Big Pharma

The pharmaceutical industry is (some might say amazingly) the second largest on the planet, worth over 600 billion dollars in sales every year and acting as the force behind the cutting edge of science that continues to push the science of medicine onwards as a field- and while we may never develop a cure for everything you can be damn sure that the modern medical world will have given it a good shot. In fact the pharmaceutical industry is in quite an unusual position in this regard, forming the only part of the medicinal public service, and indeed any major public service, that is privatised the world over.

The reason for this is quite simply one of practicality; the sheer amount of startup capital required to develop even one new drug, let alone form a public service of this R&D, would feature in the hundreds of millions of dollars, something that no government would be willing to set aside for a small immediate gain. All modern companies in the ‘big pharma’ demographic were formed many decades ago on the basis of a surprise cheap discovery or suchlike, and are now so big that they are the only people capable of fronting such a big initial investment. There are a few organisations (the National Institute of Health, the Royal Society, universities) who conduct such research away from the private sectors, but they are small in number and are also very old institutions.

Many people, in a slightly different field, have voiced the opinion that people whose primary concern is profit are those we should least be putting in charge of our healthcare and wellbeing (although I’m not about to get into that argument now), and a similar argument has been raised concerning private pharmaceutical companies. However, that is not to say that a profit driven approach is necessarily a bad thing for medicine, for without it many of the ‘minor’ drugs that have greatly improved the overall healthcare environment would not exist. I, for example, suffer from irritable bowel syndrome, a far from life threatening but nonetheless annoying and inconvenient condition that has been greatly helped by a drug called mebeverine hydrochloride. If all medicine focused on the greater good of ‘solving’ life-threatening illnesses, a potentially futile task anyway, this drug would never have been developed and I would be even more hateful to my fragile digestive system. In the western world, motivated-by-profit makes a lot of sense when trying to make life just that bit more comfortable. Oh, and they also make the drugs that, y’know, save your life every time you’re in hospital.

Now, normally at this point in any ‘balanced argument/opinion piece’ thing on this blog, I try to come up with another point to try and keep each side of the argument at an about equal 500 words. However, this time I’m going to break that rule, and jump straight into the reverse argument straight away. Why? Because I can genuinely think of no more good stuff to say about big pharma.

If I may just digress a little; in the UK & USA (I think, anyway) a patent for a drug or medicine lasts for 10 years, on the basis that these little capsules can be very valuable things and it wouldn’t do to let people hang onto the sole rights to make them for ages. This means that just about every really vital lifesaving drug in medicinal use today, given the time it takes for an experimental treatment to become commonplace, now exists outside its patent and is now manufactured by either the lowest bidder or, in a surprisingly high number of cases, the health service itself (the UK, for instance, is currently trying to become self-sufficient in morphine poppies to prevent it from having to import from Afghanistan or whatever), so these costs are kept relatively low by market forces. This therefore means that during their 10-year grace period, drugs companies will do absolutely everything they can to extort cash out of their product; when the antihistamine drug loratadine (another drug I use relatively regularly, it being used to combat colds) was passing through the last two years of its patent, its market price was quadrupled by the company making it; they had been trying to get the market hooked onto using it before jacking up the prices in order to wring out as much cash as possible. This behaviour is not untypical for a huge number of drugs, many of which deal with serious illness rather than being semi-irrelevant cures for the snuffles.

So far, so much normal corporate behaviour. Reaching this point, we must now turn to consider some practices of the big pharma industry that would make Rupert Murdoch think twice. Drugs companies, for example, have a reputation for setting up price fixing networks, many of which have been worth several hundred million dollars. One, featuring what were technically food supplements businesses, subsidiaries of the pharmaceutical industry, later set the world record for the largest fines levied in criminal history- this a record that persists despite the fact that the cost of producing the actual drugs themselves (at least physically) rarely exceeds a couple of pence per capsule, hundreds of times less than their asking price.

“Oh, but they need to make heavy profits because of the cost of R&D to make all their new drugs”. Good point, well made and entirely true, and it would also be valid if the numbers behind it didn’t stack up. In the USA, the National Institute of Health last year had a total budget of $23 billion, whilst all the drug companies in the US collectively spent $32 billion on R&D. This might seem at first glance like the private sector has won this particular moral battle; but remember that the American drug industry generated $289 billion in 2006, and accounting for inflation (and the fact that pharmaceutical profits tend to stay high despite the current economic situation affecting other industries) we can approximate that only around 10% of company turnover is, on average, spent on R&D. Even accounting for manufacturing costs, salaries and such, the vast majority of that turnover goes into profit, making the pharmaceutical industry the most profitable on the planet.

