He studies not homeopathy but US patent medicines in the 19th century. Despite being practically useless, these enjoyed spectacular long-run growth - Professor Troesken estimates that spending on them grew 22 times faster than US GDP between 1810 and 1939. Why?
The answer, he says, is that demand for them was inelastic with respect to failure - people kept buying them even though they didn’t work. This was because the medicines offered enormous consumer surplus; the products were cheap, but the benefits they offered were huge; there’s an analogy here with Pascal’s wager. As a result, when a product failed to work, consumers downgraded the probability that patent medicines generally would work, but still saw a positive expected gain from buying them; the small chance of a big improvement in one’s health is worth paying for.
What’s more, there were several things that stopped consumers learning that the entire industry was useless:
1. Many of the products contained morphine or alcohol, so even though the medicine didn’t make the patient better, it made him feel better for a while. In this regard, patent medicines were superior to homeopathy - and possibly better than at least cheap placebos.
2. Consumers of failed products didn’t tell others of their bad experience. Few people told their colleagues that their Nobby Stiles were as bad as ever.
3. There were countless new products coming onto the market, so someone who had tried many medicines could hope that the new one would finally do the trick. This is, however, not the whole story; several patent medicines had a long product life.
4. Companies spent a fortune on advertising. Hadacol, for example, sponsored concerts by superstars such as Hank Williams and Carmen Miranda. This had the effect of excluding superior but honest products. What chance does “a 20% chance of making you a bit better” have against “most efficacious in every case”?
And on top of all this, the very fact that the medicines failed meant that there remained a huge market for cures. “Patent medicines proliferated and flourished not despite their dubious medicinal qualities, but because of them” says Professor Troesken.
The story here is a wider one than quack remedies. The moral of this story is that a form of Gresham’s law might apply quite widely. We can put this alongside Marko Tervio’s paper on the market for “talent“. Both show that, far from weeding out bad products, a free market can allow them to thrive. I guess the markets in music or newspaper columnists vindicate this view.
I say this not (just!) to knock neoliberal economics, but rather to suggest that markets operate in some more interesting ways than Econ 101 would have us believe.