The Competitiveness of Nations in a Global Knowledge-Based Economy

The Neo Physiocracy

BIOLOGY, ECONOMICS & EPISTEMOLOGY

Harry Hillman Chartrand, April 2002

Content

Part I - Concepts & Connexions

0.0 Introduction

1.0 Biology

2.0 Economics

3.0 Epistemology

4.0 Connexions

5.0 References

Part II - Industrial Dynamics

 0.0 Introduction

1.0 Basic Conditions

2.0 Structure

3.0 Conduct

4.0 References

Part III - Performance & Prospectus

0.0 Introduction

1.0 Performance

2.0 Prospectus

3.0 Conclusions

4.0 List of Exhibits

5.0 References

Part IV - Conclusions: Some Artful Reasoning about Biotechnology       

0.0 Introduction

1.0 Findings: IO Entries 

2.0 Physiocratic Policy Paradigm 

3.0 Neo Physiocratic Policy Paradigm 

4.0 End

5.0 References

Addendum

The Economics of Biotechnology & Intellectual Property Rights

Part I                                                                                     

Concepts & Connexions                                                                                 

0.0 Introduction

0.1  In this paper, I outline concepts and connexions between three distinct disciplines of human thought – biology, economics and epistemology (the study of knowledge). They are, however, for purposes of this and two subsequent companion papers, but single cells of three vast ‘knowledge domains’ outlined below.  

0.02  Collectively, these three will serve as a vehicle to explore the meaning and implications of a ‘knowledge-based’ economy (OECD 1996), and more generally, a knowledge-based society.  To provide focus definitions are in order:

a) Biology: specifically, its engineering offshoot - biotechnology;

b) Economics: specifically, seven American Economic Association sub-disciplines:

 B - Schools of Economic Thought and Methodology;

 H - Public Economics;

 K - Law and Economics;

 L - Industrial Organization;

 O - Economic Development, Technological Change, and Growth;

 Q - Agricultural and Natural Resource Economics; and,

 Z - Other Special Topics – specifically, Z100 Cultural Economics; and,

c) Epistemology: specifically the study of knowledge as organized, systematized and retrievable information.  This is the etymological meaning of science derived from the Latin scientia from scindere ‘to split’ or ‘to know’ then compounded with the Latin suffix entia forming nouns of quality (a word in turn derived from the Latin for ‘kind’), i.e., to split into types or taxonomies.  Technology, on the other hand (conventionally associated with the application of knowledge for fun, profit or military purpose), derives from the Greek techne for art, and logos for reason, i.e. reasoned art.  Similarly, the intellectual device used to split types is ‘concept’, derived from the Latin meaning to grasp firmly with the hands [of the mind].

1.0 Biology

1.1  Biology is one of the three primary natural sciences including: biology, chemistry and physics.  It shares with its sisters a fundamental reliance on the ‘experimental method’ to generate knowledge, more specifically, to disprove hypotheses about the ‘natural world’.  Unlike its sisters, however, biology concerns ‘living things’, some of whom are human beings.  At this juncture, the experimental method, in recognition of ‘human rights’ and the Hippocratic Oath, fades away as an ethically and legally acceptable methodology.  In addition to such rights, human life also exhibits unique biological characteristics as homo sapiens, i.e., it is conscious of itself and it transfers ‘extrasomatic’ knowledge (Sagan 1977) – words, numbers and pictures - to subsequent generations; and, finally, it is the dominant life form on the planet.

1.2  Living things have been ‘scientifically’ classified, beginning with Carl Linnaeus (1707 -1778), into a complex taxonomy headed, at present, by six (or seven) kingdoms: animal, vegetable, fungi, bacteria, protoctists or protists (slime molds, algae, amoebas, and seaweed), and most recently, archea (archaic anaerobic bacteria-like organism).  Virus’ are not counted ‘living’ things at present.  Reductively, the biological taxonomy runs: kingdom, phylum, class, order, family, genus and species - individual. 

1.3  Living things display characteristics distinct and different from members of the seventh ‘kingdom of minerals’, the taxonomic title given by biologists to the subject matter of physics and chemistry reflected in a shared ‘Periodic Table of Elements’.  Living things display seven distinctive characteristics:

a) they are organized into cells (without or without nuclei) composed of heterogeneous chemicals separated one from the other and from the ‘environment’ by a semi-permeable osmotic membrane;

b) they are fueled by an internal metabolism involving chemical and energy transformations;

c) they exhibit homeostasis, i.e. they maintain internal conditions separated from an outside environment;

d) they grow purposively converting environmental materials into themselves, reacting to and selecting external stimuli;

f) they reproduce transferring sections of DNA for the organization and metabolism of a new generation; and,

g) they evolve through the changing individual caused by mutation and natural selection in response to a stressful environment.  Unless interrupted by catastrophe, life tends towards ever more complicated structures, i.e., from single cell to cooperative or symbiotic cells to multi-cellular organisms to animals with multiple organs and, ultimately, to a self-conscious organism bent on breaking the Third Law of Thermodynamics: entropy: i.e., all structures breakdown into randomness.

1.4  Biological knowledge when applied in the ‘real world’ becomes technology.  The most dramatic demonstration to date of the ‘reasoned art’ of biotechnology was the so-called Agriculture Revolution of six thousand years ago that provided the human organism with a surplus of food sufficient to lay the foundation of ‘civilization’, i.e. living in cities.  In this sense, biotechnology is as old as history: i.e., plants and animals have been selectively bred and microorganisms used to make, for example, beverages (wine and beer) and foodstuffs such as, cheese and bread throughout history, i.e. the written record of humanity.

1.5  The actual term ‘biotechnology’ was coined in 1919 by an Hungarian engineer, Karl Ereky,  who meant all the lines of work by which products are produced from raw materials with the aid of living organisms, e.g., fermentation processes that produce acetone from starch and paint solvents.  Ereky envisioned a biochemical age similar to the stone and iron ages. (Murphy and Perella, 1993)

1.6  Biotechnology generates benefits through enhanced production and quality of foods, fibers, materials and medicines.  Using the newly acquired tools of molecular biology it can, for example, produce enhanced materials such as spider silk produced by goats (Noble 2002); it offers new possibilities for information processing, e.g., the DNA computer (Reaney 2001).  Contemporary biotech has been erected on a foundation laid down by advances in electronic information processing technology, i.e. based on innovations in sub-atomic physics (transistors) leading to the integrated circuit and hence to the modern computer.

1.7  Modern biotechnology commands seven classes of tools (Biotech Education Program 1994):

(a) Fermentation: using microbes to convert a substance such as starch or sugar into other compounds such as carbon dioxide and ethanol;

(b) Selection and Breeding: manipulating microbes, plants or animals, and choosing desirable individuals or populations as breeding stock for new generations;

(c) Genetic Analysis: studying how traits and genes for traits are passed from generation to generation and how genes and the environment interact to result in specific traits;

(d) Tissue Culture: growing plant or animal tissues or cells in test tubes or other laboratory glassware for propagation, chemical production and/or medical research;  

(e) Genetic Engineering/Recombinant DNA (rDNA): transferring a DNA segment from one organism and inserting it into the DNA of another.  The two may be totally unrelated – spiders and goats; and,

(f) DNA Analysis: including polymerase chain reaction (PCR) to make copies of a DNA segment and RFLP mapping (restriction fragment length polymorphism) to detect patterns in DNA that may indicate the presence of a trait gene.  Both PCR and RFLP analysis are used in "DNA fingerprinting" for genealogical studies and forensics.  ‘Junk genes’, i.e. genes for which no trait can currently be attributed are problematic: how does one test for a trait not expressed and that may never have been expressed, and if expressed may doom an organism?

 

2.0 Economics

2.1 Economics can be defined as the study of the allocation of scarce resources to satisfy an evolving and expanding spectrum of human wants, needs and desires. Economics began as a ‘moral science’, emerging from medieval or ‘scholastic’, and then ‘humanistic’, philosophy, to become the first of the ‘social sciences’.  As a discipline of thought, economics, conventionally breaks down into micro-economics, i.e. the study of individual economic agents like consumers, firms and markets; and, macro-economics, i.e., the study of the (national) economy as a whole and its aggregate parts such as national income, consumption, investment and government spending as well as international trade. 

2.2  The taxonomical organization of information at the micro-economic level is dominated by other disciplines, e.g. business accounting (a product of the so-called Commercial Revolution of the 15th and 16th centuries C.E.) and survey research (the product of the 20th century) as well as government tax and survey data that stretches back beyond the Doomsday Book of William I (The Conqueror) of England in 1066 C.E.  Economists generally have to re-process the resulting evidence of these disciplines (quantitative and qualitative) to test theoretical models concerning the behaviour of consumers, firms and markets.  Economics has not developed its own data collection system at the micro-level.       

2.3  The taxonomical organization of information at the macro-economic level, however, is dominated by the System of National Accounts (SNA) designed by economists and implemented after the Second World War.  The SNA serves to inform macro-economic policy and decision at the political and economic levels of the Nation-State.  To the degree evidence generated by the SNA is produced by ‘public servants’ its veracity is subject to bias similar to all sources of ‘human intelligence’.

2.4  Between micro- and macro-economics, however, lays an ill-defined taxonomic territory sometimes called meso-economics.  Here may be found most economics specialties distinguished from conventional micro- and macro-economics by the recognized peculiarities of their economic agents and/or of their macro-economic aggregates.

2.5  With respect to the seven economic sub-disciplines to be used in this, and two companion articles, peculiarities, or relevance for this paper, include:

 B - Schools of Economic Thought and Methodology: e.g., concerns the changing face of the ‘orthodoxy’ in economics.  Thus once upon a time the dominant school was the Physiocrats who believed the wealth of nations depended on the ‘economic surplus’ of agriculture.  It was replaced by Classical Economics that focused on manufacturing and the division and specialization of labour characteristic of the ‘Industrial Revolution’;

H - Public Economics: concerns government usually operating outside the market system with its monopoly of coercive force.  Agents include voters, politicians and bureaucrats who have motivations and objectives different from market players, e.g. pro- or anti-GM (genetically modified) foodstuffs;

 K - Law and Economics: e.g. concerns laws of Nation-States that define economic ‘property’, how it may and may not be sold (civil and criminal law) subject to the coercive powers of the State.  Laws (and regulations) also serve to establish many transaction costs (costs of doing business) as well as intellectual property rights like patents that serve as the legal foundation for the industrial organization of biotechnology;

 L - Industrial Organization: concerns the use and application of micro- and macro-economic tools and techniques in the study of aggregates called ‘industries’ or ‘sectors’ of the economy including the so-called ‘biotechnology sector’;

 O - Economic Development, Technological Change, and Growth: concerns growing and developing national, regional and local economies.  A critical factor is technological change.  Technological change is generally recognized as emerging from new knowledge flowing from discovery or invention that leads to innovation and marketing.  Much debate in economics surrounds whether technological change is exogenous or endogenous to the economic systemRecently, purposively built national innovation systems have arisen in many countries to facilitate the 'innovative process’ (OECD 1997);

 Q - Agricultural and Natural Resource Economics: specifically Agricultural Economics concerns production and consumption processes distinctly different from Neo-Classical diminishing marginal returns and its related ‘industrial’ system; and,

 Z - Other Special Topics – specifically, Z100 Cultural Economics; concerns differing patterns of economic behaviour reflecting differences in culture, e.g. language, religion and law that according to some define the battlefield of the post-Cold War era (Huntington 1993).  The ‘institutionalization’ of knowledge accordingly varies significantly between Nation-States.

2.06  In the last generation there has been a revival of an old school of economic thought (in fact the dominant orthodoxy in American economics until the 1930s) known as the “New Institutionalism”.  As in the ‘old’, an institution is a routinized pattern of human behaviour designed, consciously or unconsciously (cum Hayek 1937), to reduce human decision costs including transaction costs in buy/sell relationships, i.e. the ‘price system’.  The work of J.R. Commons, e.g., The Legal Foundations of Capitalism highlighted the importance of law in defining economic property and markets evolving from such definition (Commons 1924) and in Institutional Economics he established the concept of transactions including enforcement costs (Commons 1934).  R.H. Coase identified transaction costs as critical in determining whether an economic activity is carried on inside, or outside, the firm (Coase 1937; 1998).  A.D. Chandler and D.C. North stressed the impact of institutions on the attainment of economic growth and development (Chandler 1973; Davis and North 1971; North 1991, 1994).  Harvey Liebenstein contributed with his discovery of “X-Efficiency” i.e., consumption in the act of production usually through informal ‘office institutions’, e.g. how many are too many coffee breaks before the bottom line suffers and how many are too few? (Liebenstein 1966, 1978, 1992)  The ‘organic’ relationship between the New Institutionalism and the recently emerged Evolutionary Economics (the Journal of Evolutionary Economics was founded in 1997) will be explored in the third paper in this series: Preferred and Probable Futures.

2.07  With respect to technological change, two antinomies play a critical role in thinking about new knowledge.  These are: exogenous/endogenous; and, embodied/disembodied.  Exogenous technological change arises outside of the economic system, e.g. outside the firm or industry and inside some other institutions like a university or through independent discovery or invention by an individual ‘outside’ the marketplace.  By contrast, endogenous technological change arises inside the economic system, e.g., through corporate R&D efforts.  Embodied technological change refers to specific products or processes that embody new, very specific knowledge, e.g. the transistor in the transistor radio.  Disembodied, on the other hand, refers to technological change that is generic and pervasive in nature, e.g. general improvement or progress in communication, transportation or information processing.   

2.08  Finally, while the ultimate unit of analysis in conventional economics is the Nation-State, a new level is arising: global economics.  The word 'economy' derives from the ancient Greek oikos meaning 'house' and nemo meaning 'manage', i.e. managing the house.  In this sense, economics shares a common root with 'ecology' which derives from oikogie or modes of life and relations within the house.  Another connection is Ekistics - the science of human settlement founded by Constantinos A. Doxiadis (Doxiadis 1966).  This term also derives form oikos but in the sense of the founder of an ancient Greek colony like Syracuse in Sicily or the numerous city states established by Alexander the Great in India at the end of the 4th century BCE (before the common era).  These three terms are increasingly linked through growing understanding of the unintended effects of economic activity (called 'externalities') on the house of humanity - the Planet Earth.  

 

3.0  Epistemology

3.01  Traditionally, epistemology has identified three units of knowing: quantity (primary), quality (secondary) and values (tertiary) (Griffen 1991: 4).  Knowledge thus extends above and beyond the foundational ‘quantitative’ results of the experimental, value-free natural & engineering sciences (NES).  Another whole domain of knowledge is inherently ‘value laden’ and generated by the essentially ‘non-experimental methods’ of the humanities & the social sciences (HSS).  Yet another domain embraces the world of ‘appearances’, of qualities: of colour and shade, of form and shape, of taste and touch, of sight and sound - the Arts.  Relationships between knowledge domains is organic and osmotic rather than mechanical (e.g. Fig. 1: Genetic Epistemics).  And, in the ‘humanist’ tradition, ultimately only the individual human being can ‘know’ such things.  Everything else is storage of extrasomatic knowledge, it is not ‘knowing’ and has, without competent human intervention, no meaningfulness other than as an indecipherable artifact.

3.02  By saying the relationship between knowledge domains is organic, a metaphor is being used.  Metaphors and similes are products of human language that permit one to connect and learn from different types of knowledge, e.g. love is a red, red rose.  The dominant metaphor for the Industrial Revolution was the machine; the dominant metaphor for the emerging Biotech Revolution is DNA.  The Arts – literary, media, performing and visual - have usually anticipated and crystallized the changing dominant metaphors of human societies.  Thus the Impressionist painters captured the ambiguous nature of light revealed by late 19th and early 20th century physics while the Cubists captured the crystalline relational reality of quantum physics (Hughes 1981), and today, performance artists are shocking audiences with human ‘bodily fluids’ anticipating, perhaps, the Biotech Revolution.

3.03  Each Nation-State institutionalizes knowledge, e.g. universities, libraries, laboratories, etc., in keeping with its own distinct history and traditions.  In fact, each country ‘institutionally’ structures knowledge using its own distinct “national” epistemology.  There are therefore different and distinct cultural epistemologies reflecting different rankings for given domains, e.g. the Islamic Republic of Iran, as an official theocracy, places religious values ahead of ‘scientific’ ones.   Actual prioritization - "putting your money where your mouth is" - is reflected by the amount of public monies devoted to any given knowledge domain, its disciplines and sub-disciplines and its ‘preferred’ methodologies and techniques.

3.04  For our purpose, the Canadian institutional taxonomy serves as a case in point.  Canada, as a knowledge-based geography, has three mountain peaks:

the natural & engineering sciences (NSE: the Natural & Engineering Research Council of Canada),

the humanities & social sciences (HSS: the Social Sciences & Humanities Research Council of Canada); and,

the Arts (the Canada Council for the Arts). 

3.05  Two questions, among others, need to be answered concerning the specific Canadian pattern.  First, where is the Medical Research Council of Canada (MRC)?  And, second, why do the humanities come first?  With respect to the MRC, it has, in effect, feet firmly planted in two domains NES & HSS.  This is reflected by the Hypocratic Oath and the limitations on medical experimentation with human beings.  Given ‘art therapies’ plays an increasingly important role in medical intervention, one can argue that the MRC is connected to all three primary knowledge domains.  With respect to the humanities, historically it was from the humanities that the social sciences emerged.  Furthermore, placing the humanities first highlights the inherently ‘value laden’ phenomenology of the HSS knowledge domain.

