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A Universal Alternative to Patents

Homer's picture

Scenario: Millions of people are suffering from [some arbitrary disease], most of whom are poor people living in the Third World. A pharmaceutical company spends billions on R&D to find a cure, and eventually makes a breakthrough. The company calculates that, in order to recover its investment, and make a reasonable profit, it must guarantee the sale of X number of units of the drug, at Y cost per unit - anything less, and they cannot justify the investment. However, this necessity presents two problems:

a) The price (Y) is prohibitively high for Third World patients
b) The company must use the exclusivity of patents to ensure sufficient sales (X), so cheaper alternatives cannot be made available to the poor by other companies

One solution might be for governments to buy large quantities of this drug (with taxpayers' money), then offer it at a subsidised rate to the Third World, as part of its foreign aid budget.

Another solution might be to simply nationalise the pharmaceutical industry, and assume all costs (again, with taxpayers' money).

Both solutions amount to the same outcome, relief for the Third World, but a severe burden on the benefactor's economy (specifically, the taxpayer).

The latter solution is especially problematic, since government resources are not supported by venture capitalists, the likes of whom invest in drugs research (and everything else) in the private sector. Governments tend to be financially driven by subsistence, not profit, and it requires the motivation of profit to encourage really substantial investment, which is why private sector funding is absolutely necessary for highly expensive undertakings like R&D.

So is there any way to procure this funding from the private sector, without the need to utilise monopoly (patents) as a guarantee for recovering investment?

One solution that just occurred to me, would be to address another inherent problem with capitalism, and use the results of that as a solution to the R&D problem.

If unregulated, capitalism tends to spin out of control. One of the effects of this is inflation. Another is where a company's profits become unreasonably large, and that company subsequently gains an unhealthy position of market dominance, resulting in less competition, which further exacerbates the problem in a spiralling catch-22. One way to prevent this is to cap profits using tiered corporate taxation, where higher tier levels of profit result in a higher rate of tax liability. This would have an effect similar to capping profits, whilst generating addition income for the government, which could then be devoted to industrial development, with a specific emphasis on R&D.

However, there is a delicate and complex circular dependency here, that warrants further analysis.

Given the above solution, the pharmaceutical companies perform R&D as before, but it is funded entirely by the government. However, the government budget for this R&D comes exclusively from taxes on those same companies' profits. The more profits those companies make, the more taxes they pay (and at rates directly proportional to that profit), the more money the government receives, the more it spends on R&D, the more new drugs can be developed, the more sales those companies make, the more profits they make, the more taxes they pay, the more money the government receives for R&D, and so on.

But there is still a problem.

What drives sales?

What compels someone to buy their drugs from companies whose R&D is government funded, rather than from elsewhere, in the absence of patents?

Well, since those companies no longer have direct R&D costs, they can now afford to compete with other producers on price. However, they do have a higher tax liability, which (if research costs are to be believed) would probably be equivalent to their previous R&D costs anyway. In other words, they are still paying for R&D, but by a less direct route, so they still need some mechanism to offset this financial liability, and the disadvantage this puts them at with respect to others who don't have that liability.

Ostensibly, this would appear to bring us right back to where we started.

But it doesn't.

At least, it doesn't need to.

What if these profit-related taxes were applied universally?

Then every company in the world would be funding all research (and any other relevant industrial development included in the budget), and every company in the world would be entitled to utilise the results of that research without any further legal obligation or financial liability. No company would be at an immediate disadvantage due to R&D costs, and the need for patent protection would be completely dispensed with.

Even better, those who benefit most from this research, profit the most, and subsequently pay the most tax. This is not only demonstrably self-sustaining, but is even fair. And of course, it keeps capitalism under control too, thus stabilising the economy, and benefiting consumers.

The result is: No patents, no profiteering, a massive and guaranteed supply of research funds, academic freedom for all, and better prospects for industrial development and mankind's overall progress.

The only losers here, that I can see, are those who were unethically over-exploiting the current system anyway (patent trolls, and those engaged in the practise of so-called Hollywood Accounting).