The source of our prosperity

Our world is more prosperous than ever, or at least was before the economic disruption from COVID-19. The ongoing search for a vaccine or cure illustrates how knowledge is the source of prosperity. For an even more prosperous future, we must ensure that people have the incentive to create and apply knowledge.

Economists and historians have offered explanations for prosperity, or what economic historian Dierdre McCloskey terms “the Great Enrichment.” Rich and poor countries clearly differ in levels of physical capital – the existence of machines, factories, computers, and robots which make labor, our ultimately most limited resource, more productive. When over 90% of humans grew and gathered food, little labor was available for producing clothes, homes or cars, to say nothing of writing books, painting works of art, or composing music.

Investing in physical capital requires saving. Tom Hanks’ character in “Castaway” could not spend a day fashioning a spear to catch fish more effectively unless he had food to eat on that day. Saving is having consumption goods available when desired. Investing also requires secure property rights; a world with too much theft, by either bandits or governments, is destined to by poor.

Yet tools and factories require knowledge. Agricultural labor is estimated to have become at least a thousand times more productive since humans first started planting crops. Some innovations – like shovels, plows and tractors – involve better tools for tasks always done. Drought-resistant seeds and pesticides require applying abstract knowledge from plant biology.

Medical researchers are racing to find a vaccine for COVID-19. The race has likely concluded; we had over 160 candidates at the end of June, with 14 in human trials. I find it highly implausible that none of the 160+ candidates will prove successful. (I knocked on wood after writing these words to avoid jinxing the vaccines.)

This represents enormous knowledge production capacity. SARS-CoV-2 is a new virus, not a variant of influenza for which we could modify the existing vaccine. Researchers needed something brand new. The development of so many candidates so quickly suggests we may be on the cusp of a new golden age of vaccines.

Historically, we have ensured adequate compensation for knowledge production through the patent system. Knowledge has some characteristics making marketing difficult. Chemists can break down a new drug and engineers could reverse-assemble a flying car. Thus, any person who “buys” knowledge can resell it. Patents give the inventor a temporary legal monopoly on use of the knowledge.

The patent system works, as the machines and products of contemporary society prove. The 160-plus candidate SARS-CoV-2 vaccines prove that patents work for medicines. Investors have paid the salaries of scores of teams of medical researchers.

The patent’s monopoly allows the charging of prices to recoup the cost of investment in research (including for products and drugs which never pan out) and reward investors with profits. The chemicals in many drugs are not incredibly expensive; the value resides in the knowledge that these chemicals fight illnesses and save lives. High prices are a feature and not a flaw of the patent system.

Insurance coverage relieves individuals of the burden of high drug prices, yet this just burdens employers, Medicare and Medicaid. Exorbitant prices for life-saving drugs and vaccines also strike many people as morally objectionable price gouging.

This makes price controls for a potential COVID-19 vaccine attractive. In the near term, price controls will likely yield benefits. Once the investment in developing a safe and effective has been made, the vaccine will not be pulled from the market even if the price is set very low. The cost of price controls will be many fewer vaccine candidates for the next new virus to afflict humanity.

An alternative can avoid the monopoly prices of patents while still encouraging knowledge production. The alternative would also, I think, be appropriate for an expedited approval process during a pandemic. But the details will have to wait for next time.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.