4.0 Connexions

4.01  Four sets of high-level connexions will be drawn in this introductory article:

· biology/economics;

· biology/epistemology;

· economics/epistemology; and,

· biology/economics/epistemology.

i)  Biology/Economics

4.02  The historical connexion between biology and economics began before the foundation of modern economics which was laid by Adam Smith’s An Inquiry into the Wealth of Nations in 1776.  The French Physiocrats (before, during but not after the French Revolution) argued that the economic surplus fuelling growth in the wealth of nations originated with agriculture. While displaced by the Classical School’s emphasis on industrial manufacturing, the unique nature of the production and consumption process in agriculture meant that a separate and distinct sub-discipline of economics emerged and has been continued into the 21st century as the reflected in the AEA’s category: Q - Agricultural and Natural Resource Economics.   

4.03  In the case of biotechnology, especially rDNA techniques, ‘non-conventional’ production processes dominate, at least at present.  Once a line of organisms is established, e.g. goats genetically modified to produce spider silk or human growth hormones, the line becomes self-perpetuating and, by definition, breeds true creating a near endless output for the price of feed grain and/or pasture land.  The factories literally reproduce themselves.  The biotech invention process is currently dominated by university-based scientists and researchers who either create firms in conjunction with their host institutions or leave to ‘start-up’ a biotech firm (Zucker, L.G. et al 1998).  In either case commercial viability depends on recognition and protection of intellectual property rights, especially patents.  The issue of intellectual property rights will be explored in the next paper in this series: Part II – Industrial Organization.

4.04  In many ways, however, invention of a new rDNA ‘factory organism’ is but the first step towards an economically viable product.  The output of such new organisms must be collected, purified and processed then ‘mass produced’.  It is at this stage that more conventional scaleable ‘industrial’ processes as well as financing re-enters the picture.  Nonetheless, the economics of organic production are significantly different from secondary manufacturing industries as well as primary ‘extractive’ industries such as mining, natural gas and oil production.

4.05  Given the range of potential outputs from (e.g. foods, medicines, materials, information processing technologies) as well as the unique production methods of biotechnology, e.g. rDNA, the stage is set for a change in the nature of the economy. In this regard, venture capital serves as a proxy for the emerging importance of biotechnology.  According to the tracking service VentureReporter.net, biotech ranked third among tech sectors - behind software and network infrastructure, and ahead of wireless, optical, broadband and semiconductors - in venture funds raised in the fourth quarter of 2001 during which time biotech start-ups reaped $US 613-million (Reuter, “Biotech reaps VC cash”, January 16, 2002.).  The future of biotechnology and its impact on the economy will be the subject of the third paper in this series: Part III – Preferred and Probable Futures.

ii) Biology/Epistemology

4.06  Science, in its original sense, involves splitting kinds of things into organized taxonomies.  Such taxonomies can be either a ‘hard-and-fast’ type, i.e. either it is A or not A, or they can be relatively ‘soft-and-easy’, e.g., applying the fuzzy logic of yes-no-maybe.  Since the time of Newton and the dominance of physics ‘hard-and-fast’ taxonomies have dominated.  Biology, however, has always tended to a more ‘soft-and-easy’ approach (at least until DNA testing became available).  At one sub-disciplinarian extreme, in complex or depth psychology, the phenomenological need to treat a unique human individual has resulted in a reasoned assessment of appropriate taxonomical methodologies in Egalitarian Topologies versus the Perception of the Unique by James Hillman (Hillman, 1980).  Phenomenologically, biological forms are characterized by: adaptation, change, mutation and evolution; osmotic processes through semi-permeable membranes; and, symbiosis, i.e., the living together in more or less intimate association or close union of two dissimilar organisms.  Assuming the future ascendance of biotechnology, it is likely that the metaphors and ‘tolerances’ of biology will increasingly affect epistemological analysis.

iii) Economics/Epistemology

4.07  Economics made a choice early in its history to adopt a mechanistic, physics-based model of the economy as a machine.  Differential calculus, the gift of Isaac Newton, to the world of ‘astral mechanics’ or astronomy was picked up by economics as the leitmotiv of economic behaviour, e.g. constrained maximization of consumer utility and firm profit.  It is interesting to note that Newton apparently considered his ‘differential engine of analysis’ to be of secondary importance to his work in alchemy, and that, similarly, Goethe did, in fact, considered his plays and poems of secondary importance to his Theory of Colours, a powerfully reasoned artistic response to Netwon’s physics of colour – the spectrum (Goethe 1810).  Neither knew of the vast horizons, on either side of the visible spectrum, that have become new event horizons for human thought. 

4.08  Through time there have been various attempts at biological modeling economics (Boulding 1953; Eaton 1984; Ghisekin 1978; Ginsberg 1931; Penrose 1952). None, to date, has taken root.  Today, however, the New Institutionalism and Evolutionary Economics are probing the organic tolerance of orthodoxy.  Results will be assessed in the third paper in this series: Part III – Preferred and Probable Futures.

4.09  Finally, for economics epistemology is a tool, an instrument.  It has utilitarian value, e.g., to make a profit (or increase the wealth of nations).  Thus the OECD’s use of terms such as: know-what, know-why, know-who as well as codified vs. tacit, represents forms of ‘instrumental knowledge’ (OECD 1996).  Similarly, national innovation systems are utilitarian institutions not necessarily concerned with ‘higher’ or the ethotic use of knowledge. If knowledge is organized, systematized and retrievable information then understanding is the ability to grasp the meaning and implications of the resulting knowledge.  And then there is wisdom, one flight above, resulting from the sufficient accumulation of philosophic or scientific knowledge to discern inner qualities and relationships, to have insight, and, to exercise good sense and judgement. 

iv) Biology/Economics/Epistemology

4.10  One of the great insights provided by biology is that there is but one biosphere shared by all humanity.  Given that Economics, Ecology and Ekistics share the same Greek root and refer, respectively, to: management of the house; activities taking place in and around the house; and, human settlement, then a reasonable epistemological conclusion would be the emergence of a global- as opposed to a macro-(national)-economics for planetary management; the care and cultivation of its environment and the organically-sound settlement of its limited acreage (as well as reaching out to settlement resources beyond the semi-permeable membrane of Earth’s atmosphere).

4.11  Biotechnology stands on the shoulders of physics-based ‘High Tech’.  It promises new complements to, and substitutes for, High Tech silicon-based ‘dryware’ in the form of carbon-based “wetware”.  The transgenetic recombination of knowledge from high-tech physics and wetware biotech is already taking place.  Its implications for the economy and epistemology will be explored in the third paper in this series: Part III – Preferred and Probable Futures.

 

References

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Part II

Industrial Dynamics

0.0 Introduction

0.01  In Part I it was established that biology is one of three elemental natural and engineering sciences.  Taxonomically, biology is organized, at present, into the study of six kingdoms of living things: animal, vegetable, fungi, bacteria, protists (slime molds, algae, amoebas, and seaweed), and most recently, archea (archaic anaerobic bacteria-like organism).  Phenomenologically, ‘living things’ exhibits distinctive characteristics: (a) they are organized into cells separated one from the other and from the environment by a semi-permeable osmotic membrane; (b) they have an internal metabolism; (c) they exhibit homeostasis; (d) they grow; (e) they reproduce; and, (f) they evolve.  Methodologically, unlike it sister natural sciences - chemistry and physics, biology also carries legal and moral imperatives constraining exercise of the experimental method especially when human beings are the subject but also, and increasingly, when higher life forms are involved.

0.02  While biotechnology, in the sense of manipulating living things for human purposes, has existed throughout history, modern biotechnology began with identification (1956), and subsequently development of techniques (1970s) for the direct manipulation of the DNA helix – the molecular basis of heredity.  This has produced a ‘scientific revolution’ (Kuhn 1962).  In effect, the previous biological paradigm focused on the ‘gross’ morphology, i.e. the form and structure, of the increasing complex and diverse life forms generated by evolution.  Epistemologically, with this scientific revolution biological complexity and diversity became simplified into the polymorphous arrangement of five chemical ‘bases’: cytosine, guanine, adenine, thymine, and uraci (found only in RNA, not in DNA).  Technologically, this simplification permitted biology to begin to mix, match and manipulate the characteristics and biochemical behaviour of all six kingdoms of life.  Economically, it produced a new sector of economic activity that increasingly affects virtually all industries, e.g., agriculture, chemicals, construction, farming, forestry, health care, information technology, mining and pharmaceuticals.

0.03  In Part I it was also established that economics is taxonomically partitioned into three primary parts: micro-, macro- and meso-economics.  Furthermore, within meso-economics one subdiscipline, Industrial Organization (IO), serves to link microeconomic behaviour of consumers, firms and markets with the overall aggregate macro-economy. 

0.04  IO was the brain-child of the late Joe Bain.  His seminal work - Industrial Organization - was first published in 1959 (Bain 1968).  Using IO, Bain began what has become an ongoing process within the economics profession of linking macroeconomics (the study of the economy as a whole) to microeconomics (consumer, producer and market theory) to better understand the way the ’real’ world works.

0.05  The IO scheme (Exhibit 1) consists of four parts.  First, basic conditions face an industry on the supply- (production) and demand-side (consumption) of the economic equation.  Second, each industry has a distinctive structure or organizational character.  Third, enterprise in an industry tend to follow typical patterns of conduct or behavior in adapting and adjusting to a specific but ever changing and evolving marketplace.  Fourth, an industry achieves varying levels of performance with respect to contemporary socio-economic-political goals.

0.06  The IO model will guide the argument to be presented in this paper.  Four elemental economic terms will be used.  First, buyers and sellers exchange of goods and services in markets - geographic and/or commodity-based.  Second, an enterprise is any entity engaging in productive activity - with or without the intention of making a profit.  This thus includes profit, nonprofit and public enterprise as well as self-employed individuals.  All enterprises have scarce resources and are accountable to shareholders and/or the public and the courts.  An enterprise is defined in terms of total assets and operations controlled by a single management empowered by a common ownership.  Third, an industry is a group of sellers of close-substitutes to a common group of buyers, e.g. the automobile industry.  Fourth, a sector is a group of related industries and thus the automobile, airline and railway industries form part of the transportation sector.  The concept of ‘sector’ was introduced into economics by Colin Clark in 1940 to describe groups or clusters of industries that exhibit distinctive characteristics, e.g. primary, secondary and tertiary industries (Wolfe 1955).

0.07  For purposes of this paper biotechnology is assumed to constitute a distinct sector of the economy based upon manipulation of the DNA helix and messenger RNA that generates proteins or the building blocks of life which is the subject of a relatively new subdiscipline, proteomics.  Thus use and application of a complex of techniques involving genetic analysis and engineering, rather than production of specific goods and services, serves as the foundation for the industrial organization of the biotech sector.  

This powerful technology base, combined with the development of enhancing technologies, such as genomics, bioinformatics, and proteomics, is speeding up the identification of genes that control valuable traits, shrinking the timelines to commercialize new products, and expanding the commercial potential of biotechnology across a growing number of market sectors, including agriculture (Shimoda 1998).

0.08            These techniques can be used to generate new and improved goods and services in many industries, e.g., herbicide-tolerant and insect-resistant plants in agriculture (Oehmke 2002), improved textiles (Noble 2002), and, bio-computers (Reaney 2001).  In this sense, biotechnology is a pervasive disembodied or enabling technology generating general progress and improvement across the economy.  As will be seen, biotechnology is a ‘process technology’ used to generate new or improved inputs for other producers, i.e., biotech goods and services are intermediary or producer goods rather than final or consumer goods.

0.09            In this paper I will only highlight selected salient aspects of the IO model of the biotech sector.  It should be noted that I have entitled this paper “Industrial Dynamics’ rather than ‘Industrial Organization’ because the biotech sector is in its early stages of development and, as will be seen, it is in a state of flux.

 

1.0    Basic Conditions

1.01  Basic conditions in an industry involve demand for its outputs and supply of its inputs.  I will first review demand conditions and then supply conditions in the biotech sector.

a) Demand

1.02  On the demand-side, biotech is a ‘process’ or ‘enabling’ technology (Research & Analysis 2000, p. 7) used by firms to generate new or improved inputs for producers of final or consumer goods and services, i.e., the results of biotech are ‘intermediary goods or services’ used by other producers, not by final consumers.  In agriculture, for example, firms use biotechnology to produce new or improved seeds, e.g., herbicide-tolerant or insect-resistant seeds for use by farmers.  Thus demand is from farmers not final consumers.  Similarly in the pharmaceutical industry, firms use biotech to produce new or improved drugs for use by doctors in treating patients, i.e., demand is generated by physicians as an input to a treatment regime for patients.  Thus demand is from physicians not final consumers. 

1.03  There is, however, an important dimension of final demand for biotech products.  While consumers tend not to be concerned about production methods in the automobile industry, e.g., whether by workers or robots, there is well documented consumer concern about biotechnology in production of final goods and services (Katz 2001).  Thus consumer attitudes towards biotechnology can play a significant role in encouraging or inhibiting use and application as well as development of biotechnology.

1.04  Given the legal and moral constraints on the experimental method in biology it is not surprising that legal, moral and ethical concerns are expressed about biotechnology.  Thus while the scientific community is primarily concerned with generating new knowledge and producers are primarily concerned about efficiency and profits, consumers harbour deep-seated cultural and moral values about the manipulation of living things for human purposes.  This concern is apparent in the description of genetically modified foods by some consumer groups as ‘frankenfoods’ (the reference being to Mary Shelley’s 1818 book: Frankenstein; or, The Modern Prometheus).  It is interesting to note, etymologically, that the word ‘biology’ entered the English vocabulary from the German in 1819. 

1.05  Consumer and public sector attitudes towards biotechnology products tend to vary across countries and cultures.  Thus in the United States, the federal government does not financially support fetal tissue research through the National Science Foundation (not because it is bad science but because of religious attitudes towards abortion) while, by contrast, the Government of the United Kingdom has formally approved human embryonic tissue research (BBC Mar. 1, 2002).  By contrast, in North America genetically modified food has been generally accepted by consumers while in Europe there is significant resistance (Kalaitzandonakes 2000).  At least one observer has noted the insensitivity of producers even in press releases announcing new biotech products and processes to the deep seated ‘value conflict’ of consumers (Katz 2001).

1.06  The implication of consumer attitudes towards biotechnology may have profound implications for the competitiveness of companies and countries.  To the degree consumer resistance inhibits the development of different lines of biotechnology, e.g., genetically modified foods v. medical goods and services, different countries will tend to develop relative strengths or weaknesses.  Thus there appears to be a movement of fetal tissue researchers out of the United States and into countries like Britain and Sweden which are more hospitable towards such research.  The opposite movement of researchers is anticipated with respect to genetically modified foods, i.e., from Europe towards North America.  The long-run implications of such ‘cultural specialization’ could be significant for the competitiveness of nations.

(b) Supply

1.07  On the supply-side of the biotech sector, the dominant factor is generation of new knowledge and development of facilitating technologies.  In this regard it is important to distinguish between intrinsic and instrumental values (Jantsch 1967, p.51).  Intrinsic knowledge is valuable in and of itself.  It improves our understanding of the world and the way it works.  It corresponds to fundamental knowledge where the value is “knowledge-for-knowledge’s sake”.  Instrumental knowledge, by contrast, is valuable because it allows us to do things, e.g., create new or improved goods and services that either contribute to human well-being or serve to achieve other human ends such as military victory or making a profit.  Instrumental knowledge corresponds to the OECD’s use of: know-what, know-why, know-how and know-who.  All relate to the competitiveness of nations and companies in a knowledge-based economy (OECD 1996, p.12).  Instrumental knowledge is thus an input rather than a final good or service.

1.08  With respect to production of new biotech knowledge, a contrast can be drawn between the capital requirements of biotechnology and high energy physics.  In high energy physics, the rising cost and scale of equipment, e.g., synchrotrons and particle accelerators, required to generate new knowledge and test hypotheses increasingly limits experimentation and the generation of new knowledge.  In biotechnology, by contrast, the cost of equipment, e.g., gene synthesizers, is relatively modest.  The contrast may reflect the different stages of development of the science involved.  Thus biotechnology is a relatively recent and revolutionary development (30 years old) while high energy physics is a well-established discipline dating back to the late 19th century. 

1.09  In this regard, major information technology companies have made significant commitments (IBM to MDS Proteomics, Hitachi to Myriad Genetics, Compaq to Celera Genomics) in the belief that the huge data-crunching needs of nascent biotechnology firms will grow into a multi-billion dollar market for IT equipment and consulting services over the next decade (Reuters January 11, 2002).  These developments also include joint ventures (e.g. Hitachi and DoubleTwist, Motorola and TissueInformatics Inc., to develop information processing hardware tailored to biotech research reflecting a belief that the next generation (Reuters January 16, 2002).  These developments may represent the beginning of a shift away from physics (especially nuclear physics and weapons production) as the most complex (and financially rewarding) information processing task towards biotechnology.

