But pharma bad behaviour is not new. For example: there’s a thing in patent law called “evergreening”. It’s most famously used by big pharma companies who don’t want their expensive drugs to reach the end of their 20-year patent and become available as a generic, so they develop a very slightly different version of the same drug and get a new patent on that.

Venlafaxine is an antidepressant, marketed as Effexor. As it neared the end of its patent, the manufacturer developed a new version – desvenlafaxine, marketed as Pristiq. Desvenlafaxine is what the body naturally breaks venlafaxine down into; your liver takes the venlafaxine and metabolises it into desvenlafaxine. It is also either less effective or no more effective than the original.

The patent for Effexor expired in December 2008; Pristiq entered the market in early 2009. By 2014, Pristiq was the second most prescribed antidepressant in the US, despite being “a slightly worse version of an older antidepressant with no proven advantages that also costs fifteen times as much”. (A month’s supply of Effexor at the time cost $20; a month’s supply of Pristiq cost $300.)

And it’s not the only bad thing they do. When a drug reaches the end of its patent, other companies can make generic versions. To encourage that, the US FDA says that the first company to do so gets 180 days of exclusivity, so it can establish itself in the market. “Until recently,” says Dr Vishal Gulati, a venture capitalist specialising in healthcare, “it was legal for the original company to pay off the company to not launch the product. Companies would get a license to make the generic, and then be paid to not launch it.” They were literally paying to prevent patients from getting cheaper healthcare.

What’s going wrong here? There’s a very tempting explanation, which is that big pharma is evil. But I never find that satisfying as an explanation. Instead, I’d rather think about incentive structures.

There’s an inherent tension at the heart of any knowledge-based business — anything which develops new technology or information and sells it. You want it to do two things: to create that knowledge, to advance our understanding; and to spread it around, so that the world can benefit from it. Information is a “non-rival good”: if I benefit from it, that doesn’t stop you from benefiting from it too. An example is a lighthouse. If I see the beam, and avoid the rocks, it doesn’t stop you from doing the same. By contrast, a hamburger is a “rival good”: if I eat it, you can’t.

People can make money selling hamburgers. But it’s much harder to do so by operating a lighthouse.

The trouble with knowledge-based businesses is that they are more like lighthouses than like burgers. If you create a new piece of software, or a new technology — or a piece of investigative journalism — then there’s nothing stopping me from simply copying it. And then you won’t make any money off it. That makes it less likely that you’ll spend the time and effort to create any more new things.

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So we created intellectual property laws in order to stop that. Creators of a thing can get a patent or a copyright, and are granted exclusive rights to produce that thing for some number of years — 20 years, in the case of pharmaceuticals.

Problem solved, right? Well, obviously not. Because we don’t just want a world in which new things are created. We also want a world in which everyone can gain access to those things. Intellectual property rights prevent us from making extremely cheap copies of things that we already know how to make. If a foreign correspondent reports human rights abuses in Yemen, it’s best for society if as many people as possible to read that report, so that we can act on it. But intellectual property rights (and their downstream effect, paywalls in journalism) stop that from happening.

This is a direct trade-off. “My mental image of all this is we’re basically squeezing a balloon,” says Owen Barder, a development economist. You can squeeze the top, and move the problem to the bottom. Or you can squeeze the bottom, and move the problem to the top. But the balloon is still there.

And this isn’t the whole problem. We want pharma companies to develop drugs and vaccines for the developing world. But people in the developing world can’t pay as much money as people in the rich world, obviously.

Pharma R&D is expensive: sometimes billions of dollars to research one drug. And for every drug that is successful, there might be 20 that aren’t, and the research into those needs to be paid for as well. That money needs to come from somewhere. At the moment, it comes from patients in rich countries paying sometimes hundreds of dollars for pills that might, individually, cost a few cents to make. The “marginal cost” of each dose is tiny — Jacobin and Oxfam fume that the Covid vaccines, for instance, are priced at many times the manufacturing cost — but that cost needs to cover the “fixed cost” of all the R&D (and marketing, staff costs, etc) you’ve put in.