I know that health is an industry, I know money must be made, I know it’s all necessary for innovation. I also know that I promised not to go into my Views here. But a drug is not like an iPhone, or a pair of designer jeans; it’s the health of millions at stake, the lives of billions, and the quality of life of the whole world. It’s not something to be played around with and treated like some generic commodity with no value beyond a number. Profits might need to be made, but nobody said there had to be 12 figures of them.

OK, this WILL be the last money post…

First up, an apology for lateness- I know I said that this post would be up on Saturday, but had forgotten at the time that I would be spending my Saturday doing an 80km hike (18 and a half hours, if you want to know- it hurt). My feet have thankfully recovered since then, and since I really CBA to do a Six Nations Post given that there was only one game at the weekend (France-Ireland), it was a draw (17 all) and I only saw the last half hour, I thought I would give it a miss and concentrate on wrapping up my recurrent theme of money.

To quickly summarise what we’ve covered so far:
1) Money is an arbitrary human situation to give us a reference point for relative value
2) The economic system is based upon the world’s value being increased by doing work on raw materials, and people making money from it by the difference between the value the workers increase the raw materials by, and the amount they get paid [This differential is partly a necessary artificial creation, and is partly due to the price of labour being effected by the workforce’s size and attitudes itself- see point 4]
3) The process of people buying stuff in an economy almost invariably leads to inflation. A low level of inflation is indicative of this- a high level indicates an economy getting desperate, and a negative level a stagnant one
4) The process of value increase and inflation is necessary to balance out the human race’s resource consumption (for living resources we have reproduction- for finite ones, economics)
5) The fundamental rule of economics- when supply goes up, or demand goes down, the price drops.

I want to proceed from point 3, with a quick (and possibly overly simple and completely unnecessary) detour into exactly why economists and politicians want people buying more stuff. The explanation is simple really- every time something is bought, a process of value-increasing is completed. The money you pay for anything will always be greater than the total cost of supplying, making, processing and serving it (serving here meaning everything from customer support and IT to the bloke behind the counter taking your money), so when stuff is bought the company who made it makes a profit. This is the bottom line that demonstrates the process of value-increase and provides the money for more of it. Thus, people buying things means, in the long run, that the value of the economy as a whole gets increased. This is what causes economic growth, and thus growth is vital for our way of existence.

This is the classical way that businesses, and economies, make money- people buyin’ stuffs. There is a fairly well-accepted model for the stages industry goes through to make money in this way. Primary industry concerns the acquisition of raw materials (so farming, logging or mining), secondary is manufacturing, tertiary is the service industry (so selling things to you) and quaternary is basically R&D- the development of new products to push companies forward. In addition to this, modern-day business has a huge sector dedicated to helping the business function properly- this is why you have the IT, HR and customer services departments, whose aim is to ensure that other companies do not get the edge on theirs in competency.

However, in the last 400 years or so, with the advent of more organised, larger-scale and less geographically restricted business (think the East India Company or modern-day multinationals), a new form of business has risen up- that of the stock market. The idea is fairly simple- instead of companies building and saving up their profit over time in an effort to gain money and grow slowly, they persuade other people to give them money in exchange for a slice of the profits, as a way of picking up some fast cash. This as a concept at first seems rather flawed, as it basically involves gambling on the individual skill and potential success of both business and businessman, but it is often a far more preferential strategy. For smaller businesses, accruing some serious cash, or getting past the point where meeting rent is a struggle, could take several years that the owner does not want to spend tearing his hair out, so a quicker way of making cash is highly preferable (although on a smaller scale all dealings will be private, rather than in the madness of the stock market, and are more likely to be in the form of loans to ensure ownership of the business). On a larger scale, dealing with all the attempts to buy and sell bits of the company gets far too complicated to deal with privately, so larger companies who want to trade themselves on a larger scale will ‘float’ themselves on the stock market- basically this means dividing their company up into several million tiny bits and waiting for people to buy them. From hereon in, the bits of the company itself behave like any other commodity- as the price fluctuates up and down (supply and demand again), professional stockbrokers will buy and sell them in an effort to make money. As a company becomes more valuable, its shares go up in value and people buy them, hoping they will continue to go up. As the price falls, people sell them in an effort to make a profit, or at least minimise the loss. This fluctuation can happen rapidly, over the course of mere hours, which is why pictures of stock exchanges seemingly all consist of men in suits screaming into phones- the stock market changes very, very fast.