1.10  On the labour-side, in the past it was physicist and chemists (as well as engineers) who were most sought after by commercial enterprise.  Today, however, the increasingly pervasive nature of biotechnology has created significant new employment and entrepreneurial opportunities for biological researchers and scientists (Zucker et al 1998).  Audretsch and Stephan found that 50% of ‘scientific founders’ of new biotech pharmaceutical firms had followed a traditional academic career trajectory while only 12.5% had established their careers exclusively with large pharmaceutical companies like SmithKline or Beckman (Audretsch and Stephan 1999, p. 103). 

1.11  In a sense, all physical capital is knowledge capital in that new plant and equipment embodies instrumental knowledge.  Furthermore, as established in Part I, ultimately only the individual human being can ‘know’.  Everything else is storage of extrasomatic knowledge, it is not ‘knowing’ and has, without competent human intervention, no meaningfulness other than as an indecipherable artifact.  This is especially true in a new and rapidly emerging industrial sector like biotechnology.  Put another way:

The ultimate repositories of technological knowledge in any society are the men comprising it, and it is just this knowledge which is effectively summarized in the form of a transformation function.  In itself a firm possesses no knowledge.  That which is available to it belongs to the men associated with it.  Its production function is really built up in exactly the same way, and from the same basic ingredients, as society’s. (Graf 1957)

 

2.0 Structure

2.01  Structure refers to the organizational characteristics of an industry or market, e.g., the number and nature of buyers and sellers.  Structure is affected by the basic conditions of supply and demand in the industry.  As noted by Phillips and Khachatourians (2001) about development of genetically modified canola in Canadian agricultural biotech, there has been significant structural evolution of the sector over a relatively short period of time.  In general, the biotechnology sector, on the production or supply-side, is currently dominated by five distinct yet interactive agents: universities (including teaching hospitals), innovators (or “stars”), newly founded small- to medium-sized biotechnology firms (NBFs), large well-established firms (especially agro-chemical, seed and pharmaceutical companies) and the public sector (government).  Collectively they function like a network with each agent specializing in a particular phase of biotech research, development and marketing (Auroa and Gambardella 1990).  In addition there are trade associations and other professional societies that are active, e.g., Biotechnology Industrial Organization (a U.S.-based advocacy group) http://www.bio.org/.

a) Universities

2.02  The original work leading to modern biotechnology took place within universities (e.g., Watson and Crick’s identification of the DNA helix at Cambridge University and Paul Berg’s development of recombinant DNA technology at Stanford University).  The university provides a setting for ‘pure research’ or the search for ‘knowledge-for-knowledge’s-sake.  It has extensive infrastructure including laboratory facilities, equipment and cadre to support research as well as teaching the next generation of researchers.  This infrastructure is built up over decades and relies heavily on public funding.  Beyond tangible assets the university by housing the full spectrum of human knowledge (NES, HSS and the Arts) in both codified form (e.g. libraries) as well as tacit form (e.g., scientists, lawyers, medical doctors, humanists, social scientists and artists) provides the opportunity for cross-fertilization, e.g., social scientists and humanists learning from the experience and practice of the physical sciences and the arts.  Put another way, the university provides agglomeration economies (formally and informally) with respect to knowledge.

b) Innovators

2.03  Within the university there are leading researchers or ‘stars’ who play a significant role as innovators within the biotechnology sector of the economy.  Of some 207 biotech ‘stars’ identified by Zucker et al, 158 (76%) were resident in universities, 44 (21%) in research institutes and only 5 (3%) in commercial firms (Zucker et al 1998: 293).  Like Watson, Crick and Berg such ‘stars’ have the talent, knowledge and experience that leads them to new insights and breakthroughs.  Their high profile tends to attract the best students who, in turn, become the ‘stars’ of the next generation.   They also tend to attract the attention of the large well established firms. 

2.04  It has been argued, using a life-cycle model, that most scientists invest in developing a reputation early in their careers usually through publication in journals that signal the value of their knowledge to the scientific community.  With maturity they seek ways to appropriate the economic value of their knowledge, e.g. through consultancy, work (full- or part-time) with established enterprise outside of the university or by joining or establishing a new firm (Audretsch and Stephan 1999).  This appears to be especially true in biotechnology.

c) New Biotech Firms

2.05  In the case of ‘scientific founders’ of new firms in pharmaceutical biotechnology some 50% followed the academic trajectory; 28% established their careers with large pharmaceutical companies; 13% followed a mix of the two while 6% established firms immediately following their academic training (Audretsch and Stephan 1998).  It has also been argued that many new biotech firms are founded with the specific intent of selling them to large established firms (Arora and Gambardella 1990, p. 362).

2.06  According to Zucker et al (1998) the number of American companies actively engaged in biotechnology grew from virtually none in 1967 to 751 by 1990.  Of these 511 or 68% were new entrants, 150 incumbents (20%), and 90 (12%) including 18 joint ventures that could not be formally classified.  Furthermore, by 1990, 52 (7%) of the 751 had died or merged with other firms (Zucker et al 1998: 292).  Zucker et al do not provide evidence regarding the size or concentration ratios for biotech firms.

2.07  Using a different data set, Biotechnology Industrial Organization (a U.S.-based advocacy group) reports there were 1,311 biotech firms in 1995 increasing 5% to 1,379 in 2001 (Table 1).  More significantly market capitalization of biotechnology firms increased 700% from $US 41 billion in 1995 to $US 339 billion in 2001.  With respect to firm size, the average biotech firm increased from a capitalization of about $US 31 million in 1995 to $240 million in 2001.

Table 1

United States Biotechnology Industry

1993-2001

Year                                              2001        2000           1999        1998     1997     1996        1995

Sales*                                          18.1         16.1            14.5           13         10.8      9.3           7.7

Revenues*                                 25.0         22.3            20.2         17.4      14.6      12.7         11.2

R&D Expense*                          13.8         10.7            10.6              9          7.9        7.7           7

Net Loss*                                     5.8           5.6              4.4           4.1        4.5        4.6           4.1

Market Capitalization*            330.8       353.5          137.9            93         83         52            41

Number of Public Companies    339          300             316          317       294       260          265

Number of Companies             1,379       1,273          1,311       1,274    1,287    1,308       1,311

Employees (‘000)                         174          162             155          141       118       108          103

* $US billions

Source: Biotechnology Industrial Organization, 2002, http://www.bio.org/er/statistics.asp

2.08  At this time it is not possible to estimate the impact of the late 2001 stock market meltdown (collapse of the dot.com economy) on market capitalization of biotech firms.  However, the National Venture Capital Association reported that biotech start-ups raised about $4.3-billion through the first three quarters of 2001, compared with about $5.2-billion in the first three quarters of 2000.  While this represented a 17-per-cent drop year-over-year, biotech financing compared favourably to overall venture funding of privately held companies which fell 63 per cent between the first three quarters of 2000 and the first three quarters of 2001 (Reuters, January 16, 2002).

2.09  In Canada the biotech sector is dominated by small and medium sized firms (Table 2).  In 1997, of some 282 reporting firms, 72% had 50 employees or less; 15% had between 51 and 150 employees; and only 13% had 151 or more employees (Research & Analysis 2000).  Nonetheless, according to the federal government’s The 1998 Canadian Biotechnology Strategy: An Ongoing Renewal Process

Canada ranks third after the United States and the United Kingdom in the global biotechnology market. With more than 500 firms, mostly small companies, Canada now has more biotechnology companies per capita than any other country.  (Industry Canada 1998, p. 5)

 

Table 2

Canadian Key Industry Data by Company Size, 1997

($Cdn Millions)

 

Small

(1-50)

Medium
(51-150)

Large (151+)

Total

No. of Firms

204

43

35

282

Biotech Sales

$183

$137

$698

$1,017

Other Revenue

$49

$47

$23

$119

Biotech Revenue

$231

$183

$721

$1,135

R&D

$192

$153

$240

$585

Exports

$95

$43

$275

$413

Employees

3,125

2,397

4,302

9,823

Unfilled Positions

1,031

281

587

1,899

Total
Positions

4,155

2,678

4,890

11,723

Source: BIOTECanada, Canadian Biotechnology’98, Success from Excellence, 1999.

 

2.10 By sector, 46% of reporting Canadian biotech firms were engaged in health care; 22% in agriculture; 11% in environment; 7% in food processing; 4% in aquaculture; 3% in bio-informatics; and 7% could not be classified (Table 3).

 

Table 3

 Canadian Key Industry Data by Sector, 1997

(Per Cent)

 

Companies
%

Biotech
Sales %

R&D
%

Exports
%

Health Care

46

50

87

58

Agriculture

22

23

5

21

Environment

11

3

1

1

Food
Processing

7

21

2

18

Aquaculture

4

1

0

1

Bio-
Informatics

3

0

2

0

Other

7

2

3

1

Total

100

100

100

100

Source: BlOTECanada, Canadian Biotechnology ‘98, Success from Excellence, 1999

 

d) Large Firms

2.11 Reliable data about large biotech firms is available only for agro-biotechnology, specifically plant biotech (Table 4).  Drawing on work by Brennan et al (2000), Fulton and Giannakas (2001) indicate that the 4 largest firms accounted for 100% of plant biotech activity with one company, Pharmacia, accounting for 88% of all activity in 1998.  No estimates were provided regarding the value of plant biotech activity by the 4 dominant firms.

2.12 The trend towards increased concentration is also indicated by merger and acquisition activity of the major firms (Table 5).  The ten largest firms in 1998 were involved in 205 consolidations of one form or another of which 68% (140) were acquisitions; 5% (11) were mergers, 6% (13) were joint ventures, and 21% (41) were other forms of industrial consolidation. 

2.13 While data is not available for the pharmaceutical industry, the other major player in biotechnology, the overlap with agro-biotechnology is suggestive that a similar level of concentration and consolidation is probably taking place in that sub-sector of biotechnology.   Thus Pharmacia (Monsanto), DuPont, Bayer, Dow and others, listed in Tables 4 and 5, are also active in pharmaceuticals.

Table 4

 World Sales of Top Ten Pesticide and Seed Companies

1997-1999

(Fulton and Giannakas, 2001)

Company                                                                     1997                       1997                       1999                       1998

                                                                              Pesticides                       Seed                       Seed                      Plant

                                                                                                                                                                                  Biotech

                                                                                                                               Millions $US

DuPont (Pioneer) USA                                               2,518                       1,800                       1,850                          

Pharmacia (Monsanto) USA                                     3,126                       1,800                       1,700                        88%

Syngenta (Novartis) Switzerland                              4,199                          928                          947                          4%

Groupe Limagrain (France)                                                                     686                          700                           

Grupo Pulsar (Seminis) Mexico                                                              375                          531                           

Advanta (AstraZeneca and Cosun)                        2,674                          437                          416                           

    UK and Netherlands

Sakata (Japan)                                                                                           349                          396                           

KWS AG (Germany)                                                                                 329                          355                           

Dow USA                                                                     2,200                                                     350                           

Delta & Pine Land (USA)                                                                                                   301                           

Adventis Group (Hoechst/Rhone-Poulenc)                       4,554                                                                                8%

Bayer                                                                             2,254                                                                                 

American Home Products                                          2,119                                                                                 

BASF                                                                            1,855                                                                                 

Sumitomo                                                                        717                                                                                 

Agribiotech                                                                                               425                                                      

KWS                                                                                                           329                                                      

Takii                                                                                                            300                                                      

Total World Sales                                                     30,900                     23,000                     24,700                           

CR4                                                                                 47%                        23%                        21%                      100%

CR10                                                                               85%                        32%                        31%                      100%

Note. From "Impact of Industry Concentration on Innovation in the US Plant Biotech Industry," by M.F. Brennan, C.E. Pray, and A. Courtmanche, 2000, In Transitions in Agbiotech: Economics of Strategy and Policy, W.H. Lesser (Ed.). Storrs, CT: University of Connecticut. Dashes indicate data not applicable.

Table 5

Consolidation Activity for the Ten Most Active Biotechnology Firms, 1998

(Fulton and Giannakas, 2001)

Company                                        Mergers             Acquisitions                Joint                       Other          Total

                                                                                                                        Ventures

Monsanto                                            1                             15                             4                             17                37

AgriBiotech                                         1                             30                             0                              5                 36

Novartis                                                3                             21                             1                              0                 25

AgrEvo/Aventis                                 2                             15                             3                              2                 22

AstraZeneca                                        0                             14                             1                              1                 16

Limagrain                                              0                             15                             0                              1                 16

Empressa La Moderna                       1                             10                             0                             5                 16

Rhone-Poulenc Agro                         3                              6                              2                              2                 13

DuPont                                                 0                              3                              2                              8                 13

DeKalb Genetics                                 0                             11                             0                              0                 11

  Total [added by author]                         11                           140                           13                            41               205

Note. From "Impact of Industry Concentration on Innovation in the US Plant Biotech Industry," by M.F. Brennan, C.E. Pray, and A. Courtmanche, 2000, In Transitions in Agbiotech: Economics of Strategy and Policy, W.H. Lesser (Ed.). Storrs, CT: University of Connecticut. 

 

e) Public Sector

2.14  The final actor in the biotech sector is government, or more properly the public sector at all levels and in many different forms.  These varying forms include: national and regional research councils as well as specialized research institutes; departments and agencies of government (national and regional) including their regulatory activities and direct grants to industry, development of intellectual property laws and regulations protecting new biotech knowledge; publicly funded universities and colleges; and, national systems of innovation (OECD 1997)

2.15  To put the public sector contribution in perspective, in 1997 total Canadian biotech R&D spending amounted to $Cdn 770 million of which the federal government accounted for $314 million (41%) not including R&D in support of regulations while private industry contributed $341 million (44%), and, not-for-profit institutes contributed $115 million (15%) (Industry Canada 1998, p.4).

2.16  Biotech research represented about 10% of the entire federal government research budget in 1997.  Of a total of $Cdn 314 million spent on biotech R&D: the Medical Research Council accounted for $104 million (33%); the National Research Council $90 million (29%); the federal department of Agriculture and Agri-Food $40 million (13%); and, other federal departments and agencies $80 million (25%) (Research & Analysis 2000, p. 14).

2.17  Thus publicly funded research councils and specialized research institutes are very active in supporting ‘pure’ and ‘applied’ biotechnology research.  As noted by Phillips and Khachatourians (2001) about development of genetically modified canola in Canadian agricultural biotech, the National Research Council of Canada played a leadership role in the 1950 to 1985 period.  In February 2000 the Government of Canada announced $160 million in funding to Genome Canada http://www.genomecanada.ca/.  It is a not-for-profit corporation dedicated to developing and implementing a national strategy in genomics research.  The Funding Agreement with the Government of Canada extends to 2004.  At that time, the Government is to decide whether or not to renew the Agreement.  Under its terms, Genome Canada will receive a total of $300 million and is required to obtain an additional $320 million from other sources.  Similarly in the United States, the Nanobiotechnology Center was created in June 2000 with the support of the U.S. National Science Foundation and led by Cornell University on behalf of a consortium of American universities and health institutions http://www.nbtc.cornell.edu/.  The creation of these two institutions is indicative of the rapid growth and dynamic change in public support to biotechnology.

2.18  In addition to support to research councils, government departments and agencies make industrial R&D and other grants to individual biotech companies.  Furthermore, the public sector spends on regulatory activities to ensure, among other things, bio-engineered food and drug safety.  At present data is not available about the total amount of public grants to the private sector nor the cost of biotech regulatory activities in Canada or the U.S. 

2.19  Intellectual property rights, especially patents, serve as the legal foundation for the industrial organization of the biotech sector.  Such rights are established by national governments and are subject to certain restraints through international treaties and conventions.  The development of biotech patents and related intellectual property rights has been crucial to the development of the biotech sector and is the result of public sector decision-making.  More will be said about the role of intellectual properties under Conduct (below).

2.20  The final strand in public support to the biotech sector is the national system of innovation (NSI).  Phillips and Khachatourians (2001), quoting Metcalfe, define a NSI as “that set of distinct institutions which jointly and individually contribute to the development and diffusion of new technology and which provides the framework within which governments form and implement policies to influence the innovation process.  As such it is a system of interconnected institutions to create, store and transfer the knowledge, skills and artifacts which define new technologies.”  Subsequently, the OECD formalized the concept of NIS’s and produced a blue print for its member States (OECD 1997).

2.21  Governments around the world are now consciously designing NSI’s in an effort to enhance their competitiveness (Pagan 1999).  The biotech sector is one of the chief objects of such NSI’s.  However, the role of multinational corporations is generating stresses and strains on the successful operation of NIS’s (Patel and Pavitt 1998). 

 

3.0 Conduct

3.01  Conduct refers to the pattern of behaviour that enterprise follows in adapting or adjusting to an ever changing marketplace.  Conduct depends on the structure of an industry, e.g. the nature and number of buyers and sellers.  With respect to the biotech sector two aspects of conduct will be examined:

(a) the bilateral relationships between the five prime biotech agents described under Structure (above);

(b) the role of intellectual property rights in the conduct of these agents.

a) Bilateral Relations

3.02  Given five prime agents described under Structure (above) there are potentially 15 sets of bilateral relationships (Figure 2). This includes relations between peers, e.g., between universities or between levels of government such as federal-provincial arrangements.  It excludes, however, multilateral relationships between more than three or more agents, e.g., joint projects between universities, newly established biotech firms and the public sector.  At the extreme, such multilateral relations would constitute the biotech section of a national system of innovation that will be examined separately in the next paper in this series: Part III – Performance, Preferred & Probable Futures.

