into the tax code. Full expensing again ends up as less neutral than it seemed in theory.”

It is easy to see the potential for abuse with refunding deductions upfront for loss-making firms, and Ekins himself points out you would need robust anti-fraud rules. But, as I’ve already mentioned adding an interest factor to tax loss carry forwards eliminates the need for the government to front money to companies that might crash and burn.

But even if full expensing were to create an incentive for cronies to lobby for favourable treatment it’s unlikely to be as favourable to cronyism and winner-picking as the status quo. As Cowen points out “current methods of determining expensing and depreciation seem to be chaotic, capricious and uneven in their impact across sectors.”.

If the US follows through with tax reform and lets firms fully deduct capital expenditures then we should expect a significant boost to investment. A paper from Devereux, Maffini and Xing suggests that when the UK expanded First Year Allowances allowing firms to deduct more of their investments straight away, firms benefitting invested substantially more (an 11% increase in the average firms rate of investment). And modelling of the GOP’s business tax reform plan by Kotlikoff, Benzell and LaGarda predicts that GDP would 8% higher after ten years.

Despite being virtually unheard of outside of tax wonks, the case for full expensing is powerful. If anything it’s been undersold.

I advocate for reforming carry forwards and full expensing in The Entrepreneurs Network’ report ‘A Boost For British Businesses: Policies For A New Government’.

It's as if the last 38 years haven't happened, isn't it?

It could even be true that the tech platform companies are gaining something like a monopoly. We don't tend to think so, we're running with the idea that a contestable monopoly will not be exploited as a natural one would be. But, for the sake of argument, OK, but that doesn't mean that this is the solution, does it? 

What’s the answer? We’ve only begun to grasp the problem, but in the past, natural monopolies like utilities and railways that enjoy huge economies of scale and serve the common good have been prime candidates for public ownership. The solution to our newfangled monopoly problem lies in this sort of age-old fix, updated for our digital age. It would mean taking back control over the internet and our digital infrastructure, instead of allowing them to be run in the pursuit of profit and power. Tinkering with minor regulations while AI firms amass power won’t do. If we don’t take over today’s platform monopolies, we risk letting them own and control the basic infrastructure of 21st-century society.

We tend to think we've all just spent the last 38 years proving that nationalisation isn't the answer to what ever monopoly problems might actually exist. The nationalised railways had a continuing decline in passenger numbers something that reversed as soon as even a simulacrum of private ownership returned. The privatisation of the electricity and water companies led to higher investment and a smaller workforce, showing that nationally run companies just weren't efficient.

And we're absolutely sure that everyone's just dandy with getting their search services from British Leyland, right? 

It is indeed true that monopolies can and do exist, either for those natural reasons or because of legislative privilege. But we've already tested the nationalisation solution to destruction and no, it's not the answer.

Peter Hitchens is wrong to oppose festival drug testing

Earlier this month, Peter Hitchens and Transform’s Steve Rolles appeared on a minor TV channel to debate whether UK festivals and police forces should continue partner with drug-testing services like The Loop in an attempt to reduce the harms associated with illegal drug use.

The discussion quickly turned towards the question of Britain’s legislative approach to drugs in general, a vital part of the context in which drug-testing services operate. Hitchens’ argument is that Britain is stuck in a halfway-house of drug prohibition; whilst police target suppliers, they largely turn a blind eye to cases of individual possession. Deaths, health risks, and other harms from illegal drugs are in his view not the result of too much prohibition, but too little. Post-1971, the War on Drugs was never fought in Britain.

Steve Rolles countered Hitchens’ call to intensify user-level enforcement of drug laws by citing a 2014 Home Office review of international approaches to drug policy, which found no clear relationship between the intensity of user-level prohibition and overall levels of drug use. The review also states that comparatively low rates of drug use in Japan—Hitchens’ go-to example of effective drug policy—cannot simply be explained by its harsh enforcement of drug laws:

In Japan, where cultural conformity is traditionally valued, drug use is subject to a degree of stigma. In this context, it is difficult to tell whether low levels of drug use are a consequence of legislation, or a product of the same cultural attitudes that have informed the zero-tolerance approach.

