I’ve been doing some more reading recently in the theoretical space of formal institutional economics – meaning scholars thinking about what kind of formal (often though not always game-theoretic) resources we can best use to model and analyse institutions.

Within this literature, it’s fairly common to typologise approaches to thinking about institutions into two broad traditions.  On the one hand, there are scholars who define institutions as the ‘rules of the game’ that structure political-economic life.  In a modelling context, an institution would here be specified as the parameters and incentives within which game-theoretic agents make their strategic decisions.  On the other hand, there are scholars who define institutions as strategic equilibria within a formal ‘game’.  Here the paradigmatic examples are coordination games, in which agents achieve a stable equilibrium – understood as a normative convention – which is stable because, once established, it is in the interests of all agents to retain this ‘cultural consensus’.  There are of course other ways to typologise the literature, but let’s go with this for now.

The next question is: what is the relationship between these two ways of understanding institutions?  And one way to understand that relationship is to see ‘the rules of the game’ as themselves emergent properties of strategic equilibria.  From this perspective, specifying the rules of any given game ‘exogenously’ is just reifying for analytic convenience a phenomenon that can itself be modelled as an emergent property of agents’ strategic play within a different, more ‘expansive’ game.

OK.  Let’s say we accept this broad outline (which I broadly do).  But if we take it that rules emerge from social practice (and are not merely a guide or constraint for social practice), this raises a set of questions about how to understand instances of social practice (or of strategic play within a game) that appear to depart from a rule.

Such practices can be understood as simply deviant – perhaps as self-interested and opportunistic departures from cooperative play, perhaps as mistakes, perhaps as ‘characterological’ in some way, but in any case as clear deviations from the accepted consensus norm.

But given that rules are themselves shaped by the reality of practice, it may be that an action that some social actors interpret as a deviation from a rule, is interpreted by others as in conformity with the rule.  In this scenario, the disagreement over whether an action is in conformity with the rule, is a disagreement over the substance of the rule

The working out of such disagreements is how rules are specified.  Here a Wittgensteinian or Brandomian perspective sheds some light: because no rule can ever be fully specified, the way in which rules become further specified is via the community reaction to new actions that could in principle be interpreted as being either in accordance with or in contravention of a rule.  Brandom uses the analogy of common law legal judgements, in which new judgements aim to be grounded in precedent, but also themselves form new precedent for future judges.

At the same time, the working out of such disagreements may do more than further ‘specify’ or ‘clarify’ a norm (or rule) – it may specify the norm in a way that can reasonably be seen as transforming the substance of the norm itself.  A new specification of a rule, in other words, may be a new equilibrium which shifts the consensus of the game, and in turn shifts the rules of ‘subsidiary’ games.  This may happen in a ‘revolutionary’ way, in which an entirely new equilibrium is established after a period of normative upheaval.  But it may also happen in an ‘evolutionary’ way, wherein the ‘rules of the game’ gradually shift over time, by way of incremental ‘deviations’ that are then transformed into part of the subtly different new norm.  Linguistic drift is an example of this transformative collective practice. 

And of course in practice some combination of these things often happens.  For example – the role of subcultures in the transformation of larger cultural spaces, with a subculture as a location of normative innovation from which new norms can then (potentially) disseminate (or not).  Is a subcultural space of this kind a deviation from the larger normative space, a simple alternative to the larger normative space, or the bleeding edge of the large normative space’s ongoing self-transformation?  Which of these attitudes you adopt, of course, depends on your political and social perspective – but there is no ‘right’ answer – this question can only be settled in political-cultural practice, by the process of normative contestation, rejection, and consensus-formation that is a significant part of our political, economic, and cultural life.

Anyway, I’m not suggesting that I’m saying anything particularly innovative here – these are pretty familiar remarks about the ways in which norms emerge and transform in social practice.  But I want to foreground these kinds of considerations as I think about how to formally model institutional equilibria and dynamics.  I think that at least some institutional economics would benefit from more emphasis on this category of phenomena, when thinking about how the ‘rules of the game’ are made and changed.