3.03  Five of the fifteen bilateral relations have, to one degree or another, been formally examined in the literature.  Relations between innovators and newly established biotech firms have, at least in part, been examined by Zucker et al (1998) and by Audretsch and Stephan (1999).  Three of the 15 have been examined by Auroa and Gambardella (1990) specifically the relations between universities and large established firms, between newly established biotech firms and large companies, and, between large firms.  Relations between universities and the public sector, in the case of the agrofood sub-sector of biotechnology  have been examined (in part) by Wolf and Zilberman (1998).  No formal studies were found regarding the remaining 10 bilateral relations between the five prime agents of the biotech sector (Exhibit 2).

Figure 2

Biotechnology Bilateral Agent Matrix

AGENT

Innovator

(I)

University

(U)

New Biotech Firm (NBF)

Large Firm

(LF)

Public Sector

(PS)

Innovator

I/I

I/U

I/NBF *

I/LF

I/PS

University

-

U/U

U/NBF

U/LF **

U/PS ***

New Biotech Firm

-

-

NBF/NBF

NBF/LF **

NBF/PS

Large Firm

-

-

-

LF/LF **

LF/PS

Public Sector

-

-

-

-

PS/PS

* Zucker et al (1998); Audretsch and Stephan 1999

** Auroa and Gambardella 1990

*** Wolf and Zilberman 1998

3.03  Zucker et al highlight the role of innovators (or ‘stars’) in the founding of new biotech firms (Zucker et al 1998).  Audretsch and Stephan also focused on the role of academic innovators in founding new biotech firms emphasizing the ‘appropriation’ and commercialization of knowledge developed during an academic career (Audretsch and Stephan 1999). 

3.04  Auroa and Gambardella focused on the complementary strengths of universities, new biotech firms and large established companies.  New biotech firms have ‘lab bench’ knowledge or ‘know-how’ as well as specific new biotech products that are prized by large companies.  On the other hand, the large firms have the knowledge and ability to scale up innovations of the new firms as well as the experience, expertise and resources to push such discoveries through the regulatory and testing processes required by the public sector.  Universities with a focus on basic research are supported by larger firms in order to interact with university scientists, gain familiarity with basic research and, potentially, to have first option on the commercialization of any discoveries.  Four types of external links by the large firms were identified by Auroa and Gambardella: (i) research and/or joint development agreements with other firms (peer-to-peer); (ii) research agreements with universities; (iii) investments in new biotech firms; and, (iv) acquisition of new firms (Auroa and Gambardella 1990). 

3.05  Wolf and Zilberman begin by noting that: “The most important agricultural biotechnology innovations originated in universities, were transferred to start-up companies, and were then absorbed by global corporations (Wolf and Zilberman 1999, p. 37).  They go on to argue that the university and public sector have a crucial role to play in fostering a decentralized and differentiated system of innovation outside the direct control of the large firms in order to maintain the potential for “radical innovation”. 

b) Intellectual Property

3.06  The biotech sector was founded on the creation of new knowledge of both intrinsic and instrumental value.  But how can such new knowledge be converted into economic property that can be bought and sold and protected from theft and/or trespass?  This is a critical question for biotechnology affecting the evolving structure of the sector and the conduct of firms as well as relations between nation states (Kerr et al 1999; Lesser 1998).

i - Economic Evolution of Intellectual Property

3.07  Knowledge is abstract.  It is not like a car or a house which can be locked and secured against theft.  In economic terms, knowledge is non-excludable.  Furthermore, if someone gains knowledge it does not reduce that available to others.  In economic terms, knowledge is non-rivalrous.  Essentially there are two ways of turning knowledge into economic property.  One is secrecy, i.e., hiding it and restricting its availability.  The second is intellectual property law, including copyright, patent, registered industrial design and trademark legislation and international conventions.  As will be seen below, with respect to biotechnology, intellectual property rights provide the legal foundation for the industrial organization of the sector. 

3.08  Secrecy is used to protect two types of knowledge: trade secrets and “know-how”.  Trade secrets such as the formula for Coca-Cola are protected by private means.  In the case of electronic data this includes encryption and “password” technologies.  Know-how refers to knowing how to do things, e.g. how to organize a construction project.  Know-how is held by employees.  Generally it is protected by contract legally binding an employee to secrecy.  When a corporation or government finds its secrets have been betrayed legal recourse is available through the courts. 

3.09  Formal intellectual property rights (IPRs), such as copyrights, patents, registered industrial designs and trademarks, are created by the State as a protection of, and incentive to, creativity which otherwise could be used freely by others.  In economic terms, without legislation knowledge suffers from a free-rider problem.  In return, the State expects creators to make their work available and that a market will be created in which such work can be bought and sold.  But while the State wishes to encourage creativity, it does not want to foster harmful market power.  Accordingly, the State builds in limitations to the rights granted to the creator.  Such limitations embrace both time and space.  Rights are granted for a fixed period of time, and protect only the fixation of creativity in material form.  Eventually, therefore, intellectual property enters what is known as the public domain where it may be used by everyone without charge or limitation.

3.10  A distinction can be made between the four principal types of IPR based on the matrix on which creativity is impressed.  In copyright, expression is fixed in a material matrix that has no utilitarian value, e.g., a book makes a second rate door jam.  Industrial design impresses aesthetic value onto a matrix that is useful in its own right – a decorated coffee cup remains a coffee cup.  A patent impresses utilitarian function on the matrix itself – an electromagnetic door jam is a new type of door jam.  Trademarks embody the ‘identity’ of a company, business or government.  The matrix, like copyright, has no intrinsic value but unlike copyright, a trademark impresses not artistic expression but rather the ‘good will’ earned by a business or government department or agency from citizens, clients, customers and the general public.  Also unlike other forms of intellectual property rights, trademarks are, potentially, capable of being extended without time limit.

3.11  The utilitarian or commercial nature of industrial designs, patents and trademarks place them in a legal category called ‘industrial property’.  The peculiar nature of such property was the subject of the first international intellectual property rights convention, the Paris Convention for the Protection of Industrial Property of March 20, 1883 (Chartrand 2001).  More recent international conventions also formally recognize and protect trade secrets and ‘know-how’, e.g., the Common Industrial Property Regime of the Andean Community and the Agreement on Trade-Related Intellectual Property and TRIPS (Chartrand 2001).  The non-utilitarian nature of copyright, by contrast, is recognized in a separate set of international conventions that began with the Berne Convention for the Protection of Literary and Artistic Works in 1886 (Chartrand 1999).

3.12  Such international conventions, however, cover significant differences in the intellectual property rights granted by individual nation states reflecting their distinct histories and legal systems, e.g., Anglo-American Common Law versus the European Civil Code tradition.  Thus each nation state can create a distinct set of intellectual property rights quite different from other nations.  This ability of nations to ‘tailor’ intellectual property regimes has significant implications for the future competitiveness of nations even under free trade (Paquet 1990).  In fact, until conclusion of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) and creation of the World Trade Organization in 1995, IPRs were not subject to formal international trade regulation or ‘harmonization’.  Rather, they were subject to the milder constraint of ‘national treatment’ imposed by international conventions such as the Berne and Rome Copyright Conventions (Chartrand 1999).  Accordingly, if a nation chooses to limit protection for its creators, then no greater protection is available to foreigners even though foreigners must be treated as if they were nationals. 

3.13  From an economics perspective, intellectual property rights are State-created transaction costs for firms.  In order to obtain access to new knowledge firms must negotiate and pay licensing or other ‘royalties’.  The term ‘royalties’ points to the evolutionary nature of intellectual property particularly, and business law in general.  As noted by John R. Commons in The Legal Foundations of Capitalism (1924) what is business law today in the Anglo-American tradition was once the internal rules and practices of guilds and monopolies created by Crown grants of industrial privilege.  The process came to a head with the 1624 British Statute of Monopolies that abolished the power of the guilds.  This was part of an evolutionary process whereby the Common Law courts progressively stripped the guilds, with one notable exception, of their monopoly powers and assumed responsibility for their regulation.

The next hundred years, until the Act of Settlement in 1700, was substantially the struggle of farmers and business men to become members of the Commonwealth, whereby they might have courts of law willing and able to convert their customary bargains into a common law of property and liberty.  The court which abolished the power of the gilds began to take over the work of the gilds.  Their private jurisdiction became a public jurisdiction.  And the very customs which the gilds endeavored to enforce within their ranks became the customs which the courts enforced for the nation.  The monopoly, the closed shop, and the private jurisdiction were gone, but the economics and ethics remained.  Much later, in the modern commonwealth, other functions of the gilds, such as protection of the quality of the product and the qualifications of practitioners, have also been taken over by courts or legislatures  (Commons 1924: 230).

3.14  The notable exception to the Statute of Monopolies of 1624 was the copyright monopoly maintained by the Stationners’ Company of London.  It took another hundred years for this copyright monopoly to be revoked by the Statute of Queen Anne (the first modern copyright act) in 1710 (Chartrand 2000).  This Act, as well as the patent provisions of the 1624 British Statute of Monopolies, (Scherer 1971, p. 381) served as the basis for Article I, Section 8 of the U.S. Constitution, the so-called ‘Intellectual Property Clause’: 

The Congress shall have Power . . . To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries;

3.15  It was, however, in 18th century British courts cases involving copyright that the legal concept of intangible property including business ‘goodwill’ became firmly established in the Anglo-American tradition.  These decisions also affected evolution of patents and trademarks:

The similar principle has been worked out in the law of patents and trade secrets.  A secret process or invention, not yet given to the public nor patented, remains by operation of common law, the exclusive property of the inventor, and his secret cannot be wrested from him by fraud or communicated to or used by others through breach of confidence.  Yet “whenever the inventor permits the invention to pass beyond the legally defined limits of his exclusive possession, his right to it ceases and the right of all mankind to it begins.”

In other words, the old distinction between the possession of physical property and liberty of contract becomes the distinction between the behavior of those persons who are subject to command and obedience and the behavior of those persons who are subject only to persuasion or coercion.  “Economy” is the exclusive holding for one's own use, according to one's own will, but the thing now held for one's own use is not a physical thing, the manuscript, nor even the printed book, nor the physical objects embodying an invention, but is the behavior of persons over whom the owner retains the power of command and obedience, since they are his employees, agents, friends, who are bound to obey his commands in their use of the manuscript, book, or secret process.  (Commons 1924, pp. 281-2

3.16  Beyond the idiosyncratic legal evolution of intellectual property rights in the Anglo-American tradition, biotechnology presents distinct problems in obtaining intellectual property right protection.  Biotechnological inventions fall into three categories.  They are the processes for creation or modification of a living organism and biological material, the results of such processes, and the use of such results.  Until the last generation, the concept of invention was generally limited to physics and chemistry because living organisms were thought outside the scope of technology, i.e., of direct human manipulation.  However, with the ability to directly manipulate the hereditary characteristic of living things, the concept has been enlarged to cover biotechnological inventions.  It is thus argued that if it is possible to control a biotechnological process and to describe it so that experts in the field can replicate it, then an invention has been made.

3.17  Nonetheless, inventors in the field of biotechnology initially faced specific problems when seeking protection.  These problems did not exist, at least to the same degree, in other areas of technology.  The first is the problem of whether there really is an invention rather than a discovery.  If, for example, a microorganism is isolated by a sophisticated process, it may be argued that it is not an invention but a scientific discovery.  The counter argument is that the isolation requires an important intervention using a highly sophisticated process that results in a solution of a technical problem (WIPO 2001).  In the United States, the issue was resolved with a microorganism created by Chakrabarty that is able to absorb oil pollution from oceans and rivers.  It was the subject of a landmark decision of the Supreme Court of the United States of America that accepted a microorganism was patentable. (Diamond v. Chakrabarty, 447 U.S. 303, 1980)

3.18  The second obstacle, which is more important, is that fact that many countries have express legislative provisions excluding certain categories of biotechnological inventions from patent protection or have yet to legislated rights required to protect them.  Such restrictions and limitations vary significantly between countries thereby complicating the global development of biotechnology and the conduct of biotech firms.  In addition, there appears to be significant confusion and uncertainty about the status of such rights which, in turn complicates the conduct of biotech firms.  To demonstrate the problems, examples will be drawn from Canada, the European Union and the United States followed by a review of international intellectual property conventions of relevance to the biotech sector.

(ii) Canada

3.19  It is commonly believed that genes are not patentable in Canada.  Thus in December 2001 the House of Commons Health Committee recommended against such patents.  However,

“We have been patenting genes for years," said Peter Davies, chairman of the Patent Appeal Board, which is part of Industry Canada.  “It's only a chemical compound.”… He noted that insulin, which is contained in the body of every person, was patented at the time of its discovery by Canadian scientists in 1922 (Bueckert 2002, A5).

3.20  Patenting of single-celled organisms, mainly bacteria or yeast cells, is permitted in Canada.  However, the Government of Canada does not allow patents on higher and more complex life forms, for example, transgenic mice.  In 1985 Harvard University applied for a Canadian patent on such a mouse but the application was turned down by the Commissioner of Patents.  Recently, however, the Federal Court of Appeal in President and Fellows of Harvard College v. Commissioner of Patents (commonly known as “the Harvard mouse case.”) decided in favour of Harvard University.  The Canadian government has appealed the decision to the Supreme Court of Canada.  If this decision is upheld by the Supreme Court of Canada, there will be much broader protection of transgenic organisms in Canada.  In particular, it appears that novel, non-obvious plant and animal varieties created by genetic engineering will be patentable.  Although some protection is currently available for plant varieties under the Plant Breeders’ Rights Act, such a legal development will provide further and better protection for organisms which qualify.  It should be noted, however, that the Plant Breeders' Rights Act c. 20, itself was not passed by Parliament until 1990 and Canada did not ratify the International Convention for the Protection of New Varieties of Plants until 1991 (more below). 

3.21  In the Pioneer Hi-Bred case (1 S.C.R. 1623, affirming [1987] 3 F.C. 8) the Supreme Court of Canada affirmed a Federal Court of Appeal’s decision that a novel soy-bean variety created by cross-breeding was not adequately disclosed by the inventor so as to enable a person skilled in the art to reproduce it based on the knowledge of the art and the information contained within the patent application.  The problem of ‘disclosing’ a biotech patent on plants and microorganisms was resolved with an amendment to the Canadian Patent Act in 1996 permitting the deposit of microorganisms.  In September 1996 Canada also acceded to the Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure (more below).

3.2 The status of ‘human stem cell’ research remains unclear in Canada compared to the United States where it is severely restricted and in Britain where it is legally allowed (BBC March 1, 2002).  Guidelines proposed by Canadian Institutes of Health Research (CIHR) on March 4, 2002 appear to place Canada somewhere between the two.  It should be noted, however, that such guidelines do not have the effect of law.

3.23  A lack of case law as well as formal legislation, e.g., concerning stem cells, leaves biotech business in Canada unclear about their property rights and even the legality of their activities. 

iii - The European Union

3.24  Article 53(b) of the European Patent Convention stipulates that European patents shall not be granted in respect of plant or animal varieties or essentially biological processes for the production of plants or animals (with the exception of microbiological processes and their products). 

3.25  There are two reasons for this approach.  Firstly, it was considered that granting such patents would create legal and administrative difficulties.  Secondly, a special system of protection had been created in various countries with respect to plant varieties, and it was thought that this system should remain the only applicable one with respect to that category of inventions.

3.26  The special system of protection for plant varieties is different from patent protection in that it only concerns the marketing of propagating material (seed, etc.) but not the growing and marketing of plants themselves.  The system of plant varieties rights is also different in respect of the conditions for protection and the protected acts.  The special nature of this system is demonstrated by the fact that an international convention was concluded for the protection of new varieties of plants which is administered by a special organization, namely the International Union for the Protection of New Varieties of Plants (more below).

3.27  The exclusion of plant and animal varieties and essentially biological processes for the production of plants or animals is a feature existing in a number of national laws.  EU countries with important biotechnology industries, however, do not expressly exclude certain types of biotechnological inventions from patenting (WIPO 2001).

3.28  Beyond formal legislation, regulations play an important role in the conduct of biotech firms.  It is, for example, well known that European Union regulatory attitude differs dramatically from those in the U.S.

When it comes to agricultural biotechnology, public policies in the United States (US) and the European Union (EU) have been radically different.  In the US, products of agricultural biotechnology have been extensively tested and marketed.  In the EU, few biotechnology products have received regulatory approval while most have faced a de-facto moratorium.  The tough regulatory stance of the EU towards agricultural biotechnology has typically been justified on the basis of public skepticism towards the technology and heightened concerns about food safety in the wake of the mad cow disease outbreak and other recent food scares. (Kalaitzandonakes 2000)

iv - The United States

3.29  The legal breakthrough facilitating the emergence of the modern American biotech industry was Diamond v. Chakrabarty in 1980 (see paragraph 3.18 above).  Among other things this led to the U.S. Patent Office approving the patentability of Harvard mouse and higher life forms.  However, the first explicit American biotech intellectual property rights were recognized in 1930 with passage of the Patents for Plants Act (35 U.S.C. § 161) which allowed “whoever invents or discovers and asexually reproduces any distinct and new variety of plant, including cultivated sports, mutants, hybrids, and newly found seedlings, other than a tuber propagated plant or a plant found in an uncultivated state, may obtain a patent therefore, subject to the conditions and requirements of this title.”