Hitchens dismisses this reference to Japanese cultural norms as “racialist”, conflating race and culture without actually rebutting the point being made. However, it does seem reasonable to expect some level of deterrence from harsher enforcement of drug laws, even if other factors also play a role. The key point that Hitchens fails to grasp is that the harms associated with drug use are not simply a function of the number of drug users. Drugs sold on the black market and consumed in the shadows create more health problems due to impurities, non-standardized dosage, HIV risks, and economic distortions. Criminal gangs tend to be more violent than regulated commercial premises.

But I suspect that weighing up the costs and benefits of different regulatory regimes is secondary to Hitchens’ moralistic case against all drug use. Despite being an occasional drinker, he believes that taking drugs “severs the link between hard work and reward, [making] deferred gratification appear a waste of time and a foolish rejection of readily available delight”. He does favour the tightest possible restrictions on alcohol, but its legality is surely irrelevant to the wider moral question of whether having a big bag of cans with the lads irreparably damages your ability to work hard. Of course, the answer is usually no, and the same is true for Britain’s illegal drug users. Nothing is risk-free, but many regulated drugs can be relatively safe and enjoyable consumer products.

Eventually, the segment returns to the original question of drug-testing at UK festivals. Hitchens argues that allowing these services to operate makes a mockery of the law, and would only support them if they weren’t part of “a deliberate campaign to undermine the idea that the law should be obeyed”. In other words, he doesn’t support them.

This argument sits uneasily with his belief that our drug laws are already toothless. Given that laws against illegal drug possession no longer exert a serious deterrence effect anyway, what difference will festival testing sites make? And since Hitchens’ approach is extremely unlikely to be tried in this country, isn’t the only realistic way of creating greater respect for the law to get rid of the drug prohibition that he argues isn’t being enforced? In the meantime, services like The Loop are doing great work by reducing the risks of drug use—we should encourage more clubs and festivals to welcome them.

How can competition law avoid being anti-competitive?

The rise of large tech companies mean that antitrust law is in vogue again. The US’s Federal Trade Commission disappointed many people by deciding that there was nothing anti-competitive about Amazon’s purchase of Whole Foods, but last month the European Commission ruled that Google’s presentation of Google Shopping search results was a monopolistic practice. It looks like this debate will get bigger and bigger, particularly since after Brexit the UK may need to make new rules about how we regulate large firms to replace Articles 101 and 102 of the Treaty on the Functioning of the European Union, which govern important elements of competition law in EU member states.

Broadly speaking, there are two views of how competition regulators should act when faced with a potentially anti-competitive firm. The first, which is dominant in the United States, sees direct harms to consumers, such as excessively high prices in an uncompetitive market, as being the most and often only reliable measure of whether a firm is acting monopolistically. This position tends to prefer to wait and see whether a big firm which may have market power will use it to harm consumers. 

The second view is that regulators should take action before a firm gets powerful enough to do this, and wants anti-monopolistic interventions in advance of a firm getting big enough to harm consumers. Members of this group would look at a firm like Amazon and, acknowledging that it has not yet hurt consumers by raising prices to extract monopoly rents (profits above normal market rates), worry that it may someday be in a position to do so, its rivals in the market being too weakened to compete back. 

This disagreement has several different elements. How good are courts at judging whether a practice is pro-competitive or anti-competitive? Many behaviours by firms could be either – taking over a supplier could allow a seller to raise prices for consumers monopolistically, or it could allow them to lower prices for consumers by reducing markups across the supply chain. How do you know which a given takeover will do, and is it better to wait and see? 

