My grad school midterm, critiques welcome :)
It's already turned in so don't worry you're not helping me cheat :P
3. What role does government play in fostering innovation? Is it necessary to have government involved to have innovation? Why or why not?
A common misconception is that a good government makes a good economy. In reality, a good government makes a great economy possible. Government interactions with technology are like a plow: if it tills the right spots, at the right depth, it will make the seeds that fall so much more fertile. But should it not till, or till too deep, or till without guidance, it may flood the field and suffocate every seed of innovation.
The government that tills too deep floods the field by embracing innovation at any cost. Tax breaks, grants, and lucrative contracts without accountability or moderation are the characteristics of such a government. For examples of this government misstep, one need only glance at the renewable energy policy embraced in the 2000’s. Firms like A123, Solyndra, and Fisker Automotive, and numerous others received massive grants and loan guarantees, totaling billions of dollars, yet never turned a profit. The result was almost no technological innovation, at steep taxpayer expense.
Government is leadership, and apathetic leadership is doomed to failure. The government that stands aside, refusing to till the field and taking no sides in the process of innovation will leave innovation stunted by lack of stimulus. In this scenario the innovating company is struggling against mighty and formidable odds. They have a powerful idea, product, and innovation that may change the world, but their industry imposes high barriers to entry. A perfect example of this scenario is a small biotech company. They often begin as off-shoots of university research, with compounds licensed out for commercialization. Such companies face crushing odds. They must somehow gather the funding to push their drug through three separate phases of trials, usually costing hundreds of millions of dollars and taking about half a decade. If the FDA decides that their drug is both safe and effective after all these expenses, they may market it. Less than 10% of all drugs entering clinical research reach this point.
The battle doesn’t end there: so-called “generic” manufacturers would mimic the active ingredients of the promising new drugs and sell them for pennies on the dollar. The firms that spent millions of dollars proving the safety and efficacy of these drugs would lose market share and their potential profit. Clearly such innovations were a perilous investment.
In 2004, the Hatch-Waxmann Act was passed by Congress and signed into law. It stipulated minimum periods of “exclusivity” for manufacturers of novel drugs, rendering them temporarily immune to competition from generic drug manufacturers. The law helped de-risk investments in new biotech firms, promising them a short-lived monopoly to recoup the expensive research they had undertaken to prove their drug. This proactive government move fostered a boom in biotech innovation, with biotech IPOs reaching record highs in recent years. The result of this government policy will be reaped in the years to come as novel and highly effective drugs survive a process that otherwise would have smothered them.
The final way a government can affect the growth of innovation is to till the field in an arbitrary, wandering manner. This occurs when government directly imposes unnecessary burden on innovators, whether it be financial, legal, or otherwise. To return to the realm of healthcare, the Food and Drug Administration has recently fought a series of legal battles involving “off-label” promotion of drugs. Doctors are permitted by law to prescribe any FDA-approved drug for any use, even if it was not the use originally approved by the FDA. This allows doctors to be innovators in their field of expertise without being micro-managed. “Off-label” prescriptions are particularly common in oncology, as physicians furiously seek innovative ways to fight a myriad of unique cancers. Often these cancer drugs have properties that allow them to help fight other cancer types, and it is not uncommon for multiple drugs to be used simultaneously in so-called “combo therapy”. These life-saving treatments would not have been possible if the FDA imposed rigorous rules which dictated a drug could only be used for its FDA-approved indication. In this respect the government is still placing unnecessary burden on innovation by restricting “off-label” marketing, but not “off-label” use. Restricting “off-label” marketing which is truthful and non-misleading denies healthcare providers the most current information about treatment options for their patients and stifles innovation.
To make a prosperous tech-based economy, a government must incentivize and de-risk innovation, but must be wary of spoiling industries with lavish reliefs, or smothering it with burdensome regulations. Such a government needs rigorous internal review, diligent public scrutiny, and executive responsibility, but its reward will be golden fields.
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