Incentives for innovation will eventually defeat Covid-19

Matt Ridley

It will be an innovation that eventually defeats the virus: a new vaccine, a new antiviral drug — or a new app to help us avoid contact with infected individuals.

So the one thing the world needs more than anything else is an incentive to innovate. Here’s an idea for how to do so.

The problem is that innovation is an uncertain, unpredictable process. I argue in my new book How Innovation Works that you can rarely summon an innovation to order when you need one.

We would love to have flying cars that run on water, or cheap ways to suck carbon dioxide out of the air, but necessity is not the mother of invention after all.

Take vaccines. Some viruses prove impossible to vaccinate against after decades, while others succumb quickly.

“Vaccine development is an expensive, slow and laborious process, costing billions of dollars, taking decades, with less than a 10 percent rate of success,” according to Wayne Koff, president of the Human Vaccines Project, writing just before the pandemic began.

There are lots of different teams working flat out on developing a vaccine for COVID-19. Some are using whole virus particles, killed or attenuated, some are using protein molecules manufactured in bacteria, some are using messenger RNA fragments that instruct human cells to make viral proteins to alert the immune system.

It is impossible to say which will work, if any.

So governments and venture capitalists have a problem: which horse to back? Giving grants and subsidies to those that shout loudest — or have the best connections — is regrettably, all too often the way innovation gets funded. But by trying to pick winners, governments all too often end up picking losers.

Luckily, there is a new idea out there for how to incentivize innovation without trying to pick winners. It’s called the Advance Market Commitment and it is the brainchild of the Nobel-winning economist Michael Kremer.

It is basically a prize, but not in the form of a lump sum, rather in the form of a contract at an attractive price to produce the innovative product once — if — it gets invented.

Earlier this month the global vaccine alliance, known as GAVI, launched an appeal to fund exactly this kind of reward for a vaccine for COVID-19. It aims to raise $2 billion through a financing instrument that would effectively guarantee sales of the new vaccine in developing countries where healthcare systems often cannot afford the costs of new vaccines.

Exactly such a venture, funded by various governments and the Bill and Melinda Gates Foundation, achieved a remarkable breakthrough a few years ago in the search for a vaccine for pneumococcus, a bacterium that kills large numbers of children in the poorer parts of the world.

Hundreds of thousands of lives have been saved. The same idea also helped the development of a vaccine for Ebola, though the epidemic ended before that vaccine could be fully tested.

These Advance Market Commitments are surely the way to go to fund innovation more generally. They have the advantage of being agnostic about the means by which an innovator achieves his or her end.

Indeed, the ancestor of all such schemes, the famous Longitude Prize in 18th century England, demonstrated neatly how solutions to problems can come from unexpected directions.

Mariners were unable to measure longitude while at sea, resulting in a disaster in 1707 when a naval squadron turned out to be farther east than its commander thought and was wrecked on the Scilly Isles. The government offered the huge sum of £20,000 (over £4 million in today’s money, and over $5 million US) for the first person to solve the problem of measuring longitude.

To the consternation of the scientific establishment, it was eventually won not by an astronomer or mathematician, but by a clockmaker from Yorkshire, John Harrison, who pointed out that all you need to know is what time it is back in Greenwich and compare that with local time (by measuring when noon occurs) and you know how far west of Greenwich you are.

So good robust clocks that kept good time even on board ship were the solution, and so it proved.

Let’s solve lots of our problems in this way: not with grants and subsidies, but with prizes.

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How Germany got coronavirus right

This April, Walther Leonhard got an unusual call from the authorities in Rosenheim, his hometown in southern Germany. He was being given a new job, in a new field, with a title that had just been invented, “containment scout”.

Leonhard, 33, who had been working as a court officer in Munich, was soon back home and hitting the phones. He was the latest recruit into Germany’s army of Kontaktmanagers (tracers) — the foot soldiers of its strategy for containing coronavirus.

Leonhard’s job is to call people who have tested positive — and all those they have recently come into contact with — to tell them to self-isolate for a fortnight. It’s not much fun. A lot of people are scared and confused when he breaks the news.

