Drug development and production is an example of an activity with a high initial cost and a low incremental cost.
Law enforcement and war are the same. Interestingly, they became government actions.
Think of ancient China. It covered an area the size of Europe. The most powerful state beat the others and established a unified government. The initial cost of creating an army was high; but after that, the cost of conquering one more city was low (for the government with the powerful army). In Europe, however, mountain ranges and the like made it too expensive to conquer the whole continent, until modern technology was developed. The Romans, Charlemagne, and Napoleon each conquered only a part.
Over the past century, in `private' industry, steel, flour milling, oil refining, railroads, radio broadcasting, and automobile building had the same economics. A century ago, it cost a great deal of money to build a steel works. But once built, it could produce steel at a low incremental cost (up to a maximum). The same with railroads. It cost a great deal to build a railroad from New York to Chicago; but after it was built, the additional cost of running 100 extra trains per year was very little, relatively speaking (up to a maximum that was seldom achieved).
That is why, in the 1880s, American railroad companies asked for and the US government created the `Interstate Commerce Commission' to regulate railroads. Previous requests, by less powerful groups, had not brought on US government regulation. The ICC prevented price wars that would overly hurt railroads. As a secondary effect, the ICC also reduced railroad companies' price gouging of others. This very popular political side effect is why many still think of government regulation as an anti-capitalist action rather than an anti-competitive market action.
In the US, steel, flour milling, and auto manufacturing industries developed into oligopolies. They used oligopolistic pricing techniques to keep prices high enough for them. (I was taught these techniques in university. The amazing thing about the `electricity crisis' in California a few years ago is that some laws actually were broken; the 1995 ban on long term contracts — cleverly called `deregulation' — meant that high prices and high profits could be made legally. Only the most greedy would bother to break the law; yet that happened!)
In Europe before the EU, markets were smaller. So monopolies were created instead of oligopolies. The monopoly format was different in different countries: in the UK, `associations' (or whatever the legal phrase was) became important; in Germany, banks. (Chandler describes this in his book Scale and Scope: The Dynamics of Industrial Capitalism.) In Russia under Lenin, the state took over. No one called the result `capitalism', except for those who referred to it as `state capitalism'.
In the Soviet Union, the `leading industrial sectors' included steel, coal, railroads, and electricity. Since education, law, and government were not considered industries, they could not be leading. Therefore people stayed ignorant, courts remained unjust, and the government corrupt.
In the contemporary world, drug development is expensive; but the cost of manufacturing incremental doses is low.
On the one hand, you can fund drug development by maintaining a government enforced high price for incremental doses. This high price pays for, among many things, development costs.
The doses are paid for either by insurance companies or by the taxes (direct or indirect) that pay for non-insured people to go to emergency rooms. And, it goes without saying, some people do not purchase these drugs; instead, they suffer and die. This is the current method in the US.
On the second hand, you can impose an `official committee' to decide what to do. This is the method used in the Soviet Union. This failed.
On the third hand (this is a science fiction reference to a story about relations with aliens who suffer a lack of environmental resources; also, it is a reference to the Christian Trinity; and, of course, it is a reference to the Trinity nuclear bomb test. Nuclear weapons are an example of a high initial cost/low incremental cost weapon): you can fund drug development by having a government tax people and then pay the proceeds to large numbers of independent organizations — to universities, for example.
The government needs to have a large number of different funding agencies, so that instead of one or five or ten `official committees', you have more. If you have too few `official committees' the process fails.
With lots of different `official committees', you fund many different experiments, some of which provide useful drugs.
The Nobel Price winning economist, Douglass C. North, pointed out that1
... no one knows the correct answer to the problems we confront ... The society that permits the maximum generation of trials will be most likely to solve [them] ...
That is why it is useful to encourage research, even if you are a stick-in-the-mud. If you do not encourage learning, a necessary basis, and accommodate eccentricity, you will not gain as much as you might from research; and as a consequence, may suffer from a foreigner.
As for pharmaceutical companies: they can make a living making and selling drugs, as `generic' drug manufacturers do now.
In the US, Europe, Japan, and in some other parts of the world, we are rich enough that enough people can produce a certain kind of high initial cost product at relatively low costs to other funders. Aristotle talked about this form of production.
In Aristotle's day, the rich produced plays and government; they depended on slaves. That is why Aristotle said slavery was a good idea until `the shuttle could weave by itself' — which modern technology enables. (Anyone have the reference? I remember underlining that phrase when I read Aristotle nearly 40 years ago, but no longer can find it. I am very certain of the reference, since it provided a reason to be against slavery that would appeal even to bad guys.)
[Update: Anthony J. Starks kindly sent me the reference. In Benjamin Jowett's 1885 translation of Aristotle's Politics, the full quotation is:
Section 1.4
#1253b23
... if every instrument could accomplish its own work, obeying or anticipating the will of others, like the statues of Daedalus, or the tripods of Hephaestus, which, says the poet,
"of their own accord entered the assembly of the Gods";
if, in like manner, the shuttle would weave and the plectrum touch the lyre without a hand to guide them, chief workmen would not want servants, nor masters slaves.
]
The high initial cost product is software. Nowadays, software can be created by the relatively rich — it is called `commons-based peer-production' — without requiring that others fund extremely high costs. However, drugs cannot be developed this way since they require processes that are much more expensive, such as clinical testing.
Incremental costs are also low. Around the world, a CD manufactured with information on it, transported and marketed, sells for the local currency equivalent of US$1.50 - US$2.50 in a free and competitive market. Any price higher than that tells us that the country's law enforcement is effective at maintaining a higher price.
I don't know what the price of various drugs is. But I do know that `generic drugs' are less expensive. They do not have government-enforced high prices and their incremental production cost is low. Many different manufacturing organizations produce them. Generic drugs are not sold in a monopoly or oligopoly capitalism market, but in a competitive, free capitalism market.
(Incidentally, I talked of manufacturing additional units of software that is sold on CDs. Note how cheap it is to manufacture additional units of software on a machine you own — to manufacture additional units when you, to use Marx's phrase, `own the means of production'. Indeed, the cost is so low that we do not use the word `manufacturing'. We use the word copying. But reduplicating — copying — is what happens in manufacturing.)
There has been a huge change in technology over the past 200 years. In the past, law and war were the best example of high initial/low incremental cost activities. Now many important activities are like them.
Over the next generation, one struggle will be over the kind of pricing that is used for the products of these technologies.