3.30  This initial act was followed by the Plant Variety Protection Act of 1970 (7 U. S. C. §2321 et seq.) which extended patent-like protection to novel varieties of sexually reproduced plants (plants grown from seed).  In effect, the PVPA extended patent-like protection to novel varieties of sexually reproduced plants (that is, plants grown from seed) which parallels the protection afforded asexually reproduced plant varieties (that is, varieties reproduced by propagation or grafting) under the Patents for Plants Act ( Chapter 15 of the Patent Act. See 35 U. S. C. §§161-164).

3.31  While the U.S., through legislation and case law, has extended biotechnology intellectual property rights further than any national jurisdiction, it too has restrictions and limitations that constrain biotech firms and development of the industry.  Such restrictions tend to centre on the application of biotechnology to human beings, or more precisely to human cells.  Thus for religious and moral reasons rather than scientific ones, the National Science Foundation will not fund any research involving human fetal tissue including stems cells derived from cloning of human cells. 

3.32  Above national intellectual property rights and the refusal to recognize certain rights there is the umbrella of international trade agreements and intellectual property conventions.  Essentially two international institutions are involved: the World Trade Organization and the World Intellectual Property Organization (WIPO).  I will briefly review the origins and mandate of both organization and relevant biotechnology international instruments that they manage.

v – The World Trade Organization (WTO)

3.33  With creation of the World Trade Organization (WTO) in 1995 minimum international standards of intellectual property right protection were established.  All applicant countries for membership in the WTO must sign all WTO agreements as a single package with a single signature - making it, in diplomatic terms, a “single undertaking”.  The “TRIPS Agreement” (Agreement on Trade-Related Aspects of Intellectual Property Rights including Trade in Counterfeit Goods) is part of that single undertaking.  Therefore it applies to all WTO members (as of January 2002, 144 countries were members of the WTO)  http://www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htm.  

3.34  In summary:

In respect of each of the main areas of intellectual property covered by the TRIPS Agreement, the Agreement sets out the minimum standards of protection to be provided by each Member.  Each of the main elements of protection is defined, namely the subject-matter to be protected, the rights to be conferred and permissible exceptions to those rights, and the minimum duration of protection.  The Agreement sets these standards by requiring, first, that the substantive obligations of the main conventions of the WIPO, the Paris Convention for the Protection of Industrial Property (Paris Convention) and the Berne Convention for the Protection of Literary and Artistic Works (Berne Convention) in their most recent versions, must be complied with.  With the exception of the provisions of the Berne Convention on moral rights, all the main substantive provisions of these conventions are incorporated by reference and thus become obligations under the TRIPS Agreement between TRIPS Member countries.  The relevant provisions are to be found in Articles 2.1 and 9.1 of the TRIPS Agreement, which relate, respectively, to the Paris Convention and to the Berne Convention.  Secondly, the TRIPS Agreement adds a substantial number of additional obligations on matters where the pre-existing conventions are silent or were seen as being inadequate.  The TRIPS Agreement is thus sometimes referred to as a Berne and Paris-plus agreement. http://www.wto.org/english/tratop_e/trips_e/intel2_e.htm

3.35  There are three permissible exceptions to the basic TRIP’s rule on patentability with implications for the biotech sector.

… One is for inventions contrary to ordre public or morality; this explicitly includes inventions dangerous to human, animal or plant life or health or seriously prejudicial to the environment.  The use of this exception is subject to the condition that the commercial exploitation of the invention must also be prevented and this prevention must be necessary for the protection of ordre public or morality (Article 27.2).

The second exception is that Members may exclude from patentability diagnostic, therapeutic and surgical methods for the treatment of humans or animals (Article 27.3(a)).

The third is that Members may exclude plants and animals other than micro-organisms and essentially biological processes for the production of plants or animals other than non-biological and microbiological processes.  However, any country excluding plant varieties from patent protection must provide an effective sui generis system of protection.  Moreover, the whole provision is subject to review four years after entry into force of the Agreement (Article 27.3(b)). http://www.wto.org/english/tratop_e/trips_e/intel2_e.htm#generalprovisions

3.36  Unlike its predecessor (the General Agreement on Tariffs & Trade), , the WTO has the power through formal ‘dispute settlement mechanisms’ to enforce its rules and findings of unfair trade practices.  This means that interpretation of treaty provisions is now subject to adjudication and revision unless the WTO chooses to explicitly exempt any given sector.  The WTO, for the first time, regulates international trade in intellectual property through TRIPS.  Previously IPRs were subject only to international IP conventions such as the 1886 Berne Copyright Convention administered by the World Intellectual Property Organization (WIPO).

vi - World Intellectual Property Organization (WIPO)

3.37  The World Intellectual Property Organization (WIPO) is an international organization responsible for promoting the use and protection of intellectual property.  With headquarters in Geneva, Switzerland, WIPO is one of the 16 specialized agencies of the United Nations system of organizations.  It administers 23 international treaties dealing with different aspects of intellectual property protection.  It has 178 member nation states.

3.38  WIPO emerged out of the Paris and Berne Conventions each of which set up an International Bureau to carry out administrative tasks.  In 1893, these two small bureaux united to form the United International Bureaux for the Protection of Intellectual Property (better known by its French acronym BIRPI) headquartered in Berne.  In 1960, BIRPI moved from Berne to Geneva to be closer to the United Nations and other international organizations in that city.  Then with the entry into force of the Convention Establishing the World Intellectual Property Organization (1967), BIRPI became WIPO.

3.39  Of the 23 treaties administered by WIPO two have specific relevance for biotechnology: the International Convention for the Protection of New Varieties of Plant (1961, 1978, 1991) and the Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure (1977, 1980).

3.40  The purpose of the Convention is to ensure that member States acknowledge the achievements of breeders of new plant varieties, by making available to them an exclusive property right, on the basis of a set of uniform and clearly defined principles.  To be eligible for protection, varieties have to be

· distinct from existing, commonly known varieties;

· sufficiently uniform;

· stable; and,

· new in the sense that they must not have been commercialized prior to the date of the application for protection.

3.41  Both the 1978 and 1991 Acts set out minimum protection allowing member States extend protection through national legislation.  The 1978 Act requires that the holder's prior authorization is necessary for commercial production, sale and marketing.  The 1991 Act contains more detailed provisions and, exceptionally, where the holder has had no reasonable opportunity to exercise his right in relation to the propagating material, his authorization may be required in relation to any specified acts done with harvested material.

3.42  Like all intellectual property rights, plant breeders’ rights are granted for a limited period of time, at the end of which protected varieties pass into the public domain.  The rights are also subject to controls, in the public interest, against abuse.  In addition, authorization of the holder of a plant breeder's right is not required for research purposes, including its use in the breeding of further new varieties.

3.43  The Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure (the Budapest Treaty) is a special agreement under the Paris Convention and came into force on August 19, 1980.  Disclosure of an invention is a usual requirement for granting a patent.  Normally, this is done by means of a written description.  With respect to a patent involving a microorganism, or the use of a microorganism, such a description is not sufficient for disclosure.  Accordingly, many countries (including Canada, the European Union and the United States) require not only a written description but also the deposit of a sample with a specialized institution.  Patent offices are not usually equipped to handle microorganisms, whose preservation requires special expertise and equipment to keep them viable, to protect them from contamination and to protect both human health and the environment from contamination. 

3.44  When protection is sought in several countries, the complex and costly procedures of the deposit may need to be done in each country.  The Budapest Treaty is intended to eliminate or reduce such duplication by allowing one deposit with any “international depositary authority” to serve the purpose of all member States.

3.45  An “international depositary authority” is a scientific institution capable of storing microorganisms.  Such an institution acquires status as an “international depositary authority” by the recommendation of a member State and its  assurances to the Director General of WIPO that the institution complies, and will continue to comply, with specific requirements established in Article 6(1) of the treaty.  In particular, the authority will: (i) be available to any “depositor” (person, firm, etc.) under the same conditions; (ii) accepts ands store deposited microorganisms; and, (iii) furnishes samples to anyone entitled to such samples but to no one else. 

3.46  The final segment of this paper: Part III – Performance, Preferred & Probable Futures, the current performance of the biotech sector will be assessed and its future forecast.

 

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Part III

Performance & Prospectus

0.0 Introduction

0.01  In Part I, the groundwork for the Neo Physiocracy was laid with concepts and context defining the biotechnology sector of a global ‘knowledge-based’ economy.  It was established that:

·   biology is one of three elemental natural and engineering sciences including chemistry and physics.  Unlike it sisters, however, biology is engramed with inherent, yet varying, cultural (legal, moral, national and social) constraints on the application of the experimental method to living things and to which ones; 

·   economics is loosely composed of three parts: micro-, macro- and meso-economics.  Once upon a time the dominant school of economic thought was the Physiocrats of pre-Revolutionary France.  For them, ‘economic surplus’ required for economic (as well as cultural) growth flowed primarily from agriculture: one seed, a thousand in return.  They were displaced, literally, by the guillotine and, conceptually, by the ‘manufacturing’ economics of the English Classical School.  At the meso-economic level, the taxonomy of Industrial Organization (IO) was chosen to organize evidence of the microeconomic behaviour of biotech consumers, firms and markets and link such evidence to the macro-, ‘national’ and/or ‘global’ economy; and,

·   epistemology, etymologically, defines ‘science’ by the Latin ‘to split nouns of kind or quality’ from which taxonomoy, in biology and other ‘sciences’ – moral, natural and social, emerged.  Technology, on the other hand derives from the Greek techne for art, and logos for reason, i.e. reasoned art.  Similarly, economics, ecology and ekistics share the same Greek root – oikos-  referring, respectively, to: management of the house; activities taking place in and around the house; and, the science of human settlement.

0.02  In Part II, the basic IO taxonomy was used to organize evidence about the dynamics of the biotechnology sector.  Only selected taxonomic slots of the IO model received evidentiary entries under Basic Conditions, Structure and Conduct.  Evidence needs to be assembled and entry made for all slots to obtain a more robust understanding of the biotechnology sector.  Evidence presented included:

·   the basic conditions of supply and demand including the role of ‘star’ innovators and ‘knowledge-preneurs’ in fuelling a spiraling cycle of technological change and the culturally and nationally varied resistance to biotechnological innovation;

·   the economic institutions (and their agents) – including ‘star’ inventors/innovators, nonprofit (including the traditional university), private and public institutions, price and market systems and ‘national systems of innovation’ - constitute the skeletal structure of the biotechnology sector; and,

·   examined the conduct of economic agents in ‘doing business’ including their reliance on an evolving system of national and global intellectual property rights. 

0.03  Finally, below in Part III, I will:

·   assess the IO performance (the strategic end results of market conduct) of the biotechnology sector with respect to allocative & technical efficiency; conservation, equity progressiveness and the rights, regulations and national systems in which the sector operates;

·   sketch a prospectus of the biotechnology sector using technological forecasting linked to economic concepts of expectations (Keynes 1936) and futurity (Commons 1931, 1950); and,

·   subsequently conclude the argument that what agriculture was to the Physiocracy of the 18th century, biology, especially genetic biology, is to 21st century Neo Physiocracy:.  It is the root (but not only source) of a distinctive form of 21st century economic and epistemological competitiveness and growth in a global knowledge-based economy.  Etymologically, genetic biology and its emerging technologies are the ‘reasoned arts’ of biotechnology (Part I – 0.2(3): Epistemology).

 

1.0 Performance

1.01  IO performance refers to the strategic end results of the conduct of economic agents who act on behalf of institutions forming the skeletal structure of the sector.  This structure, in turn, is rooted in basic supply and demand conditions.  For purposes of this paper, four performance entries will be made about:

a) allocative & technical efficiency

b) conservation of time & equity in law;

c) progressiveness in the cultivation of knowledge, talent and technique; and,

d) rules, regulations, national and global systems

 

a) Allocative & Technical Efficiency

1.02  Allocative and technical efficiency are ‘terms of the trade’ in economics that I interpret as:

i - allocative (or economic) efficiency refers to the idealized outcome of perfect or ‘workable’ competition, specifically: no agent exercises market power; there are zero ‘economic’ profits; all factors of production receive their marginal revenue product; and, consumer & producer surpluses remain intact.  Essentially, allocative efficiency involves the relationship between cost and price;

ii - technical efficiency refers to achieving maximum output for minimum input without regard to ‘economic’ cost.  Ideally, it represents ‘know-how’ or ‘can do’.  Such ‘can do’ efficiency is especially important in military and other critical cultural activities.  Essentially, technical efficiency involves attaining the minimum optimum scale of production – maximum output for minimum input -including vertical integration; and,

iii - while allocative efficiency is always technically efficient, technical efficiency is not necessarily economically efficient.

1.03  Data from Biotechnology Industrial Organization (Part II - Table 1: United States Biotechnology Industry, 1993-2001) and Ernst & Young (2000) indicate that the biotechnology sector has not attained allocative efficiency.  In 2001, the U.S. sector (the most developed in the world) lost nearly $US 6 billion on sales of little more than $US 18 billion.  Canadian data for 1997, however, shows a modest profit (Part II - Table 2: Canadian Key Industry Data by Company Size, 1997).  It is not possible, at this time, to reconcile these differing data sets.  U.S. data is simply accepted as more representative of the global situation.

1.04  How can a sector survive annual profit rates of -33%?  The primary reason is business expectations (Part III2(a): Futurity, Expectations & Technological Forecasting, para. 2.01-2.12, below).  There is, in effect, an economic consensus about the long-run profitability of biotechnology and its importance as an enabling technology.  This consensus is rooted in the “animal spirits” of business expectations (Keynes 1936) that fuels the sometimes rollercoaster ride of equity markets responding to the ebb and flow of “creative destruction” (or innovation) emanating from monopolistic and oligopolistic enterprise, or from government (Schumpeter 1942).  This consensus is evident in the accelerating market capitalization of the sector - a 700% increase between 1995 and 2001 (Part II - Table 1: United States Biotechnology Industry, 1993-2001).

1.05  In essence, Keynes’ economics focused on allocative efficiency and the static charms of neoclassical equilibrium to be achieved by the domestication of entrepreneurial ‘animal spirits’ through the benign macroeconomic management of a democratic, yet gentlemanly, government with a commitment to ‘merit goods’ production including the health, education, culture and welfare of citizens as well as pure and applied R&D.  A policy implication of Keynesian allocative efficiency was anti-trust and anti-combines policies to maintain competitiveness between domestic producers.  Such a ‘macro’ or national policy broke down, however, when the majority of supply was foreign-made.

1.06  Schumpeter, on the other hand, focused on technical efficiency fed by creative destruction or innovation.  He waxed and waned on whether a socialist or a capitalist form of government would best be able to manage to an ‘unconscious’ technological teleology reminiscent of Marx’s technological imperative.  A policy implication of Schumpeterian technical efficiency has been a national innovation policy to foster and promote clusters of domestic producers in global competition for ‘the next big thing’.  This policy may also be breaking down due to the appropriation of domestically producer knowledge by global enterprise ‘partners’(Patel and Pavitt 1998)

1.07  Schumpeter’s faith in a ‘transcendent’ (as well as Keynes’ fixation on animal spirits) parallels his contemporary and fellow Austrian, Fredrik A. von Hayek’s belief in the unconscious “economy of knowledge” of the free market or price system, of which he wrote:

Its misfortune is the double one that it is not the product of human design and that the people guided by it usually do not know why they are made to do what they do.  But those who clamor for “conscious direction” - and who cannot believe that anything which has evolved without design (and even without our understanding it) should solve problems which we should not be able to solve consciously - should remember this: The problem is precisely how to extend the span of our utilization of resources beyond the span of the control of any one mind; and, therefore, how to dispense with the need of conscious control and how to provide inducements which will make the individuals do the desirable things without anyone having to tell them what to do. (von Hayek 1945, 547)

1.08  Global enterprise (Part II - Table 4: World Sales of Top Ten Pesticide and Seed Companies 1997-1999), the structural peak of biotechnology, are few in number.  They constitute an effective ‘oligopoly’ enjoying the Schumpeterian deep pockets necessary to maintain the innovation process and to bear the costs, in time and money, of satiating national and international public sector regulators (see, Part III - Public Infrastructure: Rights, Regulations and National Systems, para. 1.29-1.46,  below).  Such firms also possess ‘the know-how’ or ‘can do’ required to upscale from lab bench to commercial production  In effect, they strive to vertically integrate all stages of the innovation process, i.e., discovery, R&D leading to and receiving feedback from market development and product placement into the utility functions of intermediate and final consumers.  This process (Phillips. and Khachatourians 2001, Figure 2.2) has been expressed as a “chain link model of innovation”.