“They ask how they’ll be able to feed themselves, what they should tell their boss, whether they can go for a walk — and you tell them, ‘No, you have to stay inside your four walls,’ ” he says. “And you say, ‘This isn’t some mean, vile thing the government is doing to you — it’s for your own protection, and to protect those around you.’”

Combined with its six-week shutdown, Germany’s “track and trace” system has been instrumental in stalling the spread of Covid-19 and preventing it from overwhelming the health system.

It has also helped that the country has a well-oiled government, led by Angela Merkel, a physicist, that has avoided the screeching policy zigzags seen elsewhere. On April 17, authorities announced that the pandemic was under control — less than six weeks after Germany’s first deaths from Covid-19.

The country saw its first outbreak in January at the headquarters of Webasto, an automotive supplier near Munich. The source was quickly identified as a Chinese employee who had been attending in-house workshops there.

Some 10 employees ended up getting infected — one after using a salt shaker handed to him by a colleague with the virus. After extensive detective work, those with coronavirus were swiftly isolated, their friends and relatives found and alerted.

“Contact tracing has been important ever since Webasto,” Jens Spahn, Germany’s health minister, tells the FT. “With Webasto, we managed to quickly recognise all the chains of infection and interrupt them. And that meant we were able to stop it spreading all over the country.”

Some experts think it’s not entirely fair to hold Germany up as an exemplar of crisis management. “There are other model countries that have received much less attention, such as Vietnam, which has seen no deaths at all from Covid-19,” says Hendrik Streeck, professor of virology at Bonn University.

A lot of Germany’s relatively good performance was down to luck. “[We] had the advantage that we had more time to prepare,” he says. “We saw the images from China and Italy before the wave hit us too.” But it also reacted more quickly to those images than other countries, he says, with “consistent testing and track and trace”.

The figures bear that out. By June 1, Germany had 183,508 confirmed Covid-19 cases, according to data from Johns Hopkins University, making it the world’s ninth-worst-hit country.

But the number of infected people who have died is remarkably low — just 8,546, or about 4.7 per cent of the total. That works out at roughly 103 deaths per million inhabitants, compared with 430 for France, 554 for Italy and 579 for the UK.

This occurred despite one of Europe’s least draconian shutdowns. Though schools, non-essential shops and restaurants were closed for weeks, a large proportion of businesses and factories continued to operate as normal. Germany also left lockdown more quickly than many of its neighbours.

More importantly, the health system never came under too much pressure. “We never reached the point where we had too many people in intensive care,” says Streeck. “That meant we were never faced with the need for triage — when you only treat those patients with a greater chance of survival. For us, triage was only ever a theoretical possibility, never a real one.”

This pattern was being replicated across Germany. A key role in ramping up preparations was played by the country’s health ministry, led by Spahn, a 40-year-old politician who has long been seen as a potential chancellor. His department intervened early, telling hospitals to postpone all elective procedures. “That freed up a lot of intensive care capacity, which gave us an important buffer at the peak of the crisis,” says Spahn.

The call was backed by financial incentives: the ministry promised hospitals €560 a day for every bed they kept vacant for a potential Covid patient and €50,000 for each additional intensive care bed they created. Even before those measures were introduced, Germany had many more intensive care beds than other big European countries — 34 per 100,000 people, compared with 9.7 in Spain and 8.6 in Italy. This ratio increased in the pandemic, with the number of ICU beds rising from 28,000 to 40,000. There were so many that, in the end, a large number stood empty.

Part of the German system’s strength is how uniform it is in terms of financial resources and the quality of care — a factor that contributed to combating coronavirus. “Our hospital landscape is extremely homogeneous,” says Deerberg-Wittram, who has worked across the UK and knows about regional disparities in the NHS. “There are no real weak spots — the standard of care is the same everywhere.”

Germany’s system also benefits from being much more decentralised than, say, the NHS. Town hospitals are often controlled by elected local mayors, rather than by regional or central government. “The mayor of Rosenheim needs great schools, swimming pools and a great hospital, and that’s the same for the mayors of Hamelin and Münster too,” says Deerberg-Wittram.

Spahn sees the decentralised nature of health provision as an asset. The hundreds of mayors “don’t just get orders from above . . . A lot more people have to take on responsibility and make independent decisions,” he says. “And if they didn’t, they’d have to answer to their voters.”

