Mariana Mazzucato - The Value of Everything - Making and Taking in the Global Economy

UNPRODUCTIVE ENTREPRENEURSHIP

It might be said that these changes have, collectively, caused patents to result not in productive but in unproductive entrepreneurship. We cannot assume that entrepreneurship will always be ‘productive’, in the sense of leading to the discovery of new products, services or processes that increase society’s wealth. In many circumstances, entrepreneurship can be unproductive: where it involves innovations in rent-seeking, for instance, or discovering unused but effective legal gambits to deploy against competitors. Today, the patent system offers many opportunities for these kinds of ‘unproductive entrepreneurship’; patents can reinforce monopolies and intensify abuse of market power, block the diffusion of knowledge and follow-on innovations, and make it easier to privatize research that is publicly funded and collectively created. Indeed, in the words of economist William J. Baumol, ‘at times the entrepreneur may even lead a parasitical existence that is actually damaging to the economy’. 36

A common assumption is that rents are simply the result of imperfections in the competitive process that otherwise would lead to beneficial results for all. An alternative view, following Marx, is that rents (including those generated from patents) arise from value creation itself – i.e. not from cheating or breaking the rules of the system, but from the rules of the system itself. The way the modern-day patenting system is structured (e.g. allowing upstream patenting, and strategic patenting), I would contend, is analogous to what Marx called ‘unproductive labour’, because it extracts rather than creates value. The patent holder derives rents from enforceable property rights over productive resources simply by excluding others from access to those resources. Holders of patents can appropriate surplus value generated by labour and not paid out in wages. In the modern economy there are few limits to the accumulation of such IPR, and therefore few constraints on the scale of value appropriation. Duncan Foley, a heterodox economist in New York studying the relationship between modern value extraction practices and the classical approach to rent, claims: ‘Any individual creator [of strategically located intellectual property] can expand her or his income effectively without limit, but this does nothing to expand social value production or surplus value appropriation.’ 37

Today’s narrative, which plays up the role of the private sector in innovation and plays down that of the state, has created space for broader and stronger patents to proliferate. Such patents are justified as rewarding the efforts of entrepreneurs, who can then continue to shoulder the risks of innovation. But neither the risks of innovation nor support for future innovation – both undeniably important – are enough to justify tipping the balance so far in the direction of this prevailing story. Instead of the creation of value, the expansion of patents has fuelled rent-seeking, value extraction, value destruction, strategic gaming and the privatizing of the results of publicly funded scientific research. As The Economist has observed: ‘Patents are supposed to spread knowledge, by obliging holders to lay out their innovation for all to see … Instead, the system has created a parasitic ecology of trolls and defensive patent-holders, who aim to block innovation, or at least to stand in its way unless they can grab a share of the spoils.’ 38

All of which has major implications for global development. Industrialization in today’s advanced economies like the US, Britain and Germany actually took place under much narrower and more flexible IPR rules than those we have today. And while later industrializing countries such as Japan and South Korea benefited from a ‘friendly’ or ‘loose’ international IPR environment, developing economies now encounter a more closed and privatized knowledge creation system, supported by international trade agreements. 39

PRICING PHARMACEUTICALS

Perhaps nowhere is the modern patent system more pernicious than in pharmaceutical pricing. It is a vivid lesson in how the concept of value is abused. In patent-intensive sectors like pharmaceuticals, greater patent protection has not led to increases in innovation. In fact, the opposite has happened. We have more drugs with little or no therapeutic value. 40At the same time, there have been numerous lawsuits attempting to extend patent validity on existing drugs by reshuffling old combinations of compounds. These suits lend weight to the claim that the patent legal system has become the main source of value extraction, rather than providing incentives for value creation through pharmaceutical innovations. Worse, because public institutions funded most of the key scientific discoveries behind health innovations, 41taxpayers are now paying twice: first for the research and second for the premium that pharmaceutical companies charge for their drugs. Furthermore, increasing returns from patents reinforce the position of incumbents and lock out competitors.

A recent case illustrates how patents lead to monopoly pricing. In early 2014, the pharmaceutical giant Gilead brought a new treatment for the hepatitis C virus to the market. The drug is called Sovaldi. It is a remarkable advance over existing therapies against this life-threatening disease, which affects around 3 million people in the US and 15 million in Europe. 42Later that year, Gilead released an improved version of Sovaldi called Harvoni. The launch of these two new drugs had wide media coverage. The reason, however, was not their therapeutic power. It was their price. A three-month treatment costs $84,000 (exactly $1,000 a pill) for Sovaldi and $94,500 for Harvoni. 43

Sovaldi and Harvoni are not isolated cases. The price of ‘specialty’ drugs – which treat complex chronic conditions such as cancer, HIV or inflammatory disease – has skyrocketed in recent years, fuelling a heated debate about why prices are so high and whether they are justified. Anti-cancer drugs that only add a few months to patients’ life expectancy cost hundreds of dollars a day. The case of Sovaldi drew the attention of the US Congress: two members of the Senate Finance Committee, including the then Chairman Ron Wyden, sent a letter to Gilead expressing concern and demanding a detailed account of how the price of Sovaldi had been determined. 44It was a good question to ask. Prices of specialty drugs are completely unrelated to manufacturing costs. For example, researchers have put the manufacturing cost of a twelve-week course of Sovaldi at between $68 and $136. 45So how does the pharmaceutical industry justify charging prices that are hundreds of times higher than production costs?

Patient Health and Impatient Profits

The standard defence by pharmaceutical companies used to be that these high prices are necessary to cover the R&D costs of developing new drugs and of compensating for the risks associated with both the research and the clinical trials. But public opinion is increasingly sceptical about this argument, and for good reason: research has disproved it. 46

First, basic research expenditure by pharmaceutical companies is very small compared to the profits they make. 47It is also much less than what they spend on marketing, 48and often less than what they spend on share buy-backs aimed at boosting short-term stock prices, stock options and executive pay. 49

Second, the research leading to real pharmaceutical innovation, 50broadly defined as new molecular entities, has come mostly from publicly funded laboratories. 51The pharmaceutical industry has increasingly concentrated its R&D spending on the much less risky development phase and on ‘me too drugs’ – slight variations on existing products.

For example, NIH and the US Veterans Administration funded the research leading to the main compound in both Sovaldi and Harvoni – from early-stage science even into later-stage clinical trials. Private investors spent no more (and perhaps much less) than $300 million in R&D outlays for Sovaldi and Harvoni over the course of a decade. 52If we consider that in the first six months of 2015 the two drugs combined produced around $9.4 billion in sales (and $45 billion in the first three years since launch from 2014 to 2016) it is clear that their price bears no relation to R&D costs. 53