1.09  At the other end of IO Structure, venture and equity capital is actively nurturing ‘new biotechnology firms’ or NBFs (Part II - 2c New Biotech Firms, para. 2.05-2.10).  In addition, the universities are expanding intellectual and capital investment and, in partnership with government and industry, are spinning off ever more ‘biotech’ research centres and institutes (Part II - 2e Public Sector, para.2.14-2.18) forming the nexus of advanced national innovation systems.

b) Conservation &Equity

1.10  Two ill-defined areas of IO Performance are conservation and equity.  The first generally refers to husbanding non-renewable resources.  The second generally refers to the ‘fairness’ of reward shared by ‘stakeholders’, e.g., management, workers, shareholders, and the public (in social democratic nations usually expressed in an egalitarianism towards the disadvantaged and/or minorities). 

i) Conservation

1.11  Conservation can be defined as the planned management of a natural resource to prevent exploitation, destruction, or neglect, or:  

To paraphrase the popular literature on this matter, conservation in an economic sense of course does not mean non-use or simple deferment of use, but “wise use” of the resources being exploited.  In technical terms, good conservation requires a choice of technique of exploitation, time pattern of production, and time pattern of investments and other costs, which together yield an optimal net social benefit relative to costs over all future time periods in which society is interested.  In determining this optimum, distant future benefits and costs should be appropriately discounted by whatever rate of “time preference” society wishes to assign in assessing the relative importance of current as opposed to future benefits and sacrifices.  And conservation performance is poor to the extent that enterprises deviate from this abstract ideal.(Bain 1968, pp.425-426)

1.12  Assessing biotechnology’s performance with respect to conservation is unique among industries and sectors.  On the one hand, biotechnology embodies ‘renewable (new) resources’ into the distant human future.  On the other hand, biotechnology, according to some, threatens to rend the inherited fabric of Nature (or of God) handed down from Time immemorial. 

1.13  The time preference of human civilization was, until the European Enlightenment of the 18th century, predominantly ‘conservative’ in the sense that it was in the past, not the future, that the Golden Age, the paradise of perfection, lay.  The circle is the image of this perpetual longing for the Origin.  Even Christianity foretells the future through the return of Christ, linking us back to His Origin.  Etymologically, the word ‘religion’ derives from the Latin re-ligio - to link back. 

1.14  With the Scientific Revolution, however, time preference became, at least for the ‘secular’ class, forward looking: the golden age lay in a future of human progress.  The ascending spiral is an appropriate image, returning to the same lateral coordinates but at progressively higher levels.  The pedagogic spiral is an example with its ascending return to the same subject at progressively higher and higher levels of rigour. 

1.15  Assessing biotechnology’s performance with respect to conservation, given this elemental and ongoing clash over time preference – secular progress vs. religious return -, boils down to an assay of value demographics.  While this clash extends beyond questions of Time, there are geopolitical fractures appearing on how far and in what directions biotechnology will be permitted to proceed.  Thus the U.K. has licensed fetal tissue research; the U.S. government does not support it and Canada’s medical community has proposed voluntary guidelines.  In effect, nations and civilizations are choosing their own particular and distinct passage between the value chasm of secular progress and religious return.  By their choices, doorways will either open or close on different avenues of biotech innovation – but not all.  It is a selective process of creating one’s own future remaining rooted in the specific historical values and experience of one’s home nation and civilization (Huntington 1993).

ii) Equity

1.16  In economics there are essentially two forms of equity: horizontal (like treatment of like) and vertical equity (unlike treatment of unlike).  Together with ‘tax burden’, i.e., the accumulated impact of all taxes, horizontal and vertical equity guide thought and action in the economic sub-discipline of Public Finance

1.17 The economic concept of equity, however, is rooted in a more ancient concept of Anglo-American law – equity.  In summary, equity governs the abuse of rights under the law.  

The word equity is also used in jurisprudence in a narrow sense, but still without the technical meaning which it has in English law to-day.  In this sense, it is contrasted with strict law, the ius strictum.  As has been pointed out, time and again, by St. Augustine amongst others, once a rule of law is settled it is the task of a judge to administer it, not to criticise it; for justice demands certainty in the application of the law.  But no system of law can provide rules which will give justice in all circumstances, because all the manifold possible variations of circumstances can never be foreseen.  The essence of a rule of law is that it should be of general application—binding in all cases within its scope.  Yet, however carefully it is framed, circumstances will arise in which it operates harshly and unjustly.  In such cases law can only say: ‘It is a hard case, but the law must, be applied.’  Moreover, formalism, which always tends to accompany the definition of legal rules, becomes the pronounced habit of the professional lawyer.  And men will at times stand too firmly on their legal rights, forgetting the obligations of good conscience and fair dealing.  The machinery of the law itself can be abused and employed for unworthy ends. (Windeyer 1957, 250-251)

1.18  Given that the legal foundation of biotechnology is intellectual property rights granted by the State, use and abuse of such rights by ‘rights holders’ would be a matter of equity under the law.  For example, does the TRIPS agreement allow global biotech firms to abuse the hereditary knowledge of communal farmers in Third World countries or Fourth World peoples living in the Amazon basin?  And if so, what can be done to mitigate the damage?  This is a question of equity.  At the national level, equity can be invoked in the courts and on appeal.  At the global level of the TRIPS agreement, however, there is no right to an independent international court.  Given current international institutional dynamics, e.g., creating an international court for war crimes, it is an open question whether such a tribune emerges sometime in the future.

c) Progressiveness: Knowledge, Talent & Technique

1.19  “Progressiveness” refers to attainment of an evolving set of national socio-economic-political goals and objectives.  Three entries will be made about:

i)   knowledge base;

ii)   talent; and,

iii) technique.

i - Knowledge Base

1.20  In 30 years, biotechnology has pupated from theoretical understanding to applied ‘can-do’ evolution, i.e., it is technically possible to create and express specific genetic traits generation unto generation; traits not necessarily of the same species.  The knowledge base underpinning this ‘technical breakthrough’ is, metaphorically, expanding exponentially (Howard 2000).  There is an economic consensus about its eventual and substantial financial yield.  This consensus is evidenced by massive annual losses while, at the same time, the capitalized or market value of sector soars (Part II -Table 1: United States Biotechnology Industry 1993-2001).  Even the vocabulary of investors is being expanded to allow this knowledge base to be absorbed (Part III - Exhibit 1: Biotech Pharmacological Glossary).  

1.21  The history of this “library of life” is quixotical.  The scientific community, perhaps reeling from self-felt complicity in the last great paradigm shift (the atomic age born in military darkness and revealed to the world as a mushroom cloud), a conference was held in 1975 in Asilomar California to discuss a self-imposed scientific moratorium on further research given the then recent innovation of recombinant DNA (rDNA) (Berg and Singer 1995).  While research did go forward it did so with the conscious approval of the scientific community.  Furthermore, it went forward as the first major paradigm shift in science to take place under the full glare of mature national systems for the regulation and testing of foods and health products and processes.  Current controversy over public (in the public domain) or private (patented) ownership of the human genome highlights the financial and social implications of the book of life.

ii -  Talent

1.22  Biotechnology appears to be at the ‘inventor’s stage’ during which seminal change flows primarily from individual ‘stars’ (Zucker 1998; Audretsch and Stephan 1999).  Such highly innovative talent (sometimes called ‘geeks’), by its very innovative nature, tends to be uncomfortable in highly bureaucratized structures with the sometime exception of the traditional university.  The traditional university was formed by cooperatives of scholars demanding guild rights and self-rule from the Church.  The Crown (the State) encouraged these new ‘secular’ centres of learning as an alternative to the Church’s monopoly of administrative talent

1.23  In another knowledge domain, the arts, creative talent also does not fit well into the technostructure (Galbraith, 1968) except when the organization itself is artistic such as a symphony, dance or theater company or architectural firm (Galbraith, 1973).  In advertising, broadcasting, motion pictures and sound recording where enterprise is large and complex, dissonance between artists and management is usually solved by employing actors, composers, copyrighters, dancers, directors, producers and scriptwriters through smaller subsidiary firms.  The parent company then confines itself to providing advertising, broadcasting, marketing, exhibition and/or production facilities. 

1.24  Concentration in the arts industry is similar to biotech; i.e., a few global firms form an effective oligopoly (Chartrand 2000).  In many ways the university plays a similar ‘day care’ role for creative scientific talent as the arts company does for artistic talent.  In both sectors, large global corporations use intellectual property rights – copyright in the arts sector, patents in biotechnology – to construct their business ‘empires’.  In each sector large enterprise has the Schumpeterian deep pockets to maintain the innovation process and bare the costs of market testing and regulation

1.25  About managing creative talent, or ‘knowledge workers’, Peter Drucker has described it as a clash between “The Gentleman and the Technologist”:

Bribing the knowledge workers on whom these industries depend will therefore simply not work.  The key knowledge workers in these businesses will surely continue to expect to share financially in the fruits of their labor.  But the financial fruits are likely to take much longer to ripen, if they ripen at all.  And then, probably within ten years or so, running a business with (short-term) "shareholder value" as its first -- if not its only -- goal and justification will have become counterproductive.  Increasingly, performance in these new knowledge-based industries will come to depend on running the institution so as to attract, hold, and motivate knowledge workers.  When this can no longer be done by satisfying knowledge workers' greed, as we are now trying to do, it will have to be done by satisfying their values, and by giving them social recognition and social power.  It will have to be done by turning them from subordinates into fellow executives, and from employees, however well paid, into partners. (Drucker 1999)

1.26  Drucker anticipates a repeat of “the English disease’ described in Martin Weiner’s 1981 book: English Culture and the Decline of the Industrial Spirit, 1850 – 1980 (The Economist Apr. 25, 1981).  The founders of the Industrial revolution in Britain were non-conformists who could not attend university.  They learned by doing.  Their sons, however, were admitted and quickly, according to Weiner, sold off their innovative birthright to join an establishment whose motto was: “Gentlemen don’t work with their hands”  English innovation declined as did the competitiveness of the British economy.

iii) Technique

1.27  A significant scientific paradigm shift implies new devices and processes, not just new products.  New devices and processes are, by definition, ‘new’.  They are technically efficient but rarely do they initially achieve allocative efficiency.  Process innovation involves the continuing improvement in devices and processes that cause the paradigm shift. 

1.28  As biotechnology matures process innovation and measuring devices will improve (Riordan 2002).  The costs of biotechnological activity will decline.  It will rise up the technological transfer space spreading wider and farther Part III2(a): Futurity, Expectations & Technological Forecasting, para. 2.01-2.12, below).

d) Public Infrastructure: Rights, Regulation & National Systems

1.29  Biotechnology is the first major scientific ‘paradigm’ shift to take place in full view of the public (Part III - 1(c) i: Knowledge Base, para. 1.21, above).  The last major shift, atomic energy, began as a military ‘black op’.  This new optic of ‘public transparency’ has been provided by a postwar institutional lens of rights granted by, regulations established and monitored by, and, national systems constructed by, the State, to foster and encourage innovation while maintaining public health and safety.  This has had a significant and differential affect on the IO Performance of the biotechnology sector in different countries. 

i) Rights

1.30  The organized research effort – the Manhattan Project - that led to the atomic age proved to government and business that organized scientific research could produce results.  Reliance no longer had to be placed on chance discoveries and the efforts of isolated inventors, as had been the case during the initial industrial revolution (Part III – 1(c) ii: Talent, para. 1.26, above).  The results of such organized efforts, however, is knowledge that is a non-excludable and non-rivalrous good (Part II -3(b) i: Economic Evolution of Intellectual Property Rights).  Accordingly, it cannot be easily bought and sold, e.g., like taking sole possession of an automobile or a house and denying access to others by lock and key.  Once knowledge is ‘known’ it cannot be repossessed.  Thus Justice Yates, in his crucial minority opinion of 1769 on Millar v. Taylor:

… Mr. Justice Yates had very clear and definite notions as to the limits of property, but a reference which he makes to the civil law throws a stronger light on his view of the whole subject than any of his direct reasoning.  What the Institutes have to say relating to "wild animals," he observes, "is very applicable to this case." And he then proceeds to draw a comparison between these two singularly related subjects. Animals ferae naturae are yours "while they continue in your possession, but no longer. " So those wild and volatile objects which we call ideas are yours as long as they are properly kenneled in the mind.  Once unchain or publish them, and they "become incapable of being any longer a subject of property; all mankind are equally entitled to read them; and every reader becomes as fully possessed of all the ideas as the author himself ever was." (Sedgwick 1879)

 

1.31  It is only with creation, by the State, of intellectual property rights that a market in knowledge can, allowing for piracy and infringement, exist.  In creating such rights, the State assumes responsibility for how to encourage innovation by denying, for a limited time, free public access to the knowledge embodied in it.  All such rights, however, require that the knowledge so embodied eventually enter the ‘public domain’. Furthermore, unlike theft of other forms of property, the State tends to leave enforcement to rights holder, i.e., generally action through the civil rather than criminal courts.  Furthermore, questions about how to encourage innovation and what restrictions to impose on the public are answered by individual nation states subject to ‘national treatment’ of foreigners.

1.32  This ability of nations to ‘tailor’ intellectual property regimes has significant implications for the future competitiveness of nations even under free trade (Paquet 1990).  ‘Nips and tucks’ recognized in the U.S. economic literature include trade-offs between breadth or scope and process versus product patents (Lerner 1994; Eswaran and Gallini 1996).  Such issues became relevant to biotechnology, however, only with a U.S. court decision (Diamond v. Chakrabarty, 447 U.S. 303, [1980]) recognizing microorganisms as patentable and the subsequent U.S. Patent Office decision to grant patents to gene sequences.  The rapid evolution and mutation of intellectual property rights, especially patents, reflects, to a great degree, the turbulent process of creative destruction upon which biotech patents are based.  Some have even suggested applying copyright to gene sequences using the medium of music and song (Fountain 2002).

1.33  The knowledge market exists because of a State grant of ‘rights’.  As such, they are subject to equity under the law (Part III – 1(b) i: Equity, para. 1.16-1.18, above).  Fair use and fair dealing provisions of in most IPR legislation provide some equity to users.  There appears, however, to be a judicial tightening in the U.S. that provides precedent around the world.  Most obvious in copyright, the same forces are active with respect to patents, especially biogenetic patents.  Controversy over the roles of the nonprofit (public domain) and profit sectors (patent) in the Human Genome Project is one example of such forces at play. 

1.34  Beyond formal rights under the law and their potential liability under equity, biotechnology is also exposed to product liability and torts.  In effect, product liability falls on the producer and/or supplier of a good and service and virtually any other party connected with the sale and marketing of that product.  Product liability is an extension of contract law.  The biotechnology sector is exposed to and fearful of product liability claims.  Torts, on the other hand, deals with non-contractual damages.  In the Anglo-American Common Law tradition, torts are settled by precedent, sometimes dating back hundreds of years.  Under tort, the biotechnology sector is exposed to non-contractual damages against its products and processes.  This may be one reason why large firms tend to locate their highest product and tort liabilities with smaller and/or newly established biotechnology firm 

ii) Regulations

1.35  Beyond claiming intellectual property rights from the State and being exposed to related legal liabilities, the biotechnology sector is also subject to agricultural, drug, food and health regulations as well as a patent review process created before biotechnology was born.  Both regulatory processes affect the IO Performance of the sector.  In the case of agricultural, drug, food and health regulations biotechnology is considered to use a phrase “guilty until proven innocent”.  This contrast with the “innocent until proven guilty” approach to traditional or natural products.  Extensive product testing is required before any biogenetic product can enter the market and earn a profit (Miller 1994).  In part, this explains current annual losses of the biotechnology sector.  Many products are in the ‘testing pipeline’ and will only emerge on the market in the next several years.

1.36  The patent review process similarly eats up time and resources.  There are statutory requirements to be met; the subject matter must be deemed patentable; the innovation must be shown to be novel and unobvious (Adler 1984).  Again, time and resources are required to go through the process, particularly in a number of different jurisdictions.  Such transaction costs tend to favour large and/or global enterprise.  In the U.S. the life of a patent has been extended in light of the delay between application and award (Steinberg 2000).  Such ‘transaction costs’ affect assessment of the IO Performance of the biotechnology sector.

iii) National Systems

1.37  In a comparative analysis of the constitutions of the United Kingdom, the United States, France, Germany and Austria, three British constitutional lawyers concluded in their title: Government by Moonlight: The Hybrid Parts of the State (Birkinshaw, Harden and Lewis 1990).

1.38  While Lord Keynes is best remembered for his rules governing navigation of the ship of State in the economic ocean, the authors remind us that he also foresaw the growth of semiautonomous bodies associated with the State which, like dolphins swimming ahead, lead the way towards the public good as they understand it.  In this regard, it should be recalled that Keynes was the father of the Arts Council of Great Britain, a postwar institution funded by the State but operating at arm's length from its political direction.

1.39  Written just after Margaret Thatcher left the scene and the Soviet Union had collapsed, the authors argue that contrary to orthodox Thatcherism and its North American variants, the ship of State is not returning to some mythic free market port with a crisply defined coastline separating public policy from a mainland of private self-interest.  Rather, in keeping with Keynes's prescience, semiautonomous bodies have become vessels in a public/private convoy used to 'offload' responsibilities accumulated by the ship of State during the rising tide of the postwar Welfare State.  The course of the ship remains unchanged.