However, the stock market itself presents a huge problem to an economy- while the investment of large amounts of money in companies is undoubtedly vital to the proper functioning of an economy, this can all go rapidly wrong. The problem is that because buying shares in a company involves giving that company money, it makes the company more valuable and so its shares more valuable. Thus, people buy more shares in it because they see the price rising- you see the problem. At its worst, this leads to people investing in a company solely because other people have invested in the company, meaning that the value of the shares is artificially high based solely on investment and speculation- nothing concrete. The problem arises when everyone suddenly decides to start selling their (now very valuable) shares- this pulls the invested money, now the backbone of the company’s high share price, out of the company, and the price begins to fall. Suddenly, all the investors (sensing the price is about to drop) sell all their shares too (incidentally, they don’t actually sell them to anyone- the rules of the stock market say the company have to buy them back at the appropriate price) and suddenly, all the money is gone, with nothing real for the company to trade to make them money the old-fashioned way (or at least not enough to justify their high share price). Suddenly, the company has had all its investment taken away and is facing the prospect of having to pay back dozens of aggressive investors, and has no cash left.

This story has repeated itself several times over the years- it is known as an economic ‘bubble’. It first occurred on any significant scale in the ‘South Sea Bubble’ in 1720, which disgraced an entire British government, collapsed a company and sent the economy into chaos (although the speculation and willingness to buy everything just before the bubble burst led to pleas for investment in square cannonballs and ‘a company for carrying out an undertaking of great advantage, but nobody to know what it is’. Genuinely). The largest ever such collapsed was the American Wall Street Crash of 1929, which (among other things), condemned a large chunk of the richest nation on earth to living in slums, provoked massive rioting, bankrupted large swathes of Europe as well (and was arguably responsible for the rise of the Nazis), lead the Democrats to control both the White House and Congress and let Franklin D. Roosevelt show the American government that a little liberal socialism now and again can work wonders, advice that they have so far steadfastly ignored for the last 80 years. So yeah- bad thing.

This is the (now muchly belated) point I was trying to make whence I first started out upon this trilogy- the Stock Market is a mental place. While investment is part of the economy we now live in, the way the stock exchange handles it does, in my opinion, far more harm than good (I know I promised to try and keep my Views out of this blog, but this is just an analysis so bear with me). The stock market does not exist for the good of the companies being invested in, it exists for the good of the stockbrokers themselves- basically, professional gamblers, betting on the economy which controls the well-being of thousands with one aim and one aim only in mind: to get rich as quickly, easily and with the least hassle possible. Don’t get me wrong- I’m sure the majority of them are just as nice, normal people as the rest of us, but as for their trade… its not one I’m a fan of.

I’m not sure I support the Occupy movements, leftie though I may be, and I certainly don’t advocate the overthrow of the entire capitalist system. But, to all those who think they are just a bunch of stupid hippies, just look at the suicide rates for 1930 and ask yourself this- do you want to live in a world where the actions of so few can ruin the lives of so many?

Money, part II

OK, and so I return from the heady excitement of a weekend’s rugby to the more confuzzling realities of base level economics- here comes the second (and hopefully final) part of my description of the precise way money works in the economic system. For those who haven’t read part one, do so (post before last), otherwise this will get confusing.

I must begin with a correction and apology for the end of the last post I did on this subject- towards the end, I began referring to the actual production of money & value in an economy as inflation, rather than what actually causes it- devaluing the effort inputted by the worker so as to create a profit margin for the company boss. This is very much NOT inflation- I was, once again, getting ahead of myself.

Just to clarify this, I thought I might begin on a slight tangent and define what inflation actually is. Inflation is the process of everything in an economy getting a little bit more expensive over time. Cat food, washing powder, the cost of your boss employing you (ie your salary)- over time, this all rises slowly, at a rate of a fer percent a year. This is why, if you read old books or hear people talking about days gone by, people seemed to be able to get things incredibly cheaply in the past. Case in point- when I was at primary school, my teacher used to tell us about this shop her son (several years older than us) used to go to to buy sweets. At this shop, there was a row of sweets worth a few pennies, ranging from 10 down to 1p in price. Nowadays if I go into my local newsagents, the cheapest sweet I could buy costs 12p, and most cost quite a bit more. Why? Inflation.

