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Paying them not to sell

  • Published at 01:32 am January 27th, 2019
New antibiotics are always needed Bigstock

A rare case for government intervention

Government must pay companies not to sell things - that look like an odd contention, especially coming from one as resolutely free market as myself. Yet it is, in fact, true at times. The big question being, well, what times? The answer to that going to the heart of both that free market ideal and also the purpose of government itself.

We all agree that government uses the right way to do some things - well, all who aren’t anarcho-capitalists at least. We all also agree - Pol Pot excepted perhaps - all the time government isn’t quite the way to do things either. Some would argue that the people might be allowed only to decide which hour of the day they’ll take their tea, others that near everything except direct harm to others should be unregulated by the state. We’re all somewhere along that spectrum that is.

The free market argument put forward by people like me is simply that the number of things that government should regulate, the number of occasions when a government should stick its oar in, is rather smaller than many seem to think. Even, rather less often than governments actually do these things. The thing being though - all markets all the time, and only markets don’t work either. One example of this exception, when the government should do something, is public goods.

This has a specific definition - public goods are not good for the public. Goods for the public are the things that we can’t stop people from having once they exist, and which also don’t diminish in quantity when someone uses them - non-excludability and non-rivalry in the jargon. These two things make it extremely difficult to make a profit from their production. And since we think that people are both lazy and greedy, if people can’t profit then they’ll not go to the trouble of making them.

The thing is, we like many such public goods, and people not making them is a problem. We thus deliberately change the rules to encourage them. One example is pharmaceuticals - it costs $1billion to gain the necessary license to sell a new drug. But once the research work has been done, it’s very easy to copy the drug. Other people using the knowledge of the drug and its effectiveness doesn’t diminish the knowledge either. Given this, how will the person who spent the billion make it back?

We solve this by inventing a property, intellectual property, by way of a patent. You spend the billion, you get a limited time - 20 years on paper, really 10 years in practice - to sell at whatever price you can without competition. After that, everyone else can copy it. It’s by no means a perfect system, but it does work. We do get new drugs, and they are expensive but later they become cheap.

But like most human constructs, this isn’t perfect. One time when this isn’t is antibiotics. We definitely want people to be researching new ones. The ones we already use are becoming less and less effective - meaning the bacteria develop resistance towards the antibiotics. An infection which 20 years ago might have been cured with a bit of penicillin now just shrugs it off and goes on to kill. We are in the Red Queen world here, 

where we have to run ever faster just to stand still - we must continue to develop new antibiotics as old ones become ineffective.

So, we want that billion to be spent on developing the next antibiotic. In fact, we want several billion to be spent on several developments. Yet, we don’t actually want anyone to use them, or we want them used in tiny quantities only on the most difficult cases already resistant to our current crop of cures. This will mean that the producers won’t make their billion back in that 10 years, for we might only start using the new antibiotic in two, three, decades’ time as the infections resistant to our current cures become widespread.

At this point, yes, the government needs to do something. Something similar to the recent announcement by the British government. They are now going to pay the developers of new antibiotics not to sell them - or to sell them in the tiny and limited quantities - only in the first decades and more of their lives, paying them not to sell something they’ve developed.

This way, we get the billion spent upon the development, and we have the new antibiotic available to treat those who really need it. And we’ve it waiting in the wings for when the mass of the people might need it. But to do this, we’ve got to pay them not to sell it in those early years.

So, strange as it may seem, there really is a case for the government to pay companies to not sell something they’ve already developed. And as to the larger point, yes, there are indeed useful things government can do to make our lives better - here, preserve those lives. It’s just that, while cases like this do exist, where there should be that intervention, they’re perhaps not as common as many think, and almost certainly rarer than current government acts upon. l

Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.