Into the future

[A18]

A healthy dose of optimism from Forbes.com:

http://www.forbes.com/2008/01/13/dismal-economics-growth-oped-cx_ata_0116dismal_print.html

Forget the talk of recession. The world is about to enter a new era in which miracle drugs will conquer cancer and other killer diseases and technological and scientific advances will trigger unprecedented economic growth and global prosperity.

Pie in the sky optimism? Perhaps. But there are reasons to be optimistic, and they rest not on science fiction but within the badly misnamed "dismal science," economics.

To understand why economics triggers such optimism, imagine that there are two deadly diseases. One disease is relatively rare, the other common. If you had to choose, would you rather be afflicted with the rare or the common disease?

If you don't want to die, it's much better to have the common disease. The reason? The cost of developing drugs for rare and common diseases are about the same, but the revenues aren't. Pharmaceutical companies concentrate on drugs with larger markets because larger markets mean more profits.

As a result, there are more drugs to treat diseases with a lot of patients than to treat rare diseases, and more drugs means greater life expectancy. Patients diagnosed with rare diseases--those ranked at the bottom quarter in terms of how frequently they are diagnosed--are 45% more likely to die before age 55 than are patients diagnosed with more common diseases.

So imagine this: If China and India were as wealthy as the U.S., the market for cancer drugs would be eight times larger than it is today.

Of course, China and India are not yet as wealthy as the U.S., but their economies are growing rapidly, and with them, the market for new drugs. Cancer is now China's leading killer, with spending on treatment increasing by 17% per year. To be close to the Chinese market, AstraZeneca and Novartis are building major research facilities in China, which will benefit patients everywhere.

Like pharmaceuticals, new computer chips, software and chemicals also require large research and development (R&D) expenditures. As India, China and other countries become wealthier, companies will increase their worldwide R&D investments. Most importantly, as markets expand, companies and countries will put to work the greatest asset of all for the betterment of mankind: brain power.

Amazingly, there are only about 6 million scientists and engineers in the entire world, nearly a quarter of whom are in the U.S. Poverty means that millions of potentially world-class scientists today spend their lives trying to eke out a subsistence living, rather than leading mankind's charge into the future. But if the world as a whole were as wealthy as the U.S. and were devoting the same share of population to research and development, there would be more than five times as many scientists and engineers worldwide.

People used to think that more population was bad for growth. In this view, people are stomachs--they eat, leaving less for everyone else. But once we realize the importance of ideas in the economy, people become brains--they innovate, creating more for everyone else.

New ideas mean more growth, and even small changes in economic growth rates produce large economic and social benefits. At current income levels, with an inflation-adjusted growth rate of 3% per year, America's real per capita gross domestic product would exceed $1 million per year in just over 100 years, more than 22 times higher than it is today. Growth like that could solve many problems.

In the 20th century, two world wars diverted the energy of two generations from production to destruction. When the horrors ended, the world was left hobbled and split. Communism isolated much of the world, reducing trade in goods and ideas--to everyone's detriment. World poverty meant that the U.S. and a few other countries shouldered the burdens of advancing knowledge nearly alone.

The battles of the 20th century were not fought in vain. Trade, development and the free flow of people and ideas are uniting all of humanity, maximizing the incentives and the means to produce new ideas. This gives us reason to be highly optimistic about the future.

[A18]

The article notes that with a larger market, potential revenues are also larger. Hence, costs being constant, profit-driven firms are increasingly directed to seek out cures for these common diseases. Put more technically, as the demand curve shifts rightward, the quantity of innovation supplied increases.

Your retort--that some individuals will nevertheless not be able to afford the drug (as opposed to before, when absolutely no one could)--casts no doubt on this observation whatsoever. It is also true that the cost of developing a cure does vary from disease to disease, but that is similarly beside the point; what matters here is simply that, ceteris paribus, a larger market results in a greater allocation of resources toward the end at issue.

Put another way, the greater output of foreigners means that our world catallaxy has room to pursue a still greater number of ends.

I do want to thank you for blessing my thread with some mindless demagoguery. "India and China hav[e] millions and millions of subsitence [sic] peasents [sic] who migrate to the cities to toil factories all day and lead unrewarding lives just so westerners can get consumer products cheaper."

Eh? Chinese peasants toil in factories in order to help us out? If so, God bless them; but I tend to think they're motivated by self-gain, as with the rest of us. In other words, they work because they benefit from the employment. Your rant verges on incoherent.

You agree that "[p]overty means that millions of potentially world-class scientists today spend their lives trying to eke out a subsistence living, rather than leading mankind's charge into the future." But these individuals, it is objected, can take little comfort in the notion that far into the future their descendants will lead better lives. Well, actually I think many would take comfort in that, but it is beside the point. No one said that they would; merely that the world's future is bright. As for the persons living today, they work for their present betterment, and indeed, countless numbers are emerging from dire poverty.

As for natural resources, obviously the market does not "create" resources. In strictness, no one but God can create matter. Rather, with the guidance of the price mechanism, we allocate those things that do exist in a more effective manner.

Let's take the concrete example of energy, and in particular oil. If demand increases and/or supply decreases, then of course the price of oil rises--perhaps even skyrockets. This is a signal for consumers to seek out alternatives and cut back on their personal usage, and for producers to find new sources of energy. If we lived in an entirely static world--say, one in which the only source of "energy" in some narrow sense were oil--and all of this oil were consumed, so that the supply of energy was perfectly inelastic over an infinite price range: then yes, we would be screwed. Even still, this would not be because of the market, but rather in spite of it.

Happily, that is not the world we live in.