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MARKET MENAGERIE

Stanford University Press

Chapter One

A Time for Integration: Evolution of States and Markets

This chapter looks beyond market-failure explanations in understanding the health sector in late industrial states. It advocates for a better appreciation of markets as processes, not immutable institutions, and for a wider, more evolutionary understanding of variety in markets and developmental states. Such an approach will serve us better across time and geographic scales. Rather than "the" market, the term "market menagerie" captures the many species of extant markets. The task of development is to structure the markets within this menagerie by plans, regulation, and other tools to serve broader developmental goals for city and nation.

I argue here for an analytical lens with three essential components: First, move beyond traditional market-failure explanations in economics and political economy. Second, draw from insights of the economics of technical change and its evolutionary contributions to provide essential grounding in institutional variety. Third, integrate urban and regional planning and industrial geography for a local institutional lens on technological advance and community institutions. By marrying these evolutionary, institutional approaches with the more traditional developmental political economy of "underdevelopment," "development," and developmental states, we can appreciate how to move beyond market-failure approaches and to assess the institutional triad's dilemmas.

Technology's Insights for Markets

Analysts have oft en argued that certain medicines and vaccines remain unproduced or unavailable because of "market failure." Many of these failures arise from more traditional arguments of public goods and externalities, and still others (still traditional) because of monopolies. "When markets fail" is then the very broad rationale for demarcating nonobjectionable boundaries for state and planning action in producing public goods such as health, defense, education, or public transportation.

There are several drawbacks to thinking of developmental interventions as primarily justified on market-failure grounds. I argue here that although the health sector has many market-failure candidates, the state's developmental task moves well beyond them. Moreover, such an explanation irrespective of the technologies involved is simply misleading. Technological advance often creates new markets and new pressures on states. As technologies differ, so do regulations, market structure, and the plans to accommodate them. Indeed, technological learning itself may require market failure such that specific priorities may be achieved. For instance, where late industrial production is concerned, states oft en step in to ensure that price is not equal to marginal cost and purposefully induce market-failure conditions so that firms can learn to adapt to imported technologies and produce them in-house.

Some failures arise, it is said, because markets are underdeveloped or absent in developing economies or are closed to more efficient private-sector participation. Indeed, market failure as an idea is so dominant that most textbooks describe development in no other terms but as a colossal symptom of market failure and sharply restrict when states should act. In turn, many "developmental states" have usurped that mantle by combating market ideology and building interventionist states. However, unlike sectors such as garments, footwear, or video recorders, the health sector calls for a dramatically different approach to markets and planned economic development precisely because both industrial and health entitlements must be considered. Michael Lipton has correctly argued that perhaps the most challenging issues in development studies are those that arise from market success and government success, not the tired arguments of market and government failures. The commercial success of the pharmaceutical industry complicates health care in many ways, as we shall see, but it can also provide a powerful boost. It is precisely because the industry is so successful that we should look more closely at markets and state choices.

What is this "developmental" approach? Although this approach has a tautological quality, we often think of "developed" economies as those whose more visible institutions do not obviously contradict one another (although there may well be inherent conflicts that become visible over time). This notion of development accommodates variety and diversity. If development is seen as a complex process of creating and legitimizing institutions that mostly complement one another, and at the same time including more interested parties at the table, then states and urban and regional planners, for instance, need not step in only when markets fail. They may also build complementary bundles of markets and nonmarket institutions to provide an inclusive umbrella for different actors. These may require creating for-profit or not-for- profit organizations, supporting those that arise, or ensuring, for example, that pharmacy locations are even across a city. They may be called on to ensure that some groups are not excluded from insurance coverage and that children's health does not suffer from the private sector's pullout from some pediatric vaccines. In this realm states and anticipatory plans are especially vital because the public sector is not only a critical producer, funder, and buyer of health technologies (defense being an important reason to invest in health as well), but is also vital to delivery and the design of institutions for collective consumption (such as insurance policies, but also easily accessible clinic locations or mobile vans). The economic organization of the industry can then be reflected nationally. Some nation-states are practically monopolies: the United States dominates global production and consumption of medical devices. Yet, not surprisingly, its production and consumption are closely wedded to the country's policies, such as those on domestic insurance, hospital ser vices, and medical prescription practices.

Extant Systems and the Weakness of Ideology for Reform

Even if reform is vital, an overdependence on market failure and adherence to market ideology are insufficient for health-care reform. After all, libertarians will find to their dismay that the state is actively present in all health- care systems; socialists may find access challenging despite universal rhetoric; and several capitalist systems, despite an emphasis on "free" markets, have nevertheless attained universal access. In every national system health goals may be accomplished by diverse mixes of markets and nonmarket institutions. In other words, markets per se lead to no particular forms of economy; their variety, mix, and regulation (by state or other planning institutions) do so. The key to responsive health- care systems is agile, adaptable, and responsive regulation balancing industrial supply, delivery, and consumption. I pose development planning here not as regulation of single acts in single markets, but as the integrative, fine-tuned management of market and institutional variety. This view is especially important in industrializing supplier countries like India and Brazil, where technological capabilities may outstrip the regulatory context for managing delivery and consumption simultaneously.

