This is the sixth installment of a nine-part series excerpting the chapter on medical care from the new edition of economist Thomas Sowell's "Applied Economics"

IBD Exclusive Series: Thomas Sowell on The Economics of Medical Care

While past costs are irrelevant to present decision-making — they are history but they are not economics — those past costs do matter when pharmaceutical companies decide whether, or to what extent, to invest in developing more new drugs. If those past costs have not been covered, future costs may not be as readily incurred to create future drugs to cure or prevent such scourges as Alzheimer's, AIDS or cancer.

Despite such weighty economic considerations — for the society, as well as for the company — in political terms the pharmaceutical drug industry is virtually ideal for imposing price controls.

Price controls can be very popular in the short run, with their bad effects usually coming some time after the next election. Since pharmaceutical drugs can easily take a decade or more to be created, even if price controls caused all research and development of new drugs to come to a halt immediately, it would be long after the next election before people began to notice that no new medications were being created to deal with the ravages of still-deadly diseases.

These are virtually ideal political conditions for killing the goose that lays the golden egg. The short-run result would be visibly lower drug prices, making millions of voters happier, and the long-run consequences would be postponed until several elections later, by which time even those suffering needlessly from illnesses that new medications could have cured or prevented may see no connection between their own suffering and political decisions made years earlier.

The effects of such political incentives can be seen in many countries around the world. The United States is the only major industrial nation without price controls on pharmaceutical drugs. In other words, politicians in other countries have already sacrificed the long-run medical benefits of pharmaceutical drug research and reaped the immediate political benefits, leaving their countries to depend on the American pharmaceutical industry to supply a wholly disproportionate share of the new medications in the world.

If a similar policy is followed by the United States, the resulting drying up of American pharmaceutical research would affect not only the American population, but also the populations of other countries that have been able to rely on the creation of new drugs in the U.S. and being able to buy these drugs by paying prices that cover only the manufacturing costs, while Americans pay prices that cover the far larger costs of developing such drugs.

As pointed out by a commissioner of the Food and Drug Administration, "the U.S. is paying the lion's share of the cost of developing drugs." As BusinessWeek pointed out, "it's not just that the higher prices Americans pay for drugs fund half of the industry's research efforts. U.S. taxpayers also support most of the world's government-funded basic biomedical research — as much as 80%, by some estimates."

One of the irrelevant distractions in many discussions of the costs of creating new medications is that much of the drug companies' research is a continuation of more fundamental scientific research done in academic institutions and government agencies such as the National Institutes of Health.

However, in every aspect of our lives, we all stand on the shoulders of giants, and all those giants were not in the past. The costs incurred in turning scientific discoveries into new medications are no less real and no less important because other individuals and organizations incurred other costs earlier.

Nor does the fact that taxpayer money was used mean that the best way to make decisions about pharmaceutical drugs is to take those decisions out of the marketplace and have them made by politicians. Yet this non sequitur is what seems to be implied by those who think that the prior costs of scientific discoveries change the economic requirements for producing new medicines.

While advocates of price controls on pharmaceutical drugs refer to this as "bringing down the cost" of these drugs, it is in fact simply refusing to pay those costs — and ignoring the consequences of that refusal, especially when those consequences occur after stage one. Europe has already gone that route:

Already, Europeans are fretting that their relatively low prices are killing their pharmaceutical industry. In 1990, European and U.S. companies each held about a one-third share of the world drug market. Now, Europe's share is down to 21%, while the U.S.'s has jumped to 50%. European companies have increasingly moved their R&D operations to the U.S., and they make 60% of their profits in the American market, analysts estimate.

In short, European policies that Americans are being urged to emulate are what drove much European research and development out of Europe to the United States. If the United States does now follow the European policies, this can shut down much of the world's research and development of new pharmaceutical drugs. It could mean killing off the biggest goose that is laying most of the world's golden eggs when it comes to producing new medications to fight painful, debilitating and fatal diseases.

However easy it may be for outside observers to dismiss advertising as an expense that accomplishes nothing for society and only increases the advertiser's profits, that is in fact not the case. The most wonderful drug ever created will help no one's medical condition unless it becomes known. Advertising does that. Nor is making the drug known something that can be done once and for all, and advertising discontinued thereafter, without consequences.

After the patent for the drug Ceclor expired and its producer, Eli Lilly & Co., cut back on the promotion of it when generic substitutes began to be marketed by other companies, prescriptions for this drug fell to one-fifth of the former level.

The generic producers had little or no incentive to advertise, since none would have a large enough share of the increased sales to recover the ad expenditures. As far as the practical effect on patients is concerned, advertising can save lives, just as creation of a new medication can.