1.40  From the constitution emerging after the English Civil War of the mid-1600s to the republican revolutions of the 18th century, first American and then French, the authors argue there has been a progressive constitutional cooptation of private interest in pursuit of the public good.  The most evolved examples today are Austria and Germany.  Concentrating on the least evolved or formalized, the ‘unwritten’ constitution of the United Kingdom, the authors demonstrate off-loading ranges far and wide - from accounting standards, financial markets, industrial strategy, land-use planning, labour relations, national defense, professional self-regulation and R&D to art, education, health, housing, voluntarism and welfare.

1.41  This restructuring has been necessitated by the inherent complexity of modern life, the limits of rationality resulting from imperfect information and a turbulent policy environment.  This fueled a perestroika as fundamental, if not as apparent, as that which shattered the Soviet Union.  The authors argue that through bargaining, cooptation and threat of legislation, the State has effectively transferred various public responsibilities to a spectrum of public/private institutions.  It has done so to, reduce costs, increase effectiveness and simplify its policy environment.

1.42  The authors use a body of literature concerning ‘corporatism’ to define this restructuring in terms of stable bargaining relationships between associations of private interest like the defense industry and the State.  They point out that corporatism is not necessarily incompatible with, but rather potentially complimentary to, traditional geographic-based constituency democracy.  While the author's suggest 'tripartism', i.e. government, management and labour cooperation is passe, an ironic legacy of Thatcherism may be the re-democratization of the union movement - final realization of Sydney and Beatrice Webbs' dream of industrial democracy.

1.43  But public authority exercised by private interests raises questions of accountability.  There has been, the authors imply, no equivalent glasnost or openness.  Various factors conspire to obscure the exercise of public authority by private interests.  These include free market rhetoric, failure to develop a body of administrative law comparable to that on the Continent or even in the United States and a self-serving conspiracy of silence between the State and recipients of public authority.  Ministerial accountability, while no longer functional, is a powerful incantation in a parliamentary democracy and has similarly blinded citizens to the changing nature of democracy.

1.44  The authors present a range of accountability regimes to make the new public/private partnership transparent to public scrutiny. In this regard, they define ‘constitutional’ in procedural terms as participation by citizens in open and informed debate about the objectives, policies and procedures of public policymaking.  They call not only for freedom of information but also creation of intermediating institutions to process information into forms accessible to the public.

1.45  The nexus of private/public/university research centres and institutes as well as national associations and granting-giving councils, at least within OECD countries, is known as ‘the national system of innovation” (NSI) (Part II - 2e: Public Sector).  The accountability of such ‘national systems’ is generally to ‘stakeholders’ not the public at large.  Furthermore, NSI’s are generally connected to publicly financed “clusters” in ‘high tech’ regional development (another stylish name for a perennial problem).  Such clusters tend to focus on universities and colleges and encourage their partnership with private and public sector agents at the local, regional, national and global levels.  The European Union’s biotechnology system of innovation represents perhaps the meta-case (Senker and van Zwanenberg.2001).  It embodies the phrase: “think globally, act locally”. 

1.46  The success of NIS is still being assessed.  The recent Government of Canada Innovation Strategy has been panned by some critics for failing to get the ‘local’ right (Wolfe 2002).  It is also subject to compromise with respect to the appropriation of locally produced knowledge by ‘the majors’ (Patel and Pavitt 1998).  Furthermore, NIS operate under an evolving definitional umbrella of the WTO, e.g., what constitutes a subsidy?  The inability of WTO rules to resolve the growth hormone and GMO controversy between the European Union and NAFTA demonstrates that biotechnological innovation is source of deep division between even the two largest and most culturally related trading blocs in the world.

 

2. Prospectus

2.01  The future has been a human concern from the beginning of the species – homo sapien sapien (Tudge 1989).  In the best Neoclassical tradition, George Stigler answered questions of the future with the survivor principle: (a) determine categories of firms which actually exhibit an ability to survive; and, (b) then seek the properties which yield this ability.  Other schools of economic thought have held different views, specifically the Keynesian and ‘old’ Institutional Schools of John R. Commons who wrote.

“Early economists began with the past and traced the origins of the present out of the past.  Economists now begin with the future and read it back into the present (Commons 1950, p.108).

2.02  To sketch a prospectus of the biotechnology sector I will link the Keynesian concept of expectations and Common’s concept of futurity with the forms and types of technological forecasting taking place in the OECD countries.

a) Futurity, Expectations & Technological Forecasting

2.03  Expectations is an operative concept in Keynesian (Keynes 1936 – Chapter 12 The State of Long-Term Expectations) and the New Classical School of rational expectations, i.e., decisions taken today are made in anticipation of conditions tomorrow.  Its clearest expression is the investment schedule of a Keynesian firm.  In one column is the expected rate of return on projects and in the other the interest rate measuring the opportunity cost of cash.  According to Keynes, fickle ‘animal spirits’ of investors keep the schedule in constant motion as waves of optimism on the stock market are replaced by their crash on the short-term shores of reality. 

2.04  Futurity was an operative concept of J.R. Commons’ ‘old’ Institutional Economics, i.e. people live tomorrow but act today (Commons 1931, 1950).  In many ways futurity establishes a stronger economic connexion with the future.  According to Commons, economic transactions involve the buying and selling of control over the future actions of economic agents.

Other intangible properties, whose present value depends on their expected exchange value or expected income, are such as patents, good will, trademarks, corporate franchises, various rights “to do business.”  All are “intangible,” because all are cases of futurity.  Even the so-called “corporeal property” - the ownership of a tangible thing, like land or an auto—is also “intangible” because it means a present right to sell or rent the thing in the future for money or its equivalent in exchange, which could not be done if one did not have “the right.”  In all cases the present value depends on expected scarcity, which is economic futurity, and this is property (Commons 1950, pp. 105-106).

2.05  Technological forecasting has become an institution, i.e., a routinized pattern of collective human behaviour.  Every government and large enterprise dedicate resource to seeing ‘over the time horizon’.  Such forecasting establishes the expectations and futurity required by investors and planners.  There four basic categories of forecasting techniques: intuitive, exploratory, normative and feedback (Part III - Exhibit 2: An Inventory of Technological Forecasting Techniques).

2.06  Forecasting generally takes place within what is known as ‘technology transfer space’ (Part III - Exhibit 3: A Technological Transfer Space) which varies between practionners.  Essentially, as a technology matures from an idea or knowledge into a marketed good or service its impact tends to widen, and in an open economy, its effects eventually spill over the lip and into other nations.  In a closed economy, such as the former Soviet Union, its spillover was to be self-contained.

2.07  Intuitive and feedback techniques can be subsumed, as techniques, under the broader rubric of Exploratory and Normative Forecasting.  In essence, exploratory forecasting, using all available forecasting techniques, seeks out ‘probable’ futures for a technology assuming current trends and thinking.  Normative forecasting begins with an ideal future and works back to discover how to realize it (Part III - Exhibit 4: Two Views of Normative & Exploratory Forecasting).

2.08  Ideally the full spectrum of techniques from ranging from highly mathematical to extremely subjective are brought to bear (Part III - Exhibit 5: Integration of Forecasting Techniques).  For purposes of this paper I will briefly review some forecasts of the probable, fictional and preferable futures for biotechnology.

 

b) Futures Probable

2.09  Probable futures are best seen in forecasts of the ‘military-industrial complex.  Two sets of exploratory forecasts are provided.  The first concerns future applications of biotechnology by the U.S. Army, excluding biological weapons.  Exhibit 5 demonstrates the potential applications of biotechnology:

Exhibit 5

Future U.S. Army Applications for Biotechnology

Camouflage & concealment                                 Combat identification

Computing                                                                       Data Fusion

Functional foods                                                       Health monitoring

High-capacity data storage                                 High-resolution imaging

Lightweight armor                                                        Novel materials

Performance enhancement                       Radiation-resistant electronics

Reductions in size and weight                 Sensing battlefield environment

Sensor networks                                                    Soldier therapeutics

Soldier-portable power                                             Target recognition

Vaccines                                                                       Wound healing

COBFAA, Opportunities in Biotechnology for Future Army Applications,

National Academy Press, http://books.nap.edu/books/0309075556/html/index.html,

2001/06/20, p. 9.

Exhibit 6: U.S. Army Biotechnology Development Areas, 2001 demonstrates the biotechnologies required to satisfy proposed applications.

2.10  The ‘telcom’ sector is another knowledge-based one.  It tries to see a future in which it is one of many such knowledge-based sectors.  British Telcom’s affiliate BTexact, has published a timeline for the probable future state of, among others, the biotechnology sector: Exhibit 7: Biotechnology Timelines, 2001-2035.

c) Futures Fictional

2.11  One recognized technique of technological forecasting is science fiction.  The artist may see farther through time than rationalist or technologist.  In order to gain a futures fictional perspective for biotechnology, consider the plots of seven works:

i)        Fredrik Pohls’ 1969 novel: The Age of the Pussyfoot (Pohl 1969)

Plot: life insurance insure life - interest and principle accumulate after one’s death paying for cryogenic freezing until the medical profession says “We can bring him back!”  If they succeed, they get the money and you get life.  If they fail, you go back into the freezer, with interest and principle intact and growing, until again it is heard: “We can bring him back!”;

ii) Andrew Niccol's 1998 film: Gattaca (Niccol 1998)

Plot: As soon as one is born, DNA is analysed and future capabilities are predicted - including risk factors and probable age of death. One is doomed to a life dictated by one's genes.  However, a black market exists for the purchase and use of someone else’s very superior DNA.  Elaborate procedures are required, however, to hide one's own DNA trail through life like laying down false DNA and clinically removing one's own from any location likely to be tested by the DNA police;

iii)       Bruce Sterling’s 1990 short story: “The Swarm” (Sterling 1990)

Plot: the most intelligent species in the galaxy knows that intelligence is dangerous so genetically turns it off (genetically represses the trait) until threatened by another intelligent species;

iv) John Carpenter’s motion picture, The Thing (Carperpenter 1982)

Plot: the most successful species in the galaxy ‘snaps on’ the DNA of every species with which it comes into contact insuring its survive in any environment by morphing into the appropriate form;

v) J. Michael Straczynski’s television series Babylon 5, (Straczynski 1993-1998)

Plot: the most ancient and intelligent species in the galaxy use quasi-sentient self-healing biotechnical devices and vessels;

vi) Ridley Scott’s motion picture Blade Runner (Scott 1982)

Plot: dangerous jobs including military positions are filled by specially cloned and genetically modified human beings known as ‘Replicants’ who have false life memories, short lives and a dangerous desire to survive; and,

vii) Patrick Lau and Richard Laxton’s British television min-series Invasion Earth (Lau and Laxton 1998)

Plot: the most intelligent species in the galaxy genetically modifies and ‘farms’ all other life forms across trans-dimensional space.

 

d) Futures Preferable

2.12      Preferred futures assume a moral consensus about the future, in general, and about biotechnology in particular.  The Europeans accept biotech drugs and medical procedures but not GM food.  The U.S., relatively speaking, accepts GM food but not certain biotech drugs and medical procedures, e.g., fetal stem cell research.  As has been demonstrated (Part III – 1(d) i: Conservation, para 1.11-1.15) the future itself is a matter of significant trans-national and trans-cultural differences.  In fact to forecast biotechnological innovation one must forecast the future values of differing cultures.  Whose future is it, anyway!

 

Conclusions: Part IV - The "Reasoned Arts" of Biotechnology, for the final Apr 24, 2002

 

4.0 List of Exhibits

Exhibit 1: Biotech Pharmacological Glossary

Source: derived from Martin, C. J., Biotech Pharmacological Glossary, Biotech Trends, Btech Investors, http://www.btechnews.com/sample_reports/BiotechTrends.pdf, Beverly Hills, CA, 2001/10/11, pp. 19-22.

Exhibit 2: An Inventory of Technological Forecasting Techniques

Source: derived from Jantsch, E., Technological Forecasting in Perspective, OECD, Paris 1967, p.6

Exhibit 3: Technological Transfer Space

Source: derived from Jantsch, E., Technological Forecasting in Perspective, OECD, Paris 1967, pp. 24-25.

Exhibit 4: Two Views of Normative & Exploratory Forecasting

Source: derived from Jantsch, E., Technological Forecasting in Perspective, OECD, Paris 1967, p. 113.

Exhibit 5: Integration of Forecasting Techniques

Source: derived from Jantsch, E., Technological Forecasting in Perspective, OECD, Paris 1967, pp. 30-31.

Exhibit 6: Future U.S. Army Applications for Biotechnology

Source: derived from COBFAA, Opportunities in Biotechnology for Future Army Applications, National Academy Press, http://books.nap.edu/books/0309075556/html/index.html, 2001/06/20, p. 9.

Exhibit 7: U.S. Army Biotechnology Development Areas, 2001

Source: derived from COBFAA, Opportunities in Biotechnology for Future Army Applications, National Academy Press, http://books.nap.edu/books/0309075556/html/index.html, 2001/06/20, p. 5.

Exhibit 8: Biotechnology Timelines, 2001-2035

Source: derived from Pearson, I. and Neild I., Technology Timelines, BTexact Technologies, Adastral Park, Martlesham, http://www.btexact.com/white_papers/downloads/WP106.pdf, UK, 2002.

 

5.0 References

Adler, R. G., Biotechnology as an Intellectual Property, Science, 224 4647, 1984/04/27, 357-363.

Audretsch, D. B and Stephan P. E., “Knowledge spillovers in biotechnology: sources and incentives”, Journal of Evolutionary Economics, 1999, 9 97-107.

Berg, P. and Singer M. F., The Recombinant DNA Controversy: Twenty Years Later, Proceedings of the National Academy of the United States of America, 92 20, 1995/09/26, 9011-9013.

Birkinshaw, P. et al, Government by Moonlight: the hybrid parts of the state, Unwin Hyman, London, United Kingdom, 1990.

Carpenter, J., The Thing starring Kurt Russell, Wilford Brimley, T.K. Carter, Keith David, Richard Dysart, Richard Masur, and Donald Moffat, Universal Studios, 1982.

Chartrand, H.H., "Towards an American Arts Industry" in The Public Life of the Arts in America, Joni Cherbo and M. Wyszomirski (eds), Rutgers University Press, April 2000.

COBFAA,Opportunities in Biotechnology for Future Army Applications, National Academy Press, http://books.nap.edu/books/0309075556/html/index.html, 2001/06/20.

Commons, J.R., The Economics of Collective Action – Chapter VIII: Futurity, University of Wisconsin Press, Madison, 1950.

Drucker, P., Beyond the Information Revolution, Atlantic Monthly, http://www.theatlantic.com/issues/99oct/9910drucker.htm, 1999/10, pp. 47-57.

The Economist, "Green and pleasant land", The Economist, April 25, 1981, p. 111. Book Review: English Culture and the Decline of the Industrial Spirit, 1850 – 1980 by Martin J. Wiener. CUP, New York, 1981.

Ernst & Young, The Economic Contributions of the Biotechnology Industry to the U.S. Economy, http://www.bio.org/news/ernstyoung.pdf, 2000/05.

Eswaran, M. and Gallini N., Patent Policy and the Direction of Technological Change, RAND Journal of Economics, 27 4, 1996/Winter, 722-746.

Fountain, H., DNA Ditties: Song of Myself, New York Times, March 31, 2002.

Galbraith, J.K., "The Artist and the Economist: Why the Twain must Meet", The Times Higher Education Supplement, February 18, 1983.

Galbraith, J.K., Economics and the Public Purpose, New American Library, Toronto, 1973.

Howard, K., The Bioinformatics Gold Rush, Scientific American, http://www.sciam.com/2000/0700issue/0700howard.html#link1, 2000/07.

Jantsch, E., Technological Forecasting in Perspective, OECD, Paris 1967.

Jantsch, E., Design for Evolution, Braziller, NYC, 1975.

Keynes, J.M., The General Theory of Employment, Interest and Money - Chapter 12 The State of Long-Term Expectations, pp. 147-164, Macmillan, London, 1967, © 1936.

Lau, P. and Laxton, R., Invasion Earth, starring Vincent Regan, Maggie O'Neill, Fred Ward, written by Jed Mercurio, BBC Sci Fi Channel, 1990.

Lerner, J., The Importance of Patent Scope: An Empirical Analysis, Rand Journal of Economics, 25 2, 1994/Summer, 319-333.

Maddox, J., The Unexpected Science to Come..., Scientific American, http://www.sciam.com/1999/1299issue/1299maddox.html, 1999/12.

Martin, C. J., Biotech Pharmacological Glossary, Biotech Trends, Btech Investors, http://www.btechnews.com/sample_reports/BiotechTrends.pdf, Beverly Hills, CA, 2001/10/11, pp. 19-22.

Miller, H. I., A Need to Reinvent Biotechnology Regulation at the EPA, Science, 266 5192, 1994/12/16, 1815-1818.

Andrew Niccol, A., Director and Screenwriter, Gattaca, starring: Ethan Hawke, Jude Law, Uma Thurman, Gore Vidal Columbia Tristar, 1998.