How good are markets at financing smaller rivals to monopolists? How important is innovation, and do monopoly rents incentivise innovations that can disrupt monopolists? Should a firm’s political power, not just its market power, be something that regulators consider – in other words could a giant Amazon be so influential someday that it is able to bully politicians into protecting it from antitrust lawsuits? (Interestingly, a new paper appears to show that ‘social lobbying’, like wining and dining, but not ‘office lobbying’ of politicians is effective at changing their minds.)

These are all disputed, but probably the biggest divide is whether you view false positives or false negatives as being equally harmful. An influential Frank Easterbook article from 1984 argues that the harms are not symmetrical, and that in fact a mistaken conviction of a firm for monopolistic behaviour that is in fact pro-competitive and efficiency-raising is much worse than a mistaken acquittal of a firm that is acting monopolistically. 

The reason for this is that even very imperfect markets still have some dynamics that work against monopoly firms. As Ben recently argued, when monopolists earn excessive profits (rents), there is an incentive for other firms to think up or apply new innovations that allow them to challenge them and win some of those rents for themselves. Specifically in tech, antitrust actions against IBM, AT&T and Microsoft do not seem to have boosted consumer welfare.

Waiting and seeing might give more information about a practice, or it might encourage investment in innovation by rivals who want to displace a monopolist with their own technological monopoly. Google’s large market share in search is clearly very valuable and has led Microsoft to try to displace it (unsuccessfully) with Bing. If Bing was indeed a superior product to Google, this outcome would have been positive for consumers even if Google had been effectively monopolistic for some time. 

So we have some pressures internal to markets that will push against monopolistic behaviour even if a court has failed to convict on it. Judicial errors of excessive leniency may still be corrected by the market – this is not to say that they always or even often will be, just that this mitigating pressure exists and, clearly, some monopolists do eventually get beaten by rivals.

On the other hand, false positives – judgements against firms that are in fact engaging in pro-competitive, pro-consumer behaviour – have no such self-correcting mechanism. Practices that appear anti-competitive but are in fact pro-consumer, such as aggressive price cuts that are ruled to be ‘predatory’ on other firms, will tend to be abandoned by all firms and the benefits they would have delivered to consumers will be lost. This does not mean that all antitrust convictions are wrong, but it does suggest that the burden of evidence should be more akin to that of a criminal conviction (beyond reasonable doubt) than a civil ruling (“fifty percent plus a feather”).

Even worse, consider what an antitrust conviction actually involves. As Easterbrook pointed out, to determine whether a given business practice like buying up your supplier is pro- or anti-competitive requires both a large amount of knowledge of the businesses and sector you’re looking at and a theory of how the sector would look if this practice was not happening. 

Economists rarely agree except on basic things like rent controls (bad) and free trade (good). In many cases a court will be expected not just to judge what the evidence before it says, but choose from several rival economic theories about how a given market works. Doing so accurately may be difficult. Easterbrook’s whole essay, which proposed five ‘filters’ for eliminating misguided antitrust cases, is still engaging and relevant today, as is Joshua Wright and Geoffrey Manne’s paper relating it to modern tech firms.

These dangers make me think that engaging in pre-emptive antitrust action would be very dangerous. As Rohan points out, Amazon buying Whole Foods is hardly anti-competitive on the face of it as both are tiny players in the US grocery market. We would only be investigating it because of the possibility that it could become big (which it is in other areas of retail), and then also that it would begin acting in a monopolistic, anti-consumer way which it has not yet done in any other area – it is putting a lot of pressure on its suppliers and its rivals, but we should only care if it begins to use its position to hurt its consumers. 

As I argued after the European Commission’s ruling about Google Shopping being anti-competitive, competition between platforms can be a more efficient model than (legally mandated) competition within them. Business models based on freely-provided platforms like Android, and the innovation and investment that goes with them, may be at risk if regulators try to force them to be internally ‘competitive’.

It’s an open question what competition law in the UK will look like after Brexit, if we aren’t just rule-takers from the EU altogether. If we can set our own rules, and want to make Britain friendly to innovative firms, we’ll need to understand what pro-competitive law actually looks like.