There is another aspect to advertising that is seldom understood. When a medication is approved by the Food and Drug Administration for one use and other uses are later discovered for it, the FDA can forbid the pharmaceutical company from advertising the other uses unless and until it has gone through the long and costly process of meeting FDA requirements for that new use.

Depending on whether the anticipated additional sales would cover these additional costs — which can run into many millions of dollars — the company may or may not try to get the approval needed to permit advertising uses which medical science has already shown to be beneficial.

A classic example is aspirin, which has long been approved as a medication for headaches but may be even more valuable in other uses which, until recent years, were not permitted to be advertised. During the period of the ban on advertising aspirin's benefits to those with heart problems, a study concluded:

There is substantial medical evidence that taking a daily dose of aspirin can reduce the risk of heart attack in middle-aged males . . . by almost 50%. Indeed, the results are so well-known that there exists a pamphlet, "Amazing Aspirin," available for 89 cents at the checkout stand of grocery stores, which discusses this benefit at great length.

What is surprising is that neither the package for the aspirin itself nor any advertising for it indicates this valuable use. Why does Bayer largely forgo the possibility of the increased sales from providing this information to consumers?

On March 2, 1988, at a meeting in the offices of FDA Commissioner Frank Young, all companies making aspirin were told that they could not advertise the benefits of the product in reducing risks for first heart attacks. If they did, the FDA would bring legal action.

As a consequence, "the ban on aspirin advertising undoubtedly causes tens of thousands of needless deaths per year," the study concluded.

Obviously, the Food and Drug Administration's ban on advertising medication for purposes that the FDA has not approved is designed to promote safety. But the purpose of the ban does not change the consequences.

Fortunately, in this case, the FDA eventually relented and allowed aspirin companies to advertise the use of their product to reduce deaths from heart attacks.

However, the deaths of those who might have saved their lives by taking aspirin, if they had known about its benefits for those suffering heart attacks, was a high price paid for the delay.

More fundamentally, when thousands of lives can be saved by advertising, are those lives any less important than a similar number of lives saved by the development of an entirely new medication? What research does for the scientific community — provide information they might otherwise not know — is what advertising does for doctors and patients.

Moreover, because physicians are the ones who prescribe pharmaceutical drugs, they are a more knowledgeable audience than the audiences for many other kinds of advertising, and are therefore harder to deceive or to impress with mere puffery.

Moreover, a drug company that attempted to deceive doctors about a particular drug would be risking an enormously costly loss of confidence in that company by doctors who prescribe a wide range of medicines, and who in the aggregate could steer billions of dollars in sales away from the deceiving company and toward its rivals.

Like other advertising, the advertising of pharmaceutical drugs is often thought of as adding to the costs which the consumer must pay for, driving up the price of the product. That would be true if advertising had no effect on sales and sales had no effect on economies of scale in production.

But the obvious purpose of advertising is precisely to have an effect on sales — and there are huge economies of scale when there are high fixed costs, running into hundreds of millions of dollars, for producing a pharmaceutical drug and very low costs of actually manufacturing the drug. The larger the number of sales over which the huge fixed costs are spread, the lower those fixed costs are per unit of medication.

Pharmaceutical drugs are a classic example of economies of scale. Yet many in politics and in the media speak as if it is axiomatic that advertising drives up the cost of medications.

Often the animus against advertising by pharmaceutical companies extends to the common practice of these companies to give free samples of new medications to doctors, who are able to pass them on to their patients without charge.

Since the pharmaceutical companies' purpose is obviously to gain faster and wider acceptance of their medications, this is often regarded by critics as somehow inimical to the public — as if this were a zero-sum transaction, in which someone must lose when someone else gains.

But patients would not go to doctors and doctors would not prescribe medications, nor the pharmaceutical company produce them, unless everyone involved benefited from this process. The pharmaceutical company has a special interest in how fast its new drugs are accepted because it has a limited number of years before its patent runs out and rival companies can then take away much of their market with cheaper generic equivalents.

The idea that there is something morally wrong about pharmaceutical companies giving doctors free samples, in order to benefit from their business, is so deeply ingrained that Stanford, Yale and the University of Pennsylvania have prohibited the doctors in their medical schools from accepting such free samples.

This symbolic gesture costs university administrators nothing but can cost patients both money and information about new medications for their conditions. Nationwide, the retail value of free samples provided by pharmaceutical companies has been estimated at $16 billion annually.

Some have claimed that the cost of these free samples will drive up the cost of the medications sold by these pharmaceutical companies. But this is repeating the same fallacy that advertising must add to the cost of the goods advertised, ignoring economies of scale resulting from the advertising, of which free samples are just one form.

Thursday: The cost of the government's drug-approval process.

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From the book "Applied Economics"  by Thomas Sowell. Excerpted by arrangement with Basic Books, a member of the Perseus Books Group. Copyright © 2009.