A libertarian argument for an FDA

Whoa! Yeah, I’m going to do this, but let me start with some caveats. First, this is an argument, not the argument. Every silver lining has a storm cloud, and acknowledging the silver lining doesn’t mean you’re in favor of tornadoes. Second, I’m being sloppy with the term libertarian; classical liberal is closer to the truth, but doesn’t make for as good a title. Most importantly, I think my argument is swamped by the traditional libertarian arguments against the FDA. All that said, this argument has some interesting implications for how we think about intervention generally. Here goes…

The human body is a complex system that we do not fundamentally understand. Although every complex system is unique, they have similarities. In the case of both the human body and society/markets, interventions lead to unintended consequences which can offset the (ostensible) gains from the intervention. At the end of the day, although the FDA intervenes in the complex system of human society, it also prevents intervention in the complex system of human physiology.

The Hippocratic Oath instructs its speaker to not play God and to avoid over-treatment, and the justification for that is made clear in a recent Econ Talk. The guest was on to promote his book which discusses the problem of medical reversal–the phenomenon of medical practices that are adopted and subsequently abandoned after evidence shows the practice to be ineffective or worse. From this position he argues that the FDA’s mandate to ensure not just safety, but efficacy, is especially important. His argument is that because of the cost of type II error the FDA ought to go further.

Let’s look at two extreme cases. In the “anything-goes” world, we might have a lot of people trying good and bad interventions with a lot of harm being done to the unlucky ones. You and I know that the real problem is one of information and that in a perfect world we would have “anything-goes-that-consumers-with-access-to-good-information-from-Consumer-Reports-®-or-a-competitor” but this world still leaves us with the problem (which we face in today’s FDA-evaluated world) that consumer trial-and-error is a poor substitute for randomized control trials.

At the other extreme we have the “first-do-no-harm-second-do-real-good” world of an ideal FDA. This world has very steep type I errors but instead of two steps forward, one step back, we would have one step forward, then another, and never any steps back…. but of course each step forward would cost a few billion dollars.

Neither extreme is ideal, but the second world is one where standards of evidence are taken very seriously. In that world I’d be a third grade teacher instead of a college professor. The standards of evidence are at the core of the problem of medical reversal, but also the problem of economic intervention (which is far less likely to be reversed, even in the face of good evidence indicating that it should be).

As far as medical intervention is concerned, my position is bullish on better efficacy evaluation of medical procedures but still bearish on the FDA itself. But looking at the FDA from this angle opens up an interesting thought experiment: what might be the effects of an Economic Intervention Standards Authority? In practice it would probably be awful (my guess is a federal bureau that attempts to quash Tiebout competition), but in a libertarian utopia it would be the bureaucracy that libertarian kids with administrative bents would dream of heading.

Production bias in economic intervention

When an intervention is proposed, it’s usually offered that it will create jobs, or somehow otherwise create work. In Clash of Economic Ideas I’m reading about Indian economic planning and how in the early 5-year plans they proposed to subsidize low-scale labor-intensive cloth making. Otherwise power looms could take their jerbs! On the face of it, it looks like a policy where home weavers get more money (and maybe the price of cloth goes up… but people will be richer because of jobs, right?), but if we strip away the monetary veil, things look different.

What would this policy look like on Gilligan’s Island? The professor comes up with a way to harness the tide so that Gilligan doesn’t have to ride a stationary bike to generate power (bankrolled by Thurston Howell III). But the Skipper can’t let them take Gilligan’s job! So he forbids the professor from using his labor saving invention and there’s no costly transition from the status quo. Essentially the Skipper is consigning Gilligan to work harder than he otherwise would. For his own good!

Okay, that example is too easy, so let’s take it a step further. The Skipper decides they need a bridge (to where? Never mind, it’ll create jobs!) and sets Gilligan to work collecting materials while the professor draws up plans. This time the jobs created will actually result in something new, which is good. But is it good enough? If the discounted present value of the bridge is less than the present value of the costs they will have to incur, then a bridge building policy is like forcing or tricking Gilligan to work at a low wage when he would rather relax on the beach. Or if he pays Gilligan a good wage, then it’s like forcing the island’s tax payers to buy overpriced goods they don’t want; If I make you buy a Hyundai for $200,000, it hardly matters that you ended up with a reliable and efficient car because you got ripped off! The only alternative is that the person who decides to build the bridge eats the loss.

Entrepreneurs make mistakes, and that’s part of the learning process of the market. These sorts of mistakes are not just economically superior than poor policy, but they are ethically superior to state intervention or full-blown socialism. Let’s imagine that a government policy is passed with the expectation that it will be a net gain for the economy (tough, right?). This project is financed by either forcing/tricking someone to pay for it (taxes or inflation), or directly forcing someone’s hand (regulation or conscription). Even if the project turns a profit and the financiers are paid back, there’s something unsettling about the use of coercion. Contrast that with an honest mistake made by an entrepreneur. The financiers make a loss, but by their own volition. Nobody forced their hand, but they learned something and they can use what they learn to guide their actions in the future. Not so with a government failure.

tl;dr: Focusing on a policy’s effects on producers (“the seen“) overlooks what’s going on behind the veil of money: more work for producers without a commensurate gain is simply making them work harder than they need to, and it’s cruel. If (as is more often the case) it’s really a matter of making taxpayers buy something they don’t want for the price, it’s a ripoff and equally cruel. Even the ethical standing of “good” policies is questionable because it removes the element of choice from the individuals forced into backing the project.