The prevalence of testing meant cases were identified at a much earlier stage, and people could be admitted to hospital before their condition worsened — one of the reasons why Germany’s death rate has been relatively low.

“In Italy, people waited far too long and by the time they got to hospital they were seriously ill,” says Deerberg-Wittram. “That just overwhelmed the health service there. In Germany it was the opposite.”

Meanwhile, the authorities were gradually ratcheting up restrictions on public life. On March 8, they recommended the cancellation of all big public events. Five days later, most of Germany’s 16 states closed their schools and kindergartens. Then, on March 22, the government closed shops and restaurants and banned meetings of more than two people.

At the same time, Berlin launched a massive economic aid package that, according to the Bruegel think-tank, is equivalent to 10.1 per cent of the nation’s gross domestic product — larger than that of any other western country.

It included a €100bn fund to buy stakes in affected companies, €50bn in direct grants to distressed small businesses and €10bn for an expanded furloughed worker scheme. The aid came in very useful — according to government forecasts, Germany will this year face the worst recession in its postwar history.

While the emergency fiscal response was spearheaded by the federal government in Berlin, shutdown measures were co-ordinated in a series of teleconferences between Merkel and the governors of the federal states, in which the chancellor, whose approval ratings soared during the crisis, deployed her powers of persuasion to reach a national consensus.

“This isn’t in our constitution — it was newly invented for corona,” says Reinhard Busse, head of the department of healthcare management at Berlin’s Technical University. “It became the central organ of crisis management, and ensured that at least at the height of the pandemic, the response was highly uniform.”

Though there were occasional tensions, vicious bust-ups of the kind seen between US president Donald Trump and state governors are unheard-of in Germany.

Much policy was overseen by Helge Braun, head of the chancellor’s office. A trained anaesthesiologist, he worked for years in an intensive care and pain management clinic. “It makes a difference that the chancellor is a scientist and her chief of staff a doctor,” says Busse. “That has shaped our response to this pandemic.”

Jens Deerberg-Wittram says Merkel’s heavy reliance on experts was a critical factor in the crisis. “She said, ‘Before I do anything, I have to understand what’s going on here,’” he says. This meant Germany’s leading virologists played an outsized role in shaping policy. “There was a kind of ‘no bullshit’ attitude that dominated all decision-making,” he says.

Meanwhile, infection rates have slowed: Germany is now reporting a few hundred cases a day, compared with 6,000 a day in early April. As the crisis eases, the unity of purpose that defined the country’s initial approach has broken down. In April, Merkel expressed frustration at the “unthinking” way some states were rushing to ease the shutdown.

These differences broke out into the open late last month when the chancellery sought to extend Germany’s restrictions on social contact till July 5. The states rebelled, insisting they be scrapped by June 29. Some states are now increasingly ignoring Berlin and setting their own rules.

More HERE

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IN BRIEF

A tidal wave of bankruptcies is coming (The New York Times)

China will speed up purchases of U.S. farm goods (MarketWatch)

Thomas Jefferson statue should be removed from NYC Council chambers, lawmakers say (New York Daily News)

Uncle Ben's rice to take black man off box; Cream of Wheat mulls removing black chef (The Daily Wire)

D'oh! Oakland mayor launches hate-crime probe into nooses in trees. Black man says it's exercise equipment he put there. (The Daily Wire)

NYPD cops encouraged to strike on July 4 to give city its independence (New York Post)

10 times Barack Obama acknowledged that DACA was unconstitutional (PJ Media)

Hillsdale College refuses to bow to the totalitarian mob (The Federalist)

Susceptible to fraud: The federal government spent nearly $3 trillion on coronavirus relief. Oversight has been a mess. (Reason)

People would be mentally crushed by second wave, psychologists say (Washington Examiner)

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For more blog postings from me, see  TONGUE-TIED, EDUCATION WATCH INTERNATIONAL, GREENIE WATCH,  POLITICAL CORRECTNESS WATCH, AUSTRALIAN POLITICS, and Paralipomena (Occasionally updated), A Coral reef compendium and an IQ compendium. (Both updated as news items come in).  GUN WATCH is now mainly put together by Dean Weingarten. I also put up occasional updates on my Personal blog and each day I gather together my most substantial current writings on THE PSYCHOLOGIST.

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