On Thursday 12th November Owen Jones wrote an article for the Guardian in which he suggested that governments should not permit pharmaceutical companies to claim patents on COVID-19 vaccines.  Jones argues that such monopolistic patents, their enforcement, and the deals for vaccine provision made by some governments to the detriment of others, will result in predictable, avoidable, and highly undesirable global inequities in access to COVID-19 vaccines.

In response, Tom Chivers at Unherd wrote a piece that lays out some of the problems with removing intellectual property rights from pharmaceutical innovations.  Crudely put, the problem is one of incentivising scientific innovation.  As Chivers writes, there is a “real, and to some extent irresolvable, tension” between the two major functions of pharmaceutical companies.  On the one hand, these companies manufacture and distribute drugs – in most cases this can be done very cheaply.  On the other hand, these companies engage in scientific research to invent new drugs, and this process can be eye-wateringly expensive.

One of the functions of the patent system is to allow companies to recoup the costs of innovation via the sale of the final product.  By granted a state-enforced monopoly on the production and distribution of a product, patents ensure that the product can be sold at a very substantial mark-up, without the threat of market rivals selling the same product at closer to marginal cost.  Without this mechanism, Chivers worries, the major financial incentive to pharmaceutical innovation would be removed 

This is a real worry: much scientific innovation costs a huge amount of money, and without the ability to recoup that money, the major economic incentive to expensive scientific innovation is removed.  At the same time, Jones’ concerns about global equity and access to drugs are also real and very serious.  Fortunately, there are institutional solutions that might walk a path between these problems.  As Chivers writes, one possibility is for governments to award financial ‘prizes’ to the creators of effective COVID-19 vaccines:

we (governments, philanthropic agencies, etc) will give whoever comes up with the first vaccine some large amount of money: perhaps $1 billion, on the condition that they then agree to make it in large quantities and sell it at close to marginal cost to the developing world. 

Chivers argues that this approach is flawed, on the grounds that more than one company might produce an effective vaccine, and we don’t want our prize money to arbitrarily reward the first vaccine to be created, which might not be the most effective.

Luckily, this problem can be resolved by simply giving money to more than one company.  Moreover, we can use this institutional mechanism to take a step closer towards Jones’ preferred solution: in exchange for receiving the prize, a drug company forfeits the patent, and the drug enters the public domain.  (This mutually beneficial exchange between state actors and pharmaceutical companies could perhaps if necessary be backed by the threat of IP expropriation if the companies are unwilling to relinquish the relevant IP rights.)

As with any institutional structure designed to incentivise innovation, this idea has strengths and weaknesses.  The ‘collective action problem’ of establishing and administering the ‘COVID-19 Innovation Fund’ would not be trivial.  Ideally, to my mind, one would want such a fund to be administered at an international level, with national governments making contributions to the fund determined by their own level of national wealth – but of course this is easier said than organised.  Moreover, abolishing the IP associated with a drug does not in itself immediately facilitate production and supply of the drug – that is another challenge, requiring its own incentive system. There would be many other institutional challenges and obstacles.  

Nevertheless – we shouldn’t feel trapped in a false dichotomy created by the faulty idea that patents are the only effective mediating mechanism via which scientific innovation can be rewarded.  At the end of the day, patents are just a way that drug companies can make a lot of money.  It is perfectly possible to sever the link between the reward for innovation and the cost of drugs, by simply rewarding innovation directly.  In the case of COVID-19, this is relatively easily done, not least because governments are already spending colossal sums in their COVID responses, and because the costs of not rolling out a COVID vaccine are so high.

In conclusion: there is no good reason not to take seriously the approach of just giving the drug companies a load of money, and making the various COVID-19 vaccines part of humanity’s common treasury of knowledge. 

[Edited to add: I want to make clear that there’s a very extensive literature on these issues, and if I were doing this properly I’d actually discuss some of it – but I don’t have time, so I’m afraid this is the blog post.]