The moral fiber of nations and their health-care systems is also evident in the choices and strategies of their national and local states. Indeed, in practice, neither market liberals nor conservatives object strongly to some state intervention in health-care practice because of some shared moral notions unique to countries in order to preserve minimum standards and practices. This morality in health care may support state actions even if the same camps are widely opposed on state intervention in industrial policies. Therefore, the conventional reading that governments step in where markets fear to tread is incorrect. States always plan and regulate in both health and industry; state intervention is simply a matter of degree, usually agreeable even to those who may, in principle, be opposed to it.

Neither will pure theory guide choices for economic practice because health-care markets are far from competitive. In principle, perfectly competitive markets and equilibria are supposed to assist Pareto optimality. If an initial wealth distribution is chosen suitably, it could bring about a Pareto-efficient distribution. But Pareto efficiency in welfare economics also requires that any good's distribution (such as health care) be nonunique; that is, not only must the solution be such that any change will make someone worse off , but the solution should be true of all distributions and must aim to make everybody better off . Kenneth Arrow's emphasis was that optimal social states could be achieved by "successive approximations," where markets take over the resource-allocation task, and where public policy handles the redistribution of income. However, because health-care markets are not competitive, Pareto efficiency in its strictest sense is a fuzzy guide to regulation.

Moreover, localized economic and health-care planning raises other concerns about community institutions. Markets do not exhaust our forms of exchange or social institutions, after all. Uwe Reinhardt and others have argued that the individual utilitarian basis on which a voluntary exchange of health services takes place also holds together poorly even under the less stringent case of Kaldor-Hicks optimality, where those that are better off can compensate in various ways those that are worse off. An individual utilitarian basis also breaks down as a means to an end when communities, not individuals, are targets. Proxy institutions also complicate the individual's role in areas ranging from of insurance to intellectual property. Combine industrial and health worlds, and these utilitarian issues become practically intractable in determining the individual's interest and political entitlements in an increasingly collective, proxy world of contracts and property rights. Therefore, situating health technologies at the intersection of local community institutions and the disciplinary areas of innovation studies, welfare theories, and international political economy can prove useful. Thus there are strong philosophical, theoretical, and, most important, practical challenges to utility as a basis for theorizing about health technologies. Therefore, on both market-failure and equity grounds, state intervention is guaranteed. The private sector can certainly solve some of these problems; in others, especially with regard to equity, this may not always be possible.

Moreover, the mainstream economic view of markets as central to economies and as the institution that makes them operate at full potential includes the view that other, nonmarket institutions "hold markets back." This scholarly bent toward deregulation pushes for understanding broad market dynamics without much institutional detail and focuses on market-supporting policies that legitimize markets as the primary (and sometimes the only) economic institutions of interest. This trend narrows the debate of economic institutions in two ways: first, it limits studying market variety, and second, it limits nonmarket institutions.

This need to look beyond markets and market failures is vital. In planning for real-life, several nonmarket, nonprice considerations enter health care all the time: expertise, availability, delivery infrastructure, experimentation, trust, reputation, hope, risk, and scientific and engineering breakthroughs. Each is difficult to analyze purely in market terms. For example, in pharmaceuticals, a complex regulatory mix of organizations and institutions determines the adoption of new technologies. For example, the state oft en leaves the introduction of surgical instruments to clinical expertise before it steps in to legitimize the practice and make it routine. Regulatory and payment rules for drug and vaccine markets too can be especially heterogeneous, depending on reputation, trust, and a society's acceptance of a particular healing practice. These nonmarket institutions oft en link an individual's access or costs to society's values about how the costs should be shared. We thus reduce markets to pure individualism at our peril because they have obvious social and collectivist natures. Societies may subsidize contraception for individual choice or population policies, but not Viagra; sometimes our health systems do just the opposite, making individuals pay more for contraception. Societies may sometimes require us all to pay collectively more for treating workplace accidents, but not for smoking- induced lung problems. Similarly, in some countries insurance firms, not states, are powerful arbiters; they routinely decide individual and collective benefits from experimental therapies for cancer or new biotechnologies for Alzheimer's. These market and nonmarket decisions for industrial production of medicines are also physically and spatially experienced in distinct ways: insurance and pharmaceutical firms, hospitals, ambulance routes, and pharmacies may be present in some parts of cities, they may agglomerate, or they may selectively offer some ser vices and physical space to only a few and long waiting lines to others.

The divisions within health care also differ by country and technology system. Although I focus on pharmaceuticals and biotechnologies here, systems of medicine may differ across countries and regions within them. Allopathic technologies ("Western medicine") are extraordinarily different from homeopathy and Chinese, Unani, or Ayurvedic treatments. Insurance coverage norms (which are socially determined as much as they are price driven) may pay for these treatments in some countries and not others. In some, this is a matter of traditional use and trust; in others, standardized testing for safety and efficacy precludes other systems of medicine from coverage. Medical associations and regulatory agencies can be equally virulent in debating coverage when health and profit stakes are high. For instance, as plant-based therapies and "natural" treatments have been commercialized, regulatory agencies have struggled to determine the appropriate systems of accreditation, treatment, and payment.

(Continues...)

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Excerpted from MARKET MENAGERIE by Smita Srinivas Copyright © 2012 by Board of Trustees of the Leland Stanford Junior University . Excerpted by permission of Stanford University Press. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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