The ideal solution to this would be selling the drug to everyone at the maximum cost they’re willing to pay. Charge hundreds of dollars in the US, a bit less in the UK and EU, much less in Bulgaria, and almost nothing in Malawi. “If you could perfectly price-discriminate, you’d be charging above the marginal cost in lots of countries, and at the marginal cost for the ones who couldn’t afford more than that,” says Barder.

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But that’s not possible. For one thing, if they tried it, people would buy the pills in Malawi for a few cents and fly to the US and sell them at a profit. But more important, Congress or Parliament (and the press) would kick off – why are our citizens paying hundreds of times over the odds? It would be politically impossible to do. So, instead, they make the drug at a single price, which only rich countries can pay, until the sales in those countries have paid off the R&D costs. “Drug companies are just responding to the incentives we’ve set,” says Barder. “They’re doing the thing we asked them to do.”

The temptation, when faced with problems like these, is to argue that big pharma should be destroyed, and all drug research run by publicly funded university laboratories. And maybe that would work – but it’s a huge gamble. Pharma companies do some bad things, but they objectively do make drugs that are hugely valuable to society. And it’s not that publicly funded bodies are free of bad incentives. Academica has huge problems of its own — academics are rewarded for publishing lots of papers, rather than for necessarily finding out true things. Government’s incentives are to remain popular, rather than to fund the most effective things: it would be easy to imagine lots of money going to fund treatments for picturesque children with cancer, rather than for, say, diabetes, even if it were a much less effective way of saving lives.

Still, it might work. At the moment, as Barder says, there’s a tendency to “socialise the losses and privatise the gains”: private companies get rich off research that is often begun in university departments. A starting point might be to pump lots of money into university research, let them bring drugs to market, and see if they can outperform big pharma. What would be crazy, though, is to destroy big pharma first, and then hope that our new nationalised version can keep new drugs coming through.

A more low-key version, says Gulati, might be for academic institutions to become better at demanding equity in pharmaceutical products that are based on their early research. He also suggests that countries such as the UK could negotiate cheaper drugs by offering the NHS as a source of clinical trial subjects — as has happened with Novartis’s new cholesterol drug inclisiran, aka Leqvio. That’s hugely valuable to pharma companies, and it’s something the NHS can do easily and safely, with its huge, centralised, well-protected data systems.

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Those ideas might help make drugs cheaper in the UK and other rich countries: getting them to poorer countries is a different problem, with different solutions. Governments could buy out patents — if a firm thinks it can make $10 billion over the next 10 years for its product, we could say that we’ll give them the $10 billion now (or a bit less) in exchange for the rights to make the drug available at cost.

Barder likes one idea, put forward by the late economist Jean Olson Lanjouw. “Her suggestion was,” says Barder, “that if I’m AstraZeneca and I show up at the UK patent office asking for IP protection for a new drug, the patent office should say ‘Well done. Can you tell me what you expect the market value for this drug to be in all 200 countries in the world?’”

Then AstraZeneca or whoever would say “I expect most of my revenue to come from the US, UK, EU and Japan, and relatively little from sub-Saharan Africa and Bangladesh.” And the patent office would grant them a patent, on the condition that they license it for free use in those countries that make up the bottom 2% of their revenue. “It’s like a tax of 2%,” says Barder, “but those countries might well make up 80% of the disease burden.” It hasn’t been tried, as far as I know, but it’s worth thinking about, and it would avoid the problems of Congress or Parliament demanding that the drug be made cheap here — although it would only work for global diseases that affect the rich world as well as the poor — diseases like cancer, or heart disease, or hypertension. It wouldn’t help incentivise research into diseases like malaria or dengue, which have no impact on the rich world. The “advanced market commitment”, which I discussed here, and involves Western governments promising to give pharma companies a bonus for every dose bought by developing nations, might be more effective for that.

Andrey Zarur, the CEO of the biotech firm GreenLight[1.  I have done several pieces of paid writing for GreenLight over the last two years], who are producing their own mRNA vaccine for Covid at the moment, comes at the whole thing from a different angle“Pfizer was not designed to make low-cost therapeutics available to every corner of the world,” he says: it’s a 150-year-old company with settled investors and a particular way of working.

