Tech and Tragedy

When is IP needed, and when does it just do harm?

As India battles a horrifying wave of coronavirus infections overwhelming its healthcare system, the United States (supposedly the Shining City on the Hill) has refused to help. Not out of concern for its own citizens, no; out of pure, unadulterated greed. The United States has refused to waive intellectual property protections for the vaccines because...the technology...might be other cure diseases!!!!!!!

Bra-f*cking-vo, you brave "normalcy"-worshippers. The adults are certainly in the room, and they've decided to sacrifice everything (lives, geopolitical standing, potential alliance, etc) at the altar of profit. America is not a country, we are a glorified strip mall run by a bunch of ghouls trying to extract every last bit of wealth from our heartland that they can.

Anyways, I was inspired to do a piece on a topic I have largely neglected to engage with: intellectual property. Part of this is that there appears to already be a fairly significant consensus about reforming IP laws, with disagreements moreso along the lines of implementation than values. But I do think there needs to be a bit of a deeper engagement with questions like "why does innovation occur" in order to get to "what is the role of IP in driving innovation" and perhaps to ask "is IP truly necessary in order to drive innovation?"

Why does innovation occur?

Innovation can occur for a variety of reasons, but these usually come back to the pursuit of increased efficiency/productivity. One part of this is a mindset: an individual constantly looking out for new opportunities, making connections others haven't, all in order to make their job or business more efficient/productive. Another side of this is the conscious/intentional pursuit of new innovations. R&D spending falls into this category. Innovation is so useful because it meaningfully improves the system...usually. A new medicine can relieve more ailments (or relieve current ones more effectively). A new piece of machinery can produce higher quality goods at a faster rate. This is all about solving problems.

What is the role of IP in driving innovation?

Sure, maybe you can keep your new technology as secret as the Krabby Patty formula. But it seems highly unlikely in the world of corporate espionage (both physical and cyber). Which begs the question: why would I potentially pour billions into researching a new medicine or a new technology when the moment I finish developing it, 10 of my competitors start making their own versions of it based on all the research I've done? I would expect to lose a whole lot of money. IP laws allow for greater amounts of innovation by protecting me from competition. Sure, the research might not work out, but if it does, I have a temporary monopoly on the goods. This means that my expected utility/profit/gain from the innovation is now far, far larger than if I had to compete right out of the gate. Of course, this still only incentivizes innovation in areas where desired profit margins can be attained, but it is still a vast improvement over prior eras.

The Problem of Rents with IP

An economic rent is, in normal language, any monetary benefit that is received for assets that you did not produce, or assets that you have established an unnatural privilege over. Making money off of unproductive activities (see: the entire financial sector) or off of assets that existed before you did (see: land) are examples of economic rents. There have been various movements that explicitly targeted the elimination of these rents, including Georgism, various anti-usury movements, and (depending on who you believe/how you read him) Proudhon's mutualists and a variety of left-anarchists. (Disclaimer: I sympathize with the anti-rent position, and believe economic rents are bad - you are receiving compensation for something you didn't work for and therefore you do not deserve the compensation).

Obviously IP is establishing an unnatural privilege over a new technology. It would be odd to tell a caveman that Grug over there had "patented" his special method of rubbing two sticks together to make fire, so now the caveman has to find a new method. "No copycats!" IP is therefore a clear example of economic rents; it is also a clear example that while economic rents are indeed bad, they may be the lesser of two evils (vs. a society with highly curtailed innovation).

IP and capital-C Capital

Now, herein lies the rub: IP is truly only necessary when we are talking about individuals and institutions putting their own capital at risk. Profit, being the compensation for risk-taking, is demanded. When a company is debating whether or not to invest money in R&D, there is an opportunity cost ("we could invest this in advertising") and arisk ("this money could do nothing for us"). In order for a company to invest in R&D, to put its money at risk, it has to believe that the expected returns to the R&D are worth it (both in terms of money explicitly spent on R&D and in terms of opportunity cost - "Do we think spending $1 billion on R&D will bring us more profit over the next 5 years than spending $1 billion on advertising?"). Management also has to believe that the risk of losing the money invested in R&D (aka the product coming out as a dud) is not high enough to warrant concern.

What I want to do is look at the example of IP in the pharmaceutical industry and consider ways we might eliminate the rent-seeking that allows bad actors to take money from productive individuals and line their unproductive pockets with it.

Big Pharma

Healthcare prices in the United States are absurd. They must come down. But, there are serious costs that pharmaceutical industry must deal with. The cost of researching a new drug is high. Like, anywhere from $350 million up to $5.5 billion. The biggest and most expensive cost here is drug discovery, the process by which scientists investigate an ailment and begin developing chemical compounds to that ailment. Obviously, there is a significant amount of risk in the proposition that you might sink half a billion dollars into a potential new drug only for it to fail in one of its clinical trials and you are left with nothing.

But what if there was an actor that was never at risk? An actor in the economic system that never had to worry about a loss of principal capital (the money that you initially invest) because it can just mint more capital whenever it wants? And if this actor can mint its own capital, there is little concern for opportunity cost. The only thing bounding this minting would be the (very real) spectre of inflation.

AND what if that actor was already heavily involved in the drug discovery process? And by "heavily involved" I mean that its "funding contributed to published research associated with every one of the 210 new drugs approved by the Food and Drug Administration from 2010–2016"...yeah. I am of course referring to the State, and in this particular case to the United States federal government and the National Institutes of Health, that acts as a massive financial catalyst for the development of new drugs.

Of course, what people don't realize is that NIH discoveries are quickly snatched up, tweaked, and patented by pharma companies that then charge 1000x markups on the price of production. Now, I can understand a 1000x markup if you have fully invested in 1000 chemical compounds for the drug discovery process and spent massive amounts of money. Sure. But these pharma companies use the NIH.

Simple step to solve this part of the problem here (at least in my opinion): all research the NIH produces is public, and any drug development using NIH research cannot be patented.

Now, how would we deal with the potential for Big Pharma to stop doing the "last steps" of research? Well, if we are talking about an actor that can literally mint capital as it pleases, the NIH could provide awards (of anywhere from $100 million up to $10+ billion, or however much) to companies and labs that complete those final long as the final drug is also public and can be produced by anyone. You are effectively trading patents for cash awards and turning every drug market into a battle between "generics." The cash awards could be based on the number of people the disease impacts and the severity of the disease, with something like a perfect, no-side-effects lung cancer cure being awarded $100 billion and a topical cream for a mild rash 1000 people per year suffer from might be awarded $10 million.

I also believe this opens up the landscape for greater competition from research institutions and independent labs to work on new discoveries. I can imagine a much more well funded NIH providing greater financial and logistical support (ex: matching drug development labs with companies that perform clinical trials) to these small companies and allowing them greater ability to compete with the big players.

Obviously this is not sufficient to fix America's horribly broken healthcare system, but I believe it presents a huge opportunity to improve the industry and build back an integral part of America's manufacturing base. Raising the NIH budget from ~$50 billion to ~$500 billion might sound ridiculous, but the fact the US government could just give itself $10 trillion if it wanted to ("what are you gonna do, fight us?") and fund any program it desired...and yet still goes into debt and practices austerity is vastly more ridiculous. (And I will argue there are ways to do this without significantly impacting inflation...but this piece is long enough and that's another rabbit hole).

Thumbnail/Cover/Preview image from VoxEurop


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