Who benefits from research and innovation?

I’ve been pondering a report written by my friend and Industrial Strategy Commission colleague Richard Jones (with James Wilsdon), The Biomedical Bubble. The report calls for a rethinking of the high priority given to biomedical research in the allocation of research funding, and arguing for more attention to be paid to the “social, environmental, digital and behavioural determinants of health”. It also calls for health innovation to be considered in the context of industrial strategy – after all, in the NHS the UK has a unique potential market for healthcare innovations. It points out the there are fewer ill people in the places where most biomedical and pharmaceutical research is carried out, thanks the the UK’sregional imbalances. It also points out that, despite all the brilliant past discoveries, the sector’s productivity is declining:

“In the 1960s, by some measures a golden age of drug discovery, developing a successful
drug cost US$100 million on average. Since then, the number of new drugs developed per
billion (inflation adjusted) dollars has halved every nine years. Around 2000, the cost per
new drug passed the US$1 billion dollar milestone, and R&D productivity has since fallen
for another decade.”

All of this seems well worth debating, for all its provocation to the status quo – and this is a courageous argument given how warm and cuddly we all feel about new medicines. I firmly believe more attention should be paid to the whole system from basic research to final use that determines the distribution of the benefits of innovation, rather than – as we do now – treating the direction of research and innovation as somehow exogenous and worrying about the distributional consequences. This goes for digital, or finance, say, as well as pharma. What determines whether there are widely-shared benefits – or not?

Serendipitously, I happened to read a couple of related articles in the past few days, although both concerning the US. One was this BLS report on multi-factor productivity, which highlights pharma as a sectors making one of the biggest contributions to the US productivity slowdown (see figure 3). And this very interesting Aeon essay about the impact of financial incentives on US pharma research. It speaks to my interest in understanding the whole system effects of research in this domain. Given that this landscape in terms of both research and commerce is US-dominated, this surely makes the question of how the UK spends its own research money all the more relevant? As The Biomedical Bubble asks:

“[T]he importance of the biotechnology sector has been an article of faith for UK
governments for more than 20 years, even when any notion of industrial strategy in other
sectors was derided. So the failure of the UK to develop a thriving biotechnology sector
at anything like the scale anticipated should prompt reflection on our assumptions about
how technology transfer from the science base occurs. The most dominant of these is that
biomedical science would be brought to market through IP-based, venture capital funded
spin-outs. This approach has largely failed, and we are yet to find an alternative.”
For it seems the model is no longer serving the US all that well either – not economy-wide innovation and productivity, and not the American population, which has worth health outcomes at higher cost that any other developed economy. There are some challenging questions here, fundamentally: who benefits from research and innovation, how should the public good being funded by taxpayers be defined and assessed, and what funding and regulatory structures would actually ensure the gains are widely shared?
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Should economic policy be joined-up and strategic – or not?

Yesterday was the formal launch of the new, independent Industrial Strategy Commission – of which I’m a member. Its chair Kate Barker explained in an article in the FT today why an industrial strategy is important: “Economic theory has always stressed the role government must play in correcting “market failures”. These include the absence of markets for new goods, social benefits in excess of private benefits where there are externalities, the public good of basic research, and uncertainties that will limit private investment due to information asymmetries in financial markets. Clear economic and social challenges lie ahead for the UK that are not going to be solved unless this government and its successors set a strategic direction and stick to it.”

Next to hers was an article by Janan Ganesh, dismissing (very stylishly) the whole thing as a bad idea: “The dread is that clamour for a New Economy — a more scientific, less London-centric Eden to justify the two-year slog of EU exit — will cause these interventions to grow from the fiddly to the invasive without gaining a jot in usefulness.” 

There are many reasons she’s right and he’s wrong, and some of them were set out at the launch by speakers including Carolyn Fairbairn, director general of the CBI, and Juergen Maier, UK CEO of Siemens. They include the obvious fact that governments do all kinds of things that affect the economy – education, training, standards, infrastructure, research funding – and they might as well be joined-up and strategic as not. There are lessons to learn from past mistakes, and there will be new mistakes. There will also be massive lobbying and – as Ganesh says – it’s important to make sure post-Brexit Britain has a tough competition policy to enable new entry into markets. But it’s lazy thinking to conclude “markets” should be left to get on with it. After all, that’s the approach since 1980 that has left us with productivity a quarter lower than France or the Netherlands.

Many of the more positive reasons are set out in a book I’ve been reading, Efficiency, Finance, and Varieties of Industrial Policy edited by Akbar Norman and Joseph Stiglitz. The opening chapter by Mario Cimoli and Giovanni Dosi makes very effectively the case that ‘industrial’ policy is more important in a knowledge economy than in an ‘industrial’ economy: the non-rival character of knowledge increases both the potential benefits of complementarities and network effects, and the extent of co-ordination problems. One of the interesting features of the book is that it covers policy in developing as well as developed economies, so introducing a wide range of discussion of institutions – one of the absolutely key issues in making a strategy to address co-ordination problems a success.

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Industrial strategy

There was a timely new arrival at Enlightenment Towers this morning, Efficiency, Finance and Varieties of Industrial Policy, edited by Akbar Norman and Joe Stiglitz.

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Ahead of the launch of the Policy@Manchester and SPERI Industrial Strategy Commission, I’m trying to build a list of the best existing resources. Aside from the academic papers (loads – and also this great blog post Stian Westlake pointed to), my off the top of my head picks so far are Geoffrey Owen’s From Empire to Europe, David Edgerton’s Britain’s War Machine, Dani Rodrik’s One Economics, Many Recipes and Joe Studwell’s How Asia Works.

Other suggestions? There must be loads.

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