Patently Harmful

How neoliberalized IP regimes incentivize innovation at the expense of the public good

Full-text audio version of this essay.

In early May, the Biden administration yielded to increasing calls for patent waivers on certain Covid vaccines and related technologies to enable their more rapid production and distribution in developing countries. To the majority of the world that supports such waivers, this was welcome news, even though it faces a long negotiating process and is only a first step in resolving the larger, more complex problem of technology transfer during a pandemic.

Pharma, meanwhile, has responded with an army of lobbyists to explain that no, IP can’t possibly be the problem with Covid vaccine distribution, that it would be much better for philanthropies to purchase lots of drugs and then distribute them, and that waivers now will hurt drug development in the future. Other unrelated IP industries, including the Motion Picture Association and the Association of American Publishers, have followed with their own lobbyists, trying to narrow and weaken Covid-related waivers.

Yet as Amy Kapczynski and Jishian Ravinthiran explain in detail, there is good reason to think that IP is a part of the problem:

There are plenty of reasons to think that patents would pose barriers. Even cursory searches turn up thousands of possible patents related to mRNA vaccines that companies are seeking to protect around the world. We also know that patents may be generating part of the bottlenecks in the mRNA supply chain. The lipid nanoparticles that encase the RNA in mRNA vaccines which are reportedly in short supply, for example, are subject to many patents, some of which are important enough that Moderna fought them in litigation. Patents also mean that the most popular means to “cap” the RNA strands in these vaccines can only be made by one company. We have every reason to expect that lucrative vaccine candidates and platforms will be widely patented, and that is why, since early in the Covid pandemic, South Africa and India have been calling for a waiver of patent and other IP protections in the TRIPS Agreement, as applied to the Covid-19 pandemic.

The warnings about drug development from IP defenders were predictably apocalyptic. One scholar at Johns Hopkins complained that the waiver “amounts to the expropriation of the property of the pharmaceutical companies whose innovation and financial investments made the development of Covid-19 vaccines possible in the first place.” This is somewhere between deflection and rubbish, given that these vaccines were developed with the assistance of enormous sums of governmental money, both in the form of direct grants and guaranteed markets.

Public health goods are poorly served by markets, because there is no obvious way to capture the value of someone not getting sick

But beyond the specific degree to which patents impede vaccine equity, it’s important to understand how anyone could argue against vaccine equity in the first place. This is not the first time we have heard these arguments. Pharma fought for years to avoid making anti-retroviral drugs to treat AIDS affordable in the poorest countries on the grounds that this would hurt innovation. It also bitterly opposed Thailand’s efforts to issue compulsory licenses for Plavix and a pair of AIDS treatments, even as those licenses brought the drug companies to the negotiating table. Western companies have even tried to go after staple foods, using indigenous knowledge to create patented products and then not compensating or even crediting the original sources. (Texas-based Rice Tec once tried to patent a basmati rice hybrid.)

Where did the belief system now presupposed by IP defenders — that incentivizing innovation must trump the public good, if it’s not inherently a higher form of it — come from? What makes that logic seem reasonable to some even in the face of a public health emergency?

Part of the answer lies in a historical shift in what the purpose of IP policy is understood to be. As I detail in my book Biopolitics of Intellectual Property, IP policy has moved from a public biopolitics model — which focused on public health and welfare benefits at the population level — to a neoliberal version characterized by an emphasis on privatization. Public health is a classic public good, which means that it’s non-rivalrous (we can all share it) and non-excludable (we can’t stop others from benefiting). But that means neoliberal markets can aim for it only indirectly, as a side effect of private gains.

Every person who is waiting for vaccination rates to drive down Covid transmission understands intuitively the idea of a public good: When fewer people get sick from Covid, the benefits spill over to all of us. But to the logic of neoliberalism — which has steadily become the governing logic of policy — the matter is not so clear cut. Public health goods are poorly served by markets, because there is no obvious way to capture the value of someone not getting sick. Even if you can sell me a vaccine, if my vaccination stops what otherwise would have been a chain of Covid transmission (because I didn’t get sick when exposed, and so didn’t transmit it to my family or friends), there is no way to monetize that benefit. That is, there is no way to make sure everyone who didn’t get sick pays a kind of licensing fee for their virus-protection “free ride.”

This point is even starker if the vaccination rate prevents new variants from developing and forestalls an immeasurable amount of damage. Virologists are deeply concerned that Covid’s running amok in India and elsewhere may breed new variants that could be more contagious or more virulent or even evade vaccines. Avoiding those is of incalculable benefit, but that benefit doesn’t translate into the profits of a vaccine maker. To the neoliberal point of view, if a benefit is “incalculable,” it does not exist.

For the neoliberal worldview to be coherent, only monetizable benefits can be considered “legitimate.”  But this leads to protecting monetization itself as though lives depended on it, even though, as the pandemic has shown, the very opposite is the case.

In general, patents function by granting to inventors the exclusive right to market their inventions for a limited period of time, establishing an artificial monopoly. As the argument goes, this incentivizes production by protecting inventors from reverse engineering and other forms of free-riding. This system took shape in the 1600s and 1700s, and is incorporated into Article I, Sec. 8 of the U.S. Constitution. Early on, the debates about it were largely oriented toward ensuring public benefit, and they were suffused with concern about the harmful effects of monopolies — including price gouging and the stifling of scientific research. For instance, Thomas Jefferson opposed the inclusion of an IP clause in the Constitution, writing that “the benefit even of limited monopolies is too doubtful to be opposed to that of their general suppression.” In England, John Stuart Mill supported a short duration for patent rights, and reasoned that the monopoly “is not making the commodity dear for [the inventor’s] benefit, but merely postponing a part of the increased cheapness which the public owe to the inventor, in order to compensate and reward him for the service.” Even the early neoliberal Friedrich Hayek wrote that “in the field of industrial patents in particular we shall have seriously to examine whether the award of a monopoly privilege is really the most appropriate and effective form of reward for the kind of risk-bearing which investment in scientific research involves.”