The reason I was getting inflation confused with the production of value (for want of a better term), is partly because it, superficially, appears to be the same basic idea. I mean, if everything’s worth more money, the value of everything must be going up, right? Wrong- remember that money is only an arbitrary construct to give us an idea of value. Everything might be getting slowly more expensive, yes- but everyone’s salary will also be increasing at, on average, the same rate. So, for example, while your groceries bill may be getting steadily more expensive as the years go by, it will still remain roughly the same proportion of what you earn (presuming you stay in roughly the same job), so will not actually be putting any greater strain on your bank account.

So why do we have inflation, then? Why do our economists and politicians always try to ensure a low,  steady rate of inflation is always ticking over? After all, hyperinflation like what occurred in Germany in the chaos after the First World War can devastate a country, and its economy ( I heard a story once of someone at the time whose coffee went up in price by a quarter in the time it took him to drink it). Simple answer- it promotes growth, and is inherently linked to the process of ‘creating value’.

To explain: imagine a company makes cars. Because there is a differential between how much the car’s value is increased by people working on it, and how much said people get paid, the head of the company makes money. This means he is able to go out and buy things from his friend’s company, who make motorbikes. This makes his friend some money, which he spends on something else, etc. etc. until eventually more people are able to buy the first guy’s cars. This increases the demand for his cars, and thus the price he can get away with charging for them (no.1 rule of economics- when demand exceeds supply, price goes up, and vice versa, because there will always be someone willing to pay a bit more to ensure he gets the car and the other guy doesn’t). This increases his turnover. At this point he thinks “hmm, I’ve got a bit more money now, so I’ll pay my workers more. That way, people will come to work for me, not the guy next door”. So he raises his wages. To combat this, the guy in the factory next door raises his wages so all his workers don’t leave him, and all the other factories do too. Thus everyone’s wages increase, all the prices increase and hey- inflation. Notice how this process has lead to more people buying things (in reality this  is not just the bosses who do this, but reality economics is heinously complicated), and thus growth. This is, therefore, the basic cycle of economic growth.

However, the same is not so true for hyperinflation- when inflation gets out of hand. Since inflation leads to everything being worth more money but having the same value, it, over time, leads to the gentle devaluation of currency. If this process happens too quickly, and money becomes rapidly worth less and less, everyone gets terrified of the economic situation and uncertainty (how would you feel if you had no idea how expensive the milk would be when you got to the supermarket, and had to carry a wheelbarrow full of notes to pay for it), so people stop buying things and the economy ceases to show any real growth. This is why the situation is so bad in countries like Zimbabwe at the moment, where a mixture of corruption in the political system and generalised chaos everywhere else has lead to idiotic economic policies that cause inflation to soar upwards just as the real economy plummets downhill. In summary, therefore, a low, steady rate of inflation is the best thing for all concerned.

Right, that’s inflation covered, now onto… ah, right, 950 words already. Damn, I really need to get less into this. Either that or economics has got to become a lot easier to explain. Either way, I’m probably going to need another post to actually make my point on this (yes, I did intend to make a point at the start of this but have got somewhat bogged down, it seems) if not more, so think I will sign off for tonight. Saturday’s post will contain the third instalment of what I hope ends up just being a trilogy of economics, and I may actually get round to going beyond an anatomical description. Although please- don’t hold me to that.

Money- what the &*$!?

Money is a funny old thing- the cornerstone of our way of existence, the bedrock of modern-day life, and the cause of, and solution to, 99% of all life’s problems. But… well, why? When you think about it, money doesn’t actually mean anything- it is an arbitrary creation brought in for convenience’s sake, and yet it as an entity has spiralled into so much more than a mere tool. Now how on earth did that happen?

