When pharmaceutical innovators take risks, we end up with new drugs that lengthen our lives

A few weeks ago, the Nobel Prize in Economics was granted jointly to William Nordhaus and Paul Romer. In the midst of the series of reports from the Intergovernmental Panel on Climate Change, most of the attention went to Nordhaus. One of the first economists to study climate change with the use of formal economic models winning the Nobel, Nordhaus basically eclipsed Romer. This is unfortunate because Romer is incredibly relevant to a wide array of topics.

Until the 1980s, economists had a hard time formalizing technology in their models. Harder still was the task of conceiving a theory of technological change and how it could be linked with theories of economic growth. Romer’s key new insight was that human capital (i.e. an educated population) could produce ideas. Ideas, unlike many things, are non-rivalrous, which can be summarized in the analogy that teaching one to fish does not make the teacher “unlearn” the concept. If human capital means that we make ideas, in turn ideas allow us to become more efficient and productive. This was a dramatic departure from the discussions economists were having, where the object of focus was the formation of physical capital (machines, tools, equipment, etc.).

Innovation, thanks to Romer, became one of the focal points of all those who study the process of economic growth.

This generated an important discussion of how innovation can be discouraged by actions that prevent individual innovators from reaping the rewards. Innovators are people who invest time, resources and energies into developing ideas. They must collect the fruits from this process.

Consider the case of prescription drugs. These are incredibly costly to develop and are also risky endeavours. The existence of patents for a fixed period of time for the developed drugs creates a lure in the form of temporarily higher prices. As new medical drugs are easy to copy, the investments can be recouped.

Without the protection of intellectual property rights granted by patents, however, few if any pharmaceutical innovators would be willing to take the risk. When they do, we end up with new drugs that lengthen our lives, reduce pain and disability, and allow us to remain active. What would happen if we did not reward these innovators? The development of new and better drugs would certainly be reduced or delayed, which we would pay for only later in the form of smaller improvements in living standards.

For years now, there have been proposals from certain individuals in Canada to cut public health expenditures by forcibly reducing the prices of medication. This trend is best seen in the recent reactions to the new trade agreement with the United States. The extension of the “data exclusivity” period—the protection of safety and efficacy data produced by a pioneer firm for up to 10 years—is denounced as deleterious as it could delay the commercialization of cheaper generic drugs.

The Romer-like response to these individuals is that their policy proposals may be well and good in the present. However, in the longer term, future generations of Canadians would likely thank us for strengthening intellectual property rights, as they will greatly benefit from the new innovative drugs brought to market.

Understanding the ideas of Paul Romer boils down to this simple reality: even small changes in innovation now may affect our living standards considerably in the future. We hope that this is a lesson that will sink in for those only too eager to disregard the future.