He compares it to Apple. “You have a $1,000 iPhone 13,” he says. “Who’s that designed for? My children. Idiot teenagers with rich parents.” Poorer countries need smartphones too, but the solution is not to force Apple to sell smartphones to Ethiopia at a discount. “What you need is an innovative company with different processes.” Instead of demanding changes from 150-year-old companies that are very good at the specific things they do, create smaller, newer companies which do the thing you want. “There’s six billion people in the developing world,” says Zarur. “You should be able to figure out a way to turn a reasonable profit with reasonably priced drugs.”

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It’s obviously true that pharma companies have done bad things. It’s also obviously true that they’ve done marvellous things — I have relatives who are alive today who wouldn’t be without the pharmaceutical industry’s products.

Perhaps there are other systems which could have produced those drugs, other than the undeniably cutthroat capitalist system we have today. But any system would have bad incentives and obvious, easy-to-publicise disasters.

The job of government in this situation should be to find the bad incentives, the market failures, and to patch them; to make it work, to decide which end of the balloon to squeeze. The Indian government, for example, decided a few years ago that it would not accept evergreening any more — it passed a law saying that it would only offer new patents on drugs that were sufficiently different from existing ones.

In 2013, the government won a court case against Novartis, which had tried to get a new patent on a cancer drug, imatinib mesylate — a crystalline version of an existing cancer drug, imatinib. The government said that the new version was no better than the existing one and was simply an attempt to squeeze more money out of the healthcare system.

It worked. You could argue (as Novartis did) that it will reduce innovation; but the point is you can change the system, change the incentives, encourage the behaviour you want, without smashing the system entirely.

Adjusted for inflation, however, defence R&D has fallen by 61% since 1990. Unsurprisingly, that decline in investment coincided with the Soviet Union’s demise. But as defence is the first duty of government, making sure the armed forces are able to fight the next war, rather than refight the last, means investing heavily in R&D.

In The Entrepreneurial State (2013), economist Mariana Mazzucato advocates more government spending on R&D generally. She debunks the belief in the ‘small state’ and the innate superiority of lightly regulated private enterprise – something she believes that the facts of technological innovation in the US simply do not bear out.

It is, though, a powerful American myth, celebrated even in that long-running encomium to the Democratic Party, The West Wing. In Episode 55, 100,000 Aeroplanes, President Bartlett gets a “legacy idea”: just as Kennedy put a man on the Moon, the government will cure cancer. This is the ensuing discussion between two of the President’s advisers, Sam Seaborn and Joey Lucas:

Joey: Federal government shouldn’t be directing scientific research.

Sam: Why?

Joey: Because you stink at it. If it was up to the NIH [National Institutes of Health] to cure polio through a centrally directed program instead of an independent investigator driven discovery, you’d have the best iron lung in the world, but not a polio vaccine.

Sam: When did you get an M.D.?

Joey: I was just quoting Samuel Broder.

Sam: Who’s he?

Joey: The former director of the National Cancer Institute.

Joey, the audience is supposed to conclude, is presenting ‘the American way’ – the private sector innovates, and the government should get out of the way.

But then something contrary happens. Sam Seaborn’s Democratic high-mindedness (and remarkable recall of historical defence statistics), preaches that presidential overreaching is both good and effective:

“In 1940 our armed forces weren’t among the 12 most formidable in the world, but obviously we were going to fight a big war. And Roosevelt said the US would produce 50,000 planes in the next four years. Everyone thought it was a joke and it was, because we produced 100,000 planes. Gave our armed forces an armada which would block out the sun.”

Conveniently, Roosevelt was a Democrat. Seaborn could have chosen a much more recent triumph – and of actual R&D rather than of production.

The US Strategic Defence Initiative of the 1980s – a space-based missile defence system that would intercept all incoming Russian intercontinental ballistic missiles (“Star Wars” as it was dubbed) – can trace its origins to the Second World War, when the US Army began thinking of a defence system to counter the German V2 rockets. It lingered on in the minds of various scientists and research institutes, some of them partially government-funded, but it was going nowhere fast. Then, in 1967 the idea lodged in Ronald Reagan’s mind when as governor of California he attended a lecture by Edward Teller, who had worked on the Manhattan Project – the development of the atomic bomb.