Before about two and a half thousand (ish) years ago, money just about not exist. To the best of my knowledge, coinage only became commonplace in Europe with the rise of the Roman Empire- indeed, when they left Britain in the 5th century AD, much of the country went back to simply bartering- trading goods and services for other goods and services. This began to change as time went on however, and by the time of William the Conqueror’s invasion, the monetary system was firmly established across Europe. Coins were a far more efficient system than bartering- trading stuff for one another is a highly subjective process, and it can be hard to get a sense of value and to what extent you were being ripped off. By giving everything a fixed, arbitrary value (ie a price), everything suddenly had a value relative to one another. More importantly, this allowed for goods and services to be traded for the potential to buy more goods and services of equal value in coin form, rather than the things themselves, which was both easier and more efficient (there was now no risk of carrying a lampshade to the supermarket to exchange for a pint of milk, because a wallet is far easier to carry). The idea of money representing the potential to buy things can be seen by anyone looking on a British note, where it reads “I promise to pay the bearer on demand the sum of…” however many pounds (this is in fact a callback to the days when banks stuck to the gold standard, when you could theoretically walk into the Bank of England and ask for five pound’s worth of gold for your fiver).

However, with coins representing potential to buy things, they instantly took on a value of their own, and here things start to get confusing. Because, when money itself takes on a value, it instantly becomes a commodity just like any other- just as people trade in gold bullion, oil and bits of companies, so people trade with money itself. And this… actually, I’ve got ahead of myself- let me take a step backward.

The input of human effort can be used to increase the value of various bits of the world we live in. For example- a heap of planks may be bought for £50 from a sawmill, but once you have gone home and spent 6 hours swearing at a hammer, you may now have a bench or something worth £500 or more. The materials themselves have not changed, but since a bench is more useful, better looking, and is better appreciated by people than a few planks, people set more value by it. Because more value is set by it, so it is worth more money.

This, at a base level, is how the economic system works- human effort is used to turn raw materials, which we don’t want, into products, which we do. Because people want these products, they pay money for them, and because they need this money to pay for them, they get a job. Because they are providing human effort to their boss (which itself has a value for its ability to raise the value of raw materials), their boss pays them the money they need. The boss gets the money he uses to pay his employees from selling things to people, which makes money because the human effort put in to make his final product raises the value of his final product above that of the raw materials he bought in order to make it- and thus we are back at the beginning of the cycle.

If we study this process, we can see that the only way the boss can make any money out of it is if the value of his final product (F) is greater than the value of its raw materials (M) plus however much he pays his employees for the effort they input (E)- ie, F>M+E. However, pretty much by definition, F should equal M+E- thereby the only way he can make money is by paying his workers less than their human effort is actually worth in the context of the product (A communist would seize on this as evidence of corporations exploiting the masses, but I refuse to go into this argument here- it is far too messy). This is the only way that any money actually gets produced in an economy, and the result is inflation. If inflation did not exist, then the only way anyone could make any money would be by spending less- but this automatically means that somebody else will not be getting your money, and so will be losing some. Thus inflation is vital to ensure that everybody in an economy gains money, and although this does lead to the gentle devaluation of currency, it allows the human race to stay one step ahead of a potential vicious cycle of decline- and inflation can only be generated by an economy manufacturing things.

But why do we need our level of money to continually rise? Well, imagine you have a steak worth £5 (It’s just an example, don’t judge me on my figures). When you eat that steak, something of value £5 has been turned into the contents of your gut, and ultimately into what comes out the other end- which is clearly worth a lot less than the steak. Thus, the human race consuming resources  reduces the overall value of planet earth, just as making stuff increases it. Nature in fact has an inbuilt system to prevent this from turning into a cycle of endless decline- reproduction. If the cow you ate your steak from had had a calf, then nature has ensured that your consumption of the steak has not, in the long run, decreased the overall steak value of the world due to the steak potential existing in the calf (I’ve just realised I’m making all these terms up on the fly- my apologies). I could go into the whole energy from calf <- energy from grass <- energy from sun <- universe in general etc. thing here, but this is extrapolating the economic problem somewhat. However, suffice it to say that ensuring our overall monetary value continues to rise via inflation is our version, from an economic perspective, of reproduction, balancing out our consumption of finite resources in terms of value.

Phew- this is getting longer than I anticipated. My apologies once again for it turning into a semi-coherent ramble, I only hope you could follow it. There is still quite a lot more to get through, so I think I’ll try to wind this all up on Wednesday (after another Six Nations post Monday- COME ON ENGLAND!). If you have been able to follow all of that then congratulations- you now understand core economics. If you haven’t then also congratulations- you are sufficiently normal to not understand my way of thinking.