Direct government funding fosters open innovation – that’s faster than the plan and provides products at lower prices

There are also many clear benefits from direct funding through a centralised mechanism. First and foremost, the output from this research can be made freely available. This applies to both the final product (when the research yields a marketable product) as well as to the research results. In the case of the final product, since the research has been paid for upfront, there is no reason that product should not be sold at its free market price, without any sort of monopoly protection.20 This would make a dramatic difference in the price of many products, most notably prescription drugs. Instead of new drugs selling for tens or even hundreds of thousands of dollars per patient, these drugs would be available as generics and likely sold at far lower prices. There would be a similar situation with many types of medical equipment that often sell for prices that are hugely out of line with production costs, due to patent monopolies. By paying for research upfront, the problem of making drugs and modern medical equipment accessible to the world’s poor would become far more manageable.

In addition to making the end products available at its free market price (at the marginal cost of production), the openness associated with directly financed research and testing is also an enormous benefit. This is very clear in the case of prescription drugs and medical equipment where there can be serious problems of asymmetric information. The pharmaceutical company or equipment manufacturer is likely to have far more knowledge of the benefits and drawbacks of their product than the doctor who is trying to determine the best treatment for a patient. However, if all the test results pertaining to the effectiveness of a drug or the usefulness of medical equipment were in the public domain, then doctors would be much better situated to make informed decisions. For example, if a particular drug had been shown to be more effective for men than women, this would be important information for a doctor to have when deciding on the best drug to prescribe for a patient. Similarly, for information concerning possible side-effects.

Even if research is not publicly funded, an argument can be made for public testing. Testing is an important part of what is normally viewed as the research process for drugs with costs that are a significant fraction of the overall costs of drug development. Current arrangements, whereby the drug companies develop and test the drugs, is expensive and creates an inherent conflict of interest - one which has played out disastrously in a number of cases. Testing can be separated both from drug development and from marketing. In this regard, see the proposals made by, among others, Baker (2008), Jayadev and Stigitz (2010)

The openness of research findings should also hasten the process of research itself. Research advances most rapidly in an open environment (Williams, 2010). Researchers can build off the findings of fellow researchers and not repeat their mistakes. The most important input to most research is knowledge, and the patent system restricts access to,21 and especially the use of, previously patented knowledge. The constraints on the free flow of knowledge are particularly important in the case of basic research, ideas that may have a wide range of applications, providing a further rationale for government support for this kind of research.

The US recently conducted an unplanned experiment in the costs and benefits of patents. The Supreme Court ruled that one could not patent naturally occurring genes. This struck down an important patent on the 2 BRAC genes, the presence of which significantly increases the probability of breast cancer. The result was a burst of follow-on research which had been stifled, resulting in better tests for the presence of the gene, with more accuracy and at a much lower price.

Patents can also be an especially important impediment to the advancement of science and technology in areas like hi-tech where a single product may be covered by dozens of patents (unlike a pharmaceutical product, where the patent may cover only a particular molecule).22