Even if some patent rights are necessary for innovation, that does not mean that more patent rights mean more innovation, or more socially useful innovation

But around the mid-20th century, a few things happened. First, Joseph Schumpeter, of “creative destruction” fame, successfully pushed the thesis that economic growth was driven by innovation. Second, neoliberal theorists decided that monopolies were often economically efficient. In 1969, economist Harold Demsetz applied this thesis to intellectual property, arguing that “in the linear model of two industries of equal output size, the more monopolistic will give the greatest encouragement to invention.” In other words, big firms protected by patent monopolies lead to more innovation than competitive markets, and stronger patents will lead to more invention. Demsetz also explicitly argued that the gains of future innovation (“dynamic efficiency”) are more important than whatever short-term distribution problems (“static inefficiencies”) they entail. You might sell more of a given drug today if you sold it at a lower, market price, but the higher, patented price — and loss of sales — today is worth it, because you’ll get more drug development down the line.

It is not obvious that this is good economics. Even if some patent rights are necessary for innovation, that does not mean that more patent rights mean more innovation, or more socially useful innovation. There are also other ways to fund innovation, such as prizes or subsidies. For these neoliberal arguments about IP to be convincing even on their own terms, they must assert that the “public good” is a fiction that can’t actually be ascertained without private profit (secured through IP) as a scorecard. So for example, if your neighbors are going to enjoy the music you’re playing in your backyard, neoliberals believe that it ought to be monetizable in the form of a public performance license. You should pay more because you are using the music for more than your own pleasure, and your neighbors should pay you instead of freeloading. And if I, the copyright owner, can monetize your playing my music, then I would have more incentives to create it in the first place.

But as the case of vaccines shows, the limits of this logic of privatization begins to work against certain kinds of innovation. Its model of incentives has failed to generate medicines like vaccines that promote public health because they are often cheap treatments, and the public benefit they bring cannot be easily calculated, much less monetized. Notably, the Covid vaccines were all developed with massive infusions of public funding, either as direct assistance or in the form of guaranteed purchase orders.

Neoliberal prerogatives of privatization need not be treated as immutable or even logical on their own terms

As I detail in the book, numerous scholars have shown that strong IP rights tend to push drug development not toward the broadest public benefit but instead in the direction of diseases that primarily affect citizens of rich countries, as well as treatments for expensive chronic conditions rather than less remunerative drugs like antibiotics and vaccines, and “me too” drugs for conditions whose treatment generates lots of revenue. (Hence, multiple drugs to treat erectile dysfunction.) The same logic of excessive proprietization of everything also tends to divert public policy and other resources away from proven successes like water-sanitation systems and toward expensive but patentable approaches like genomics.

Neoliberals tell us that we should be willing to bear these diversions away from public health for the sake of long-term gain in the form of innovation. But how much innovation — and what kind — at what cost? Covid vaccine equity shows the high cost of single-mindedly pursuing the neoliberal agenda. How do we trade off potential slowdowns in innovation against the urgent need for vaccines now to stop a pandemic that has officially claimed, in what is almost certainly a substantial undercount, nearly 3.5 million lives so far?

People who live in countries that can’t afford the price or that urgently need technology transfer of patented materials and processes are suffering from what the economics literature calls “deadweight loss.” The phrase refers to how much more product would be sold if it were priced at marginal cost (i.e. what it costs to make one more) and not at what monopolists can get away with; it essentially measures unmet social demand. When this is a matter of, say, streaming entertainment goods, it’s maybe not such a big deal. But when people need a vaccine, deadweight loss becomes more literal: Some of those people will die.

Nothing in nature or the “laws” of economics requires this. The decision to try to treat public health as a private good and the refusal to compel companies to allow the production of vaccines at cost are both political decisions. IP theory was not always this way. Indeed, patent-licensing schemes have historically been able to protect both inventors’ and the public’s interest at the same time. Patents can serve the public good, as when they are used to ensure adequate quality control and equitable pricing and licensing. The University of Toronto’s early patent on insulin was justified on these terms: “the idea here was not to use the power of the patent to create a commercial monopoly or to extract a rent, but to make it the instrument of a drug biopolicy inspired by the public good.” When Harvard University decided not to pursue patents on liver extracts to treat anemia, the goal was again to promote public access. But the university had second thoughts because quality control was more difficult to ensure without a licensing scheme to enforce it. The stakes in those cases were not who gets to internalize the gains of an invention but how public benefits would be best managed and guaranteed.

The idea that the present should always be sacrificed at the altar of future innovation, and that this should guide IP, dates roughly to the 1960s, not to eternity. These decisions can be made differently. Neoliberal prerogatives of privatization need not be treated as immutable or even logical on their own terms. Getting more people the vaccine faster is not only a net social gain; it’s not even a loss to Pharma, because those people weren’t going to buy the vaccine anyway under the status quo. In this case, the need for present consumption outweighs any speculation about the future. This is not a hard call. But the fact that Pharma is dispatching armies of lobbyists to deflect from it anyway says everything you need to know.

Gordon Hull is Professor of Philosophy and Public Policy at the University of North Carolina at Charlotte. He has written extensively on issues at the intersection of law, technology and politics, as well as on political philosophy and the history of philosophy. He is also blogs on New APPS.