In last week’s edition of Finanomics, I wrote about the need for the waiver of patents for vaccines as well as other covid-related innovations, as that could help end the covid-19 pandemic sooner. Since the last week’s post went up the United States Trade Representative (USTR) Katherine Tai, announced that the Biden administration was now willing to support a temporary waiver of TRIPS (Trade-Related Intellectual Property Rights). When this news broke out, various intellectuals and experts joined the discussion and said that it was not patents that were denying access to vaccines and drugs for poor/developing countries, but it is the fragile supply chain.
Alex Tabarrok, a professor of economics at George Mason University (GMU) and also the founder of a very famous economics website called Marginal Revolution wrote an article titled ‘Patents are not the problem’ in this article he writes, and I quote “I am indeed angry that the people in power think they can solve real problems on the cheap and at someone else’s expense. This is not serious. I am also angry that they are sending the wrong message about business, profits and capitalism.” He writes that plastic bags are a bigger bottleneck than patents.
Before we understand his argument, let me try and explain what patents are and why they are so important. Economic theory holds patents to be an efficient tool that allows innovation to foster. When an individual or a firm come up with an innovation, by patenting the innovation, the innovator becomes a monopolist over that product. Being a monopolist gives exclusive rights for the innovator to profit out of the innovation that he/she has created. But this profit is not permanent as it acts as an incentive for other innovators to come up with new innovations in order to take the monopoly status away from the original monopolist and create a new monopoly.
Let us take an example, ‘Blockbuster’ in the United States had a huge market share of the video rental service and had a valuation of $8.4 billion at their peak in 1995. Netflix started in 1997 as a similar video rental service that would deliver the DVD to your house. In 2007, Netflix started the video on demand platform online, which became the origin of Netflix that we know now. This innovation of over-the-top (OTT) video streaming service killed previous innovations such as blockbuster, putting them out of business. This process is called is ‘creative destruction,’ which Joseph Schumpeter In 1942 considered ‘the essentials fact about capitalism.’ And more recently, this is being called the ‘Netflix effect’ by some and in the tech industry it is called as being the ‘market disruptor.’
It is this role that Patents play in protecting innovations as well as incentivising future innovators to become a monopolist in their field is why patents are considered an important economic tool in fostering growth and innovation.
This is why in this article, Alex Tabarrok argues that it is not the patents that are a bottleneck in supplying vaccine to everybody and making sure there is equitable access of vaccines to everyone, but it is the supply chain that has been the bottleneck preventing equitable access to vaccines. For example, he links an article by news 18 which talks about bioreactor bags and how those were in shortage for Indian manufacturers of vaccine. This was one of the key raw materials that we found ourselves in short of and had asked the US government to lift the export ban for us to be able to get those.
The US had used the ‘Defence Production Act,’ DPA, earlier in the pandemic to make sure such shortages of important raw materials do not occur. This act prevents hoarding, limits exports, and increases the production of critical supplies. Using this act, the US federal government has the authority to control domestic industries and direct companies to prioritize orders from the federal government. The Biden administration by using DPA prioritised things like bioreactor bags and filters to the US manufacturers of vaccines.
This is just one example, but we need to understand that there is a limited supply of the raw materials and by lifting patents on vaccine and drugs it will not help create equitable access but create more bottlenecks as countries may not have access to the raw materials and for countries that have good production lines of vaccines may be denied the access to key raw materials, all of them resulting in disruption of supply chains and may delay the inoculation process.
The solution he proposes is the need for government to step in and create a conducive environment for improving the supply chain and improving the supply of raw materials to the key manufacturers.
“What can we do to increase supply? Sorry, there is no quick and cheap solution. We must spend. Trump’s Operation Warp Speed spent on the order of $15 billion. If we want more, we need to spend more and on a similar scale. The Biden administration paid $269 million to Merck to retool its factories to make the J&J vaccine. That was a good start.” writes Alex Tabarrok
As the title of the popular movie, there are indeed fifty shades of grey between black and white, but black and white happen to be the loudest, flashiest and have great social media managers. Getting rid of patents completely as well as the argument of keeping patent restrictions, both do not seem like sustainable solutions in this crisis, there is a need to understand the complexities of the situation and act accordingly.
This post is part of the weekly newsletter on economics, finance and public policy – Finanomics by Phani Datta. You have reached the end of the thirteenth edition of finanomics, thank you for reading. Please do let me know your thoughts, suggestions, feedback, or comments on the newsletter as well as the content in it. Thank you, happy Sunday! See you next week!