Sovaldi: What Price Innovation?

Just a brief addendum to my post on the $84,000 apparent hepatitis C-cure, Sovaldi. (See also addendum #2)

Gilead’s vice president Gregg Alton said, “Those who are bold and go out and innovate like this and take the risk — there needs to be more of a reward on that.”

Let’s just parse that a little bit. Surely Alton wasn’t trying to put forward absolute truth or perfect phraseology, but his casual sentiment runs strong among many (mostly conservatives) in the modern economy.

Define “more.”

At what point does the reward for innovation and risk-taking become sufficient, and any further increase becomes gratuitous? Proponents of the Laffer Curve need to appreciate that it cuts both ways: do you think a tax cut will boost the economy by simply rewarding productivity more? Fine – that’s a brood, average assessment of the entire economy. But the exact same line of reasoning implies that, across the full spectrum of incomes – that is – prices for services – there are necessarily a significant fraction for whom increased remuneration is gratuitous (ie, frivolous) – and for this group, a fall in their remuneration would be more than offset by the gains of rewarding others more.

Gratuity is the key word here, since what he’s talking about is how much is our culture willing to pay – to tip – for pro-active, creative productivity? After all, you don’t tip a server first, then wait to see if the server earns the tip (in your opinion). In our modern way of doing things, we ask our server pro-actively risk spending their valuable time and charm on us for an uncertain reward. We ask them to implicitly bet that more people will make their preemptive goodwill worth their while than not. Then we tip them, based on how much we think their service was worth, balanced by our means to part with our money. Servers that want to receive larger tips know they will need to work places that attract a clientele with significantly greater wealth.

The way we acquire innovation in the current economy works the same way. We don’t want to explicitly socialize the costs of all the start-up speculation (beyond the basic social safety-net – and even maintaining that is a political struggle), but we do want to obtain the benefits of the successful innovations, after innovators have (usually) strained and put their time and money (often limited, in this age of income disparity) on the line.

But what Gregg Alton and many like him are turning away from is how much do we actually need to reward people to encourage them to work up their innovations? If the price of Gilead’s new drug is any indication, Alton doesn’t show up for work for anything less than about a billion dollars. If I was his employer, I’d fire him. That kind of risk premium is too rich for everyone.

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About stormculture

In pursuit of reality.
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One Response to Sovaldi: What Price Innovation?

  1. Pingback: Sovaldi: Risk vs Uncertainty, Innovation vs Facilitation, and How Patents and Ownership Don’t Differentiate Them | Stormculture’s Weblog

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