Markets are often incredibly efficient, at least in terms of stimulating the production and consumption of goods and services. Most of us own more than we want or need. We have closets stuffed with clothes we never have time to wear, garages and attics filled with things we bought but don’t have any real use for. We eat too much.
In a country like the United States, most of our private consumption goes way beyond anything we need to get by. And, it is hard to see that it really contributes that much to our happiness. Many people I know fondly recall periods of their lives when they were much poorer in material terms, but richer in terms of freedom, the quality of personal relationships, and a sense of community – such as the time spent in college, graduate school, doing voluntary or semi voluntary work, participating in team sports or finding time to bond with nature.
We definitely under-produce what Galbraith broadly defined as public goods. Galbraith focused on goods that might be supplied by governments, and which also addressed the appalling inequalities of incomes.
Today we are discovering new ways of thinking about knowledge goods, including an astonishing provision of goods that are produced to be freely shared.
Yoachi Benkler and others have focused on the importance of networks and communities that create knowledge goods largely without an expectation of earning wages or any commercial reward. In areas where the Internet has reduced transaction costs, this has led to an amazing production of goods.
There are other important public goods that will not be produced without sustainable income for the people who create the goods, or sustainable incomes for critical services that support voluntary efforts.
In some cases, financing for such projects is feasible from governments. But often non-government solutions are important, in order to avoid bureaucracy, inappropriate political control, or a number of other problems. Decentralized decision-making, the freedom to try unconventional solutions, or to challenge incumbent managements, are quite important.
Competitive markets for private goods benefit from powerful mechanisms that harness the efficiency and creativity of dynamic decentralized decision-making by consumers and producers of goods.
There is renewed interested in methods to create parallel markets for public goods. In some cases, the economic incentives used in markets for private goods are adopted for the production of public goods. In other cases, entirely new ways to financing public goods are invented.
The proposal for rewarding medical innovations with large prizes, tied to medical outcomes, rather than 20-year monopolies on inventions, is one such effort. In Representative Sanders’ HR 417, the annual funding for such prizes would come from the federal government – at least .5 percent of US GDP, and awarded to successful drug developers on the basis of incremental health care benefits, as measured by health outcomes. Payments from the fund would be awarded once yearly for the first ten years a product was on the market, based upon an evaluation of the relative benefits, when compared to all competing products that were introduced in the previous ten years.
When applied to medicines, the prize fund approach would have the government value the medical outcomes, but leave the decision making on which R&D projects to fund to entrepreneurs. Any project that would deliver positive health care outcomes, possibility measured by Quality Adjusted Life Years (QALYS) or other pharmaeconomic metrics, could be rewarded from the Prize Fund.
Another, different but possibly complementary approach to medical innovation would be competitive intermediaries. Under one proposal, employers would contribute a minimum amount per employee, to intermediaries that funded R&D projects. These projects could include open source databases, research tools, or translational research, as well as later stage drug development projects, such as clinical trials with human subjects. The employers (or employees themselves), would have to contribute, but could choose who they gave their money to. The intermediaries would compete against each other for the employee contributions – not on the basis of a shareholder return, but on the basis of the impact of the investments on solving health care problems.
In these models, sustainable and competitive systems of finance are designed for cases where the final product – the development of a new medicine, enters the public domain. Generic competition for the products would lead to low prices, and largely eliminate price based rationing of access to the medicine.
The market for the invention is effectively separated from the market for the product that uses the invention. For consumers (and taxpayers), the prices for the invention would be zero, on the margin, while the price for the product that uses the invention would only reflect the costs of manufacturing and distribution.
Could the Prize Fund or competitive intermediaries approaches be generalized to other goods? There is increasing interest in designing prize funds to reward innovations in agricultural science. The NIH is considering holding a workshop on the use of prizes or competitive intermediaries to reward open access scholarly journals. There may be applications for projects involving software and other goods.
Much of this could expand the relevance and scope of Galbraith’s earlier observation that we are investing too much in private goods, and too little in public goods. If we can create markets for public goods, we can do more than we are doing today to address a wide range of important social needs.