Solving World Problems With Economic Incentives

Economic forces are more powerful than politics. Political change is slow. Changing laws takes time. Lobbyist water down the intended legislation. Companies find loop holes. The population as a whole, lacks the strength of conviction to make the tough decisions and stick with them.

Economic forces are far more powerful and certainly more responsive than political forces. Effectively, what I’m observing is great good can be done if there is a business model and profit encouraging it. Here’s my favorite two examples, partly because they are both doing great things and partly because they are so different in their approach, but still have the common thread of using the free market to improve the world.

Google RE<C

As a society, we can attempt to limit greenhouse gas emissions by trading carbon credits or passing laws attempting to force change but, in the end, it seems we just keep burning coal. In my view, the Google approach to tackling this problem is wonderful: invest in renewable energy technologies that can be cheaper than coal. More on the program: Google’s Goal: Renewable Energy Cheaper than Coal and Plug into a Greener Grid: RE<C and RechargeIT Initiatives. They are working on solar thermal, high-altitude wind, and geo-thermal. The core idea is that, if renewable sources are cheaper than coal, economic forces would quickly make the right thing happen and we actually would stop burning coal. I love the approach but its fiendishly difficult.

Bill & Melinda Gates Foundation

Here’s a related approach. The problem set is totally different but there are some parallels with the previous example in that they are attempting to set up an economic system where it can be profitable to do good for society.

I attended a small presentation by Bill Gates about 5 years ago. By my measure, it was by far the best talk I’ve ever seen Gates gave. I suspect Bill wouldn’t agree that it was his best but it had a huge impact on me. No press was there and I saw nothing written about it afterwards, but two things caught my interest: 1) Gates’ understanding of world health problems is astoundingly deep, and 2) I loved his technique of applying free-market principles to battle world problems ranging from disease through population growth.

In this talk Bill noted that North American disease has a very profitable business model and consequently is heavily invested. Third world disease lacks a business model and, as a result, there is very little investment. It’s clear that many diseases are easy to control or even eradicate but there is no economic incentive and so there is no sustained progress. There are charity donations but no deep and sustained R&D investment since there are no obvious profits to be made. Bill proposed that we encourage business models that allows drug companies to invest R&D into third world health problems. They should be able to invest knowing they will be able make money on the outcome.

Current drug costs are driven almost exclusively by R&D costs. The manufacturing costs are quite low by comparison. Does this remind you of anything? It’s the software world all over again. So, the question that brings up is: Can we create a model where drugs are sold in huge volume at very low cost? I recall buying a copy of Unix for an IBM XT back in 1985 and it was $1,000 (Mark Williams Coherent). Today 1/10 of that will buy an O/S and many are free with the business model being built on services. Can we do the same thing to the drug world? Where else could this technique play out?

Using the free market to drive change is the most leveraged approach I’ve ever seen to drive change. Where else can we cost effectively change the economic model and drive a better outcome for society as a whole?

James Hamilton



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3 comments on “Solving World Problems With Economic Incentives
  1. I agree with your overall point. In a way, I find it amazing that the apparently disorganized free-market actually leads to so much cooperation and innovation, all without the power of force. Within the realm of what is humanly possible, it seems to lead to a more efficient allocation of resources, ultimately based on the needs of the many.

    Regarding drugs, there are two key solutions to make them cheaper: remove the artificially rigid FDA approval process and remove the IP protection.
    IP laws create artificial scarcity which does not reflect the nature of the good. They are unethical and unpractical.

    The main point is that property rights are justified as a way to minimize conflicts over scarce resources. But ideas and information, once they exist, are not scarce, because they are non-rivalrous (unlike a bike, my using an idea does not prevent other people from using it too). It makes no sense to call IP "property".

    From a practical point of view, we see that the incentives that patents provide for inventors lead to less overall innovation, as inventors can collect more rent from their previous inventions and have fewer incentives to create new ones.

    See "Against Intellectual Monopoly" for a detailed argumentation:

  2. Thanks for pointing that out Deepak. I hadn’t seen that change.


  3. Deepak Singh says:

    In recent months there have been two very interesting examples of a big pharma company releasing a lot of data with a CC0 (essentially public domain) license. First Merck donated a ton of biological network data into the Sage Commons, and just last week GSK released; a whole bunch of Malaria compounds into the public arena as well.

    The companies like the CC0 license because it is unencumbered and it adds more heads into solving some crucial problems which, in the end, is going to be a net positive for these companies. It’s a slow change, but I think they’re finally getting that, at least in some areas, making the data available is going to help the field in general and in the long term their revenue prospects.

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