SDI became Reagan’s signature project when he became president in 1981, and he threw huge resources at the R&D. The costs have never been publically aggregated, but in 1985 one scientific study estimated that by 1990 SDI would absorb one quarter of the US Defense Department’s R&D funding. The programme was progressively abandoned after 1992, although some aspects were incorporated in other (non-strategic systems).

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No project in history that did not get beyond the development stage ever had the strategic effect of SDI. It convinced the Soviets that the US could achieve a position of invulnerability from which they could launch a nuclear attack on the Russian homeland. It precipitated the end of the Cold War and the break up of the USSR. And it was conceived and driven by government rather than industry.

Britain’s greatest strategic defence programme – radar – was conceived and researched independently in a university laboratory (Dundee, by Robert Watson Watt) before the First World War, and then developed by the Meteorological Office (a branch of the Board of Trade). It came to fruition in large part through the Committee for the Scientific Survey of Air Defence, set up and funded by the government in 1934 under Sir Henry Tizard, principal of Imperial College London. The committee persuaded the RAF of radar’s potential, and its development was then funded in full by the Air Ministry. Without radar the Battle of Britain in 1940 might have been lost.

Given the urgency and complexity of both the SDI and radar programmes it was wholly beyond private R&D, although some subsidiary elements were taken up from concepts stemming from private research. There comes a point when government must make the critical decision to accelerate investment in R&D, whether in its own research departments or via the private sector (the latter will probably be increasingly the case with cyber).

Without that state action,  priorities would not be met in time. Private enterprise, after all, cannot be expected to be more certain of a concept – and therefore more generous in its R&D – than its intended user.

There is a danger, however. Unchecked, the close and mutually beneficial relationship between government and private defence R&D will tend towards ever greater spending, since the potential of technology is in large part a function of how much is spent. President Eisenhower – who had been a soldier for 41 years – famously warned in his farewell address in January 1961 of this tendency: “We must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military–industrial complex.”

For this reason government must be prepared to direct defence R&D along specific lines of exploration, based on its own assessment of future operating conditions. In other words, the state must make choices, and in doing so direct its entrepreneurial capability to smart ends. That means resisting routine, incremental R&D that is likely to yield only marginal advantage – a notoriously profitable area for defence companies. Instead, the state must be alert to unexpected technological potential from ‘off-field’, and agile enough to fund urgent R&D to the point that a decision about viability can be taken – a fine balancing act.

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Although in the past there has been much commercial spin-off from defence R&D, it is not obvious that in the future this will be so. Indeed, defence acquisition will increasingly become a business of technological repurposing. To meet the likely increase in R&D expenditure needed in a world where the rate of technological change is increasing at an unprecedented pace, government spending might have to be offset by limiting production. In the past production has tended to automatically follow development – that must change.

Whatever the mercantilist advantages of the entrepreneurial state, however, it is worth recalling Eisenhower’s specific concern about R&D:

“Yet, in holding scientific research and discovery in respect, as we should, we must also be alert to the equal and opposite danger that public policy could itself become the captive of a scientific-technological elite. It is the task of statesmanship to mold, to balance, and to integrate these and other forces, new and old, within the principles of our democratic system – ever aiming toward the supreme goals of our free society.”

R&D is an infinite process. Every new technological concept begins the process of counter-concept, and the ‘threat’ is an ever-evolving one. State investment is essential to ensure urgent needs are met. But success breeds ever more demands for more investment in new R&D projects, and government must be disciplined in resisting that pull. Benjamin Franklin famously remarked “nothing can be said to be certain, except death and taxes”, to which should now perhaps be added “more R&D.”

Germany remains some 30% more productive than the UK; France and the US some 25%. This is in part because business investment has stalled, not helped by a retrenchment of public sector capital spending in the years following the crisis. Without investment, innovation atrophies, and with it growth.

