drugs from countries like India and Thailand, which cost only $3–500, or 2–5% of the ‘real’ thing.
The African governments have not been doing anything revolutionary. All patent laws, including the most pro-patentee US law, have a provision for restricting the rights of IPR-holders when they clash with the public interest. In such circumstances, governments can cancel patents, impose compulsory licensing (forcing the patent holder to license it to third parties – at a reasonable fee) or allow parallel imports (imports of copy products from countries where the product is not patented). Indeed, in the aftermath of the anthrax terror scare in 2001, the US government utilized the public interest provision to maximum effect – it used the threat of compulsory licensing to extract a whopping 80% discount for Cipro, the patent-protected anti-anthrax drug from Bayer, the German pharmaceutical company.[3]
Despite the legitimacy of the actions of African countries concerning the HIV/AIDS drugs, 41 pharmaceutical companies banded together and decided to make an example of the South African government and took it to court in 2001. They argued that the country’s drug laws allowing parallel imports and compulsory licensing were contrary to the TRIPS agreement. The ensuing social campaigns and public uproar showed the drug companies in a bad light, and they eventually withdrew the lawsuit. Some of them even offered substantial discounts on their own HIV/AIDS drugs to African countries to make up for the negative publicity generated by the episode.
During the debate surrounding the HIV/AIDS drugs, the pharmaceutical companies argued that, without patents, there will be no more new drugs – if anyone can ‘steal’ their inventions, they would have no reason to invest in inventing new drugs. Citing Abraham Lincoln – the only US president to be issued a patent* – who said that ‘patent adds the fuel of interest to the fire of genius’, Harvey Bale, director general of the International Federation of Pharmaceutical Manufacturers Associations, asserted that ‘without [intellectual property rights] the private sector will not invest the hundreds of millions of dollars needed to develop new vaccines for AIDS and other infectious and non-infectious diseases.’ [4] Therefore, the drug companies went on to say, those who are criticizing the patent system (and other IPRs) are threatening the future supply of new ideas (not just drugs), undermining the very productivity of the capitalist system.
The argument sounds reasonable enough, but it is only a half-truth. It is not as if we always have to ‘bribe’ clever people into inventing new things. Material incentives, while important, are not the only things that motivate people to invest in producing new ideas. At the height of the HIV/AIDS debate, 13 fellows of the Royal Society, the highest scientific society of the UK, put this point powerfully in an open letter to the
This is not a fringe phenomenon. A lot of research is conducted by non-profit-seeking organizations – even in the US. For example, in the year 2000, only 43% of US drugs research funding came from the pharmaceutical industry itself. 29% came from the US government and the remaining 28% from private charities and universities.[6] So, even if the US were to abolish pharmaceutical patents tomorrow and, in response, all the country’s pharmaceutical companies shut down their research labs (which will not happen), there would still be more than half as much drugs research as there is today in that country. A slight weakening of patentee rights – for example, being forced to charge lower prices to poor people/countries or being made to accept a shorter patent life in developing countries – is even less likely to result in the disappearance of new ideas, despite the patent lobby mantra.
We should also not forget that patents are critical only for some industries, such as pharmaceutical and other chemicals, software, and entertainment, where copying is easy.[7] In other industries, copying new technology is not easy, and innovation automatically gives the inventor a temporary technological monopoly, even in the absence of the patent law. The monopoly is due to the natural advantages accorded to the innovator, such as imitation lag (due to the time it takes for others to absorb new knowledge); reputational advantage (of being the first and so best-known producer); and the head start in ‘racing down learning curves’ (i.e., the natural increase in productivity through experience).[8] The resulting temporary monopoly profit is reward enough for the innovative activity in most industries. This was indeed a popular argument against patents in the 19th century.[9] This is also why patents do not feature at all in the Austrian-born American economist Joseph Schumpeter’s famous theory of innovation – Schumpeter believed that the monopoly rent (or what he calls the entrepreneurial profit) that a technological innovator will enjoy through the above mechanisms is a big enough incentive for investing in generating new knowledge.[10] Most industries actually do not
Even in those industries where copying is easy and thus patents (and other IPRs) are necessary, we need to get the balance right between the interests of the patentees (and the holders of copyrights and trademarks) and the rest of society. One obvious problem is that patents, by definition, create monopolies, which impose costs on the rest of society. For example, the patentee could use its technological monopoly to exploit the consumers, as some people believe Microsoft is doing. But it is not just the problem of income distribution between the patentee and the consumers.Monopoly also creates net social loss by allowing the producer to maximize its profit by producing at a less than socially desirable quantity, creating net social loss (this is explained in chapter 5). Also, because it is a ‘winner takes all’ system, critics point out, the patent system often results in the duplication of research among competitors – this may be wasteful from the social point of view.
The unstated presumption in the pro-patent argument is that such costs will be more than offset by the benefits that flow from increased innovation (that is, higher productivity), but this is not guaranteed. Indeed, in mid-19th-century Europe, the influential anti-patent movement, famously championed by the British free-market magazine,
Of course, the 19th-century anti-patent liberal economists were wrong. They failed to recognize that some forms of monopoly, including the patent, can create more benefits than costs. For example, infant industry protection does produce inefficiency by artificially creating monopoly power for domestic firms, as free-trade economists are only too pleased to point out. But such protection may be justified, if it raises productivity in the long run and more than offsets the damages from the monopoly it creates, as I have repeatedly explained in the earlier chapters. In exactly the same manner, we advocate the protection of patents and other intellectual property rights, despite their potential to create inefficiency and waste, because we believe they will more than compensate for those costs in the long run by generating new ideas that raise productivity. But accepting the potential benefits of the patent system is different from saying that there is no cost involved. If we design it wrong and give too much protection to the patentee, the system can create more costs than benefits, as is the case with excessive infant industry protection.
The inefficiency from monopolies and the waste from ‘winner-takes-all’ competition are neither the only, nor the most important, problems with the patent system, and other similar forms of intellectual property rights protection. The most detrimental impact lies in its potential to block knowledge flows into technologically backward countries that need better technologies to develop their economies. Economic development is all about absorbing advanced foreign technologies. Anything that makes it more difficult, be it the patent system or a ban on the export of advanced technologies, is not good for economic development. It is as simple as that. In the past, the Bad Samaritan rich countries themselves understood this clearly and did everything to prevent this from happening.
As water flows from high to low, knowledge has always flowed from where there is more to where there is less. Those countries that are better at absorbing the knowledge inflow have been more successful in catching up with the more economically advanced nations. On the other side of the fence, those advanced nations that are good at controlling the outflow of core technologies have retained their technological leadership for longer. The technological ‘arms race’, between backward countries trying to acquire advanced foreign knowledge and the