R&D expenditure in the UK stands at a paltry 1.67% of GDP – below the European average of just over 2%, and well below world leaders Israel and Japan, both of whom spend over 4%. And within this total R&D, government spends just £10 billion per annum, or a disappointing 0.6% of GDP.

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The latest industrial strategy pledges to increase the total spend to 2.4% by 2027 – clearly indicating that the Government sees innovation as a ‘public good’ – but whether that can be achieved remains to be seen.

The worry is that individual companies would not, if left to themselves, make the level of investment needed to boost the economy as a whole. Businesses take a narrow definition of benefits, they do not price in any positive ‘spillover’ effects (seemingly unconnected benefits) or ‘externalities’ (benefits to others) that flow to the rest of the economy as a result of investment.

If the market is failing to innovate adequately, to the detriment of the economy, does that mean that state intervention is justified? In my mind the answer is a resounding: yes! The dilemma, of course, is how best to intervene.

The ideal, surely, would be to change market incentives by putting more emphasis on long-term returns. But that would require changing accepted norms and cultures. Even though R&D spending should increase innovation, efficiency and productivity, such benefits take time. In the short term, profits are cut – and that isn’t always favoured by institutional investors.

Perhaps it would be better to just alter the fiscal framework, or increase government subsidies. But that requires an understanding of ‘additionality’ – in other words, whether the desired outcomes would have happened anyway, meaning that taxpayers’ money is wasted. Was it worth, for example, the UK government introducing in 2013 a low tax ‘patent box’ to encourage companies (like big pharma) to invest in R&D and commercialise their patents, or would firms have invested in the UK anyway? A better focus for taxpayer investment might be small and medium size businesses where the need is likely to be greater and the impact wider.

Or perhaps greater competition is the answer. Large monopolies, or oligopolies, enjoying high profits have little incentive to invest. While on the other hand, the difference innovation can make for a competitive firm can be significant. Research clearly shows a positive relationship between competition and innovation.[1. See for example Richard Bundell et al., ‘Market Share, Market Value and Innovation in a Panel of British Manufacturing Firms’, The Review of Economic Studies, 1999; Paul Geroski, ‘Innovation, Technological Opportunity and Market Structure’, Oxford Economic Papers, 1990].

This all suggests that a mix of better conditions for innovation, and a series of targeted but properly costed and evaluated interventions may help boost the UK’s lagging productivity – and with it, all important economic growth.

The UK has done a number of things already. The Technology Strategy Board, now Innovate UK, emerged from the first innovation strategy produced in the early 2000s. In 2016-17 it provided some £560 million worth of project funding, and also attracted large private funding, to assist collaborative research in areas such as emerging and enabling technologies, life sciences, scientific instruments and manufacturing and materials.

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There is now also a £725 million Industrial Strategy Challenge Fund focused on innovation, announced in the 2017 Industrial Strategy White Paper, and ten ‘catapults’ which are not-for-profit centres aimed at promoting innovation by connecting businesses with universities and other research organisations.

These are positive steps, but more needs to be done and the sums are still small. Academics like Mariana Mazzucato would argue that an obsession with limiting state intervention to correcting market failure is misplaced. Instead, the state should be actively shaping markets.

That implies, however, that government knows best, and there’s not much evidence that it has been particularly successful at picking winners so far. Current suggestions for a National Investment Bank, for example, would only make sense if it functions at arm’s length from politicians, and it is staffed by experts with banking and commercial skills.

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But as Mazzucato suggests, “building dynamic public-private partnerships” to drive innovation makes sense, particularly if that partnership shares the risks and profits. Sadly, the UK is behind the curve. It missed out on developing a sovereign wealth fund, for example, as Norway did so successfully with the oil and gas proceeds when they were at their height in the 1970s and 1980s.

To that end, taking a strategic stake in firms as Mazzucato proposes, and investing in innovation though the process, may indeed be the way forward. Perhaps the UK should take a leaf out of France’s book. The most state-controlled country in Western Europe is, under Macron’s Presidency, about to sell off state shares in companies, partly to raise funds for – you guessed it – a €10 billion Innovation Fund.