Paquet, G., “Science and Technology Policy Under Free Trade”, Technology in Society, Vol. II, Pergammon Press, 1990, pp. 221-234.

Patel, P. and Pavitt. K., National Systems of Innovation Under Strain: The Internationalisation of Corporate R&D, Science Policy Research Unit, University of Sussex, May 1998.

Phillips, P. and Khachatourians, G.G., The Biotechnology Revolution in Global Agriculture: Invention, Innovation and Investment in the Canola Sector, CABI Publishing, 2001.

Pohl, F., The Age of the Pussyfoot, Ballantine Books, NYC, 1969.

Riordan, T., A Patent for Gene Sequencing, New York Times, 2002/03/18

Scott, R., Blade Runner, starring Harrison Ford, Rutger Hauer, Sean Young, Edward James Olmos, M. Emmet Walsh, Daryl Hannah, written by Philip K. Dick, Hampton Fancher, David Webb Peoples, Roland Kibbee, Columbia Tri-Star, 1982

Sedgwick, A., “International Copyright by Judicial Decision”, The Atlantic Monthly, Volume 43, No. 256, 217-230, February 1879.

Senker, J. and van Zwanenberg P., European Biotechnology Innovation Systems: Final Report, SPRU, University of Sussex, http://www.sussex.ac.uk/spru/biotechnology/ebis/ebisfinalreport.pdf, 2001/10.

Sterling, B., “The Swarm” in Crystal Express, Ace Books, Dec. 1990.

Steinberg, D., Biotech Faces Evolving Patent System, The Scientist, 14 5, 2000/03/06, 8.

Straczynski, J.M., Creator, Writer and Producer, Babylon 5, Warner Bros., 1993-1998.

Tudge, C., The Rise and Fall of Homo sapiens sapiens, Philosophical Transactions of the Royal Society of London, 325 1228, 1989/11/06, 479-488.

Wolfe, D., Give R&D a place to grow, Globe & Mail, Mar. 18, 2002, A13.

Zucker, L. G. et al, “Intellectual Capital and the Birth of U.S. Biotechnology Enterprises”, American Economic Review, March 1998, 88 (1), 290-306.

 

Part IV

Conclusions

Some Artful Reasoning about Biotechnology

0.0 Introduction

0.01  In this concluding paper I sum up findings of Parts I, II & III (Exhibit 1).  I also sketch out a Neo Physiocratic Policy Paradigm (Exhibit 2) and end with a statement of why both the findings and policy paradigm can be but ‘artful reasoning’ about biotechnology in an emerging global knowledge-based economy.

 

1.0 Findings: IO Entries

1.01  In Part I, the groundwork was laid with concepts and context defining the biotechnology sector of a global ‘knowledge-based’ economy.  It was established that:

(a)    biology is one of three elemental natural and engineering sciences including chemistry and physics.  Unlike it sisters, however, biology is engramed with inherent, yet varying, cultural (legal, moral, national and social) constraints on application of the experimental method; 

(b)    economics is loosely composed of three parts: micro-, macro- and meso-economics.  Once upon a time the dominant school of economic thought was the Physiocrats of pre-Revolutionary France.  For them, ‘economic surplus’ required for economic (as well as cultural) growth flowed primarily from agriculture: one seed, a thousand in return.  They were displaced, literally, by the guillotine and, conceptually, by the ‘manufacturing’ economics of the English Classical School.  At the meso-economic level, the taxonomy of Industrial Organization (IO) was chosen to organize evidence of the microeconomic behaviour of biotech consumers, firms and markets and link such evidence to the macro-, ‘national’ and/or ‘global’ economy; and,

(c)    epistemology, etymologically, defines ‘science’ by the Latin ‘to split nouns of kind or quality’ from which taxonomy, in biology and other ‘sciences’ – moral, natural and social, emerged.  Technology, on the other hand derives from the Greek techne for art, and logos for reason, i.e. reasoned art.  Similarly, economics, ecology and ekistics share the same Greek root – oikos-  referring, respectively, to: management of the house; activities taking place in and around the house; and, human settlement.

1.02  In Part II, the basic IO taxonomy was used to organize evidence about the industrial dynamics of the biotechnology sector.  Only selected taxonomic slots of the IO model received evidentiary entries under Basic Conditions, Structure and Conduct (Exhibit 1, below).  Evidence needs to be assembled and entry made for all slots to obtain a robust understanding of the biotechnology sector.  Evidence presented included:

·   the basic conditions of supply and demand including the role of ‘star’ innovators and ‘knowledge-preneurs’ in fuelling a spiraling cycle of technological change and the culturally and nationally varied resistance to biotechnological innovation ;

·   the economic institutions (and their agents) – including ‘star’ inventors/innovators, nonprofit (including the traditional university), private and public institutions, price and market systems and ‘national systems of innovation’ - constitute the skeletal structure of the biotechnology sector; and,

·   examined the conduct of economic agents in ‘doing business’ including their reliance on an evolving system of national and global intellectual property rights. 

1.03      In Part III, the IO taxonomy was completed with assessment of Performance (Exhibit 1, below).  In addition a prospectus for the biotech sector was sketched.  Evidence presented with respect to Performance included:

·   Allocative & Technical Efficiency: Allocative or economic efficiency has not been achieved.  The sector, as a whole, is experiencing significant annual losses while market capitalization soars (Part II - Table 1: United States Biotechnology Industry, 1993-2001).  This apparently contradictory situation reflects an economic consensus about the technical efficiency of the sector (‘can-do’ efficiency) combined with the expectation of large future profits (Part III – 1.0 Performance (a) Allocative & Technical Efficiency, para. 103-104).  In addition to growing equity capitalization of the sector, losses are also covered by the Schumpeterian deep pockets of large firms that tend to vertically integrate the innovation process – formally through acquisitions and informally through ‘partnerships’;

·    Conservation: assessing biotechnology’s performance with respect to conservation is unique.  On the one hand, biotechnology embodies ‘renewable (new) resources’ into the distant human future.  On the other hand, biotechnology, according to some, threatens to rend the inherited fabric of Nature (or of God) handed down from Time immemorial.  Resolution of this clash over “time preferences” (Bain 1968, pp.425-426) – essentially secular progress vs. religious return - boils down to an assay of value demographics;

·   Equity usually refers to the ‘fairness’ of reward shared by ‘stakeholders’, e.g., management, workers, shareholders, and the public.  Equity also has meaning in law, specifically, it governs the abuse of rights under the law.  Given that the legal foundation of biotechnology is intellectual property rights granted by the State, use and abuse of such rights by ‘rights holders’ are a matter of equity under the law.  ;

·   Progressiveness of the biotech sector was reviewed assessed with respect to the knowledge base, talent and technique. 

·   With respect to the knowledge-base, it is, metaphorically, expanding exponentially (Howard 2000).  There is an economic consensus about its eventual and substantial financial yield. 

·   With respect to talent, like all ‘knowledge sectors’, biotechnology is evolving institutional patterns to accommodate highly innovative talent that, by its nature, tends to be uncomfortable in highly bureaucratized structures with the sometime exception of the traditional university.  A parallel was drawn between the arts industry and biotechnology.  In both sectors, large global corporations use intellectual property rights – copyright in the arts sector, patents in biotechnology – to construct business ‘empires’.  In each, large enterprise has the Schumpeterian deep pockets to maintain the innovation process and bare the costs of market testing and regulation.  Both tend to solve the problem of creative talent by employing them in smaller subsidiary or affiliate firms with corporate office responsible for strategic development, ‘mass’ production and marketing. 

·   With respect to technique, as part of a fundamental scientific revolution, the initial tools and techniques of biotechnology are ‘first generation’.  They are technically efficient but do not usually achieve immediate allocative efficiency.  Process innovation is occurring leading to rapid and continuing improvement of the very devices and processes that caused the initial paradigm shift.

·   Public Infrastructure: Biotechnology is the first major scientific ‘paradigm’ shift to take place in full public view.  This new optic of ‘public transparency’ has been provided by a postwar institutional lens of rights granted by, regulations established and monitored by, and, national ‘innovation’ systems constructed by, the State, to foster and encourage innovation while maintaining public health and safety.  This has had a significant and differential affect on the IO Performance of the biotechnology sector in different countries.

1.04      Entries made to the IO taxonomy in Parts II and III are indicated in Exhibit 1, below:

 

Exhibit 1

A Preliminary IO Profile of the Biotechnology Sector 

BASIC CONDITIONS

Supply

Knowledge Workers

New Knowledge

Public Infrastructure

 Demand

Cultural Resistance

Enabling Technology

Intermediate Demand

STRUCTURE

Large Firms

National Systems of Innovation

Newly Established Biotech Firms

Public Sector

‘Star’ Innovators

Universities, Institutes & Research Centres

CONDUCT

Bilateral Relations

Intellectual Property Rights

PERFORMANCE

Allocative &

Technical Efficiency

Conservation

Equity

Progressiveness

Public Infrastructure

1.06  In the Prospectus, economic concepts of expectations and futurity were examined to explain why the biotechnology sector, as a whole, is experiencing significant annual losses while market capitalization soars.  In short, one’s vision of the future affects one’s actions today.  Visions of the future concerning technology are generated using a range of technological forecasting and assessment techniques that breakout into two major categories: exploratory forecasting of existing trends and normative forecasting of preferred futures and how to get there.  Available forecasts suggest a continuing flow of significant new biotechnologies, products and processes well into the middle of the century.

 

2.0 The Physiocratic Policy Paradigm

2.01  In the natural and engineering sciences (NES) new knowledge displaces old, e.g., colour TV replaces black and white.  In the humanities and social sciences (HSS), however, as well as in the arts, what is old often becomes ‘new’ again having been conserved in the ‘cultural canon’.  Thus Aristotle and Plato are still taught, Bach is still played and King Tut still amazes.  Economics, as part of HSS, is not just about ever increasing precision of mathematical formulae; it is also about retracing the numerous voyages made by economists over some three centuries of discovery.  In many cases captains and crews never returned marooned in intellectual cul de sac.  Sometimes, however, their voyages are retraced and the discoveries of early explorers are then, sometimes, added to mainstream thought: witness ‘New’ Classical Economics, ‘New’ Institutionalism and the revivification of Schumpeterian ‘creative destruction’. 

2.02  Not only economic thought is changed as the mainstream evolves, economic policy is affected involving, as it does, implementation by nonprofit, profit and public institutions with the expenditure of vast sums of monies and person-years of effort.  Such reconstruction will, I believe, be the fate of Physiocracy in the emerging global knowledge-based economy:

The Physiocrats  were a group of French Enlightenment thinkers of the 1760s that surrounded the French court physician, François Quesnay.  The founding document of Physiocratic doctrine was Quesnay's Tableau Économique (1759).  The inner circle included the Marquis de Mirabeau, Mercier de la Rivière, Dupont de Nemours, La Trosne, the Abbé Baudeau and a handful of others.  To contemporaries, they were known simply as the économistes.

History of Economic Thought Website

Department of Economics, New School University

http://cepa.newschool.edu/het/schools/physioc.htm

2.03  The term “Physiocracy” itself (introduced by Dupont de Nemours in 1767) literally translates to “the rule of nature”.  For the Physiocrats, the ‘surplus’ required for economic (as well as cultural) growth flowed primarily from the land, i.e., agriculture: one seed, a thousand in return.  They were displaced, some of them literally by Madame La Guillotine and all, conceptually by the ‘manufacturing’ economics of the English Classical School founded with Adam Smith’s Wealth of Nations (1776).  Beyond a focus on agriculture, the Physiocrats are also remembered for two French phases incorporated into mainstream economics: laissez faire and laissez passer. 

2.04  Given the feudal nature of France during their time, the Physiocrats called for the removal of restrictions on internal trade (laissez faire) and labor migration (laissez passer), the abolition of compulsory labour or corvée, the removal of state-sponsored monopolies and trading privileges as well as the dismantling of the guild system.  In England, the Statute of Artificers continued regulating training and employment in the craft guild tradition until 1814 when, responding to Classical Economists, Parliament abolished the statute (Savage 1985, 94-97). 

2.05  Unlike Smith, Marx, and Keynes, the Physiocrats had but one short-lived opportunity to implement the policy implications of their theory.  Thus Anne Robert Jacques Turgot served as Contrôleur général of France between 1774 and 1776.  While not formally a member of the économistes, Turgot engaged “in a heroic but ill-fated attempt to sweep away statist restrictions on the market economy in a virtual revolution from above.” (Rothbard 2002)  He was fired.  In little more than a decade the so-called Ancien Regime was swept away in revolution.  The Physiocrats became little more than a footnote in economic history trotted out, time to time, in support of free enterprise, limited government and the sanctity of private property.

2.06  Behind the Gallic façade of laissez faire, laissez passer and a focus on agriculture, there lays, however, deeper policy implications to Physiocracy.  First, unlike the Classical Economists, the Physiocrats accepted government as an active and productive agent in the economy:

The Physiocrats would have influenced the allocation of resources directly, as they deemed necessary; and, moreover, pervasively, by controlling the particular institutional environment within which resource allocation takes place, to wit, so as to direct resources to agriculture - neither of which is Smithian.  The free market of Smith was relatively spontaneous, autonomous and viable; that of the Physiocrats would not be the opposite but it would be a manipulated economy.  To Smith, government had positive tasks but was to be relatively passive insofar as resource allocation and economic development were concerned; to the Physiocrats, government was to supervise actively the performance of the economy (thus antedating contemporary programs of economic development). (Samuels 1962, 159)

Second, the nature of public intervention was to be radically different from Marxian ‘ownership of the means of production’ or Keynesian macroeconomic management of aggregate demand.  Accepting that private property and self-interest were the drivers of economic growth and development, the Physiocrats planned to reach beneath the surface of the laissez faire, laissez passer marketplace.  They would reach down to the legal foundation of capitalism (Commons 1924) and manipulate the nature of property rights themselves:

The Physiocratic theory of economic policy is fundamentally related to a theory of property: state relations in which private property is the dominant institutional form but wherein the public interest is manifest in the continuing modification or reconstitution of the bundle of rights that comprise private property at any given time. (Samuels 1962, 161)

Thus Physiocrats intended to ‘load the dice’ of the marketplace to raise the ‘commanding heights’ of the economy or build up its strategic sector – agriculture.  They intended the conscious manipulation of capitalist self-interest –accumulation of marketable property - to foster and promote the economic growth and development of France - their Royaume Agricole.

Finally, the Physiocrats did not just view property rights as instruments of economic policy, they also viewed the entire foundation of the economy – what is bought and sold, how and where – as essentially legal in nature and subject to public policy control and manipulation to further the public good:

Thus did the Physiocrats implicitly recognize that the basic economic institutions (the organization of economy) are legal in character; that law is an instrument for the attainment of economic objectives and that economy is an object of legal control. (Samuels 1962, 162)

In summary, the Physiocratic policy paradigm (Exhibit 2) consisted of:

(a) an objective – the economic and cultural growth of the nation, absolutely and relative to its rivals;

(b) strategic choice, and focused support, of a ‘core’ sector whose health and development contributes most in attaining national objectives;

(c) creation of tactical ‘instruments’– property rights and manipulation of the legal structure and form of institutions – to direct individual and collective behaviour towards development of core capabilities; and,

(d) logistical ‘deployment’ of core enhancing instruments into a free wheeling, private property, laissez faire, laissez passer marketplace.

 

Exhibit 2

The Neo Physiocratic Policy Paradigm

3. The Neo Physiocratic Policy Paradigm

3.01  It should be noticed that in Exhibit 2, no country is named and no core specified.  If, however, one were to replace ‘France 1776’ with ‘Canada 2002’ and ‘agriculture’ with ‘knowledge-based economy’, the paradigm seems to fit the facts.

3.02  The stated Canadian objective is national ‘competitiveness’. The ‘knowledge-based economy’ has been chosen as the strategic ‘core’ sector because of its national income enriching potential through innovation of new knowledge – commercial and cultural.  Tactical instruments have been, and are being, created through the manipulation of intellectual property rights (Exhibit 3) and creation (and endowment) of an institutional network constituting, de facto and de juro, a national innovation system.  And finally, these core enhancing instruments have been deployed into a free wheeling, private property, laissez faire, laissez passer marketplace overseen by the WTO (that, in turn, is engaged in manipulating ‘global’ property rights and institutional structures).

3.03  There are at least two ‘legal’ reasons why this apparent coincidence of old and new should take place in Canada.  First, like the temperamental homeland of the original Physiocrats, Canada is a constitutional monarchy in which, ‘not withstanding’ the Charter of Rights and Freedom, all persons and property are subjects of Her Majesty.  This is why there is no guarantee of private property within the Charter.  Second, Canada is not only bilingual and bicultural, it is also bi-juridic.  Concepts and principles of both Anglo-American Common Law and French Civil Code are current in Canada.  With respect to intellectual property rights the currency of the Civil Code tradition has had a palpable effect, at least with respect to copyright.  Thus Canada’s Copyright Act (Sections 14.1 and 14.2: Chartrand 1997) includes ‘moral rights’ (a Civil Code tradition) for creators relative to the American Copyright Act that contains no such provisions (Chartrand 2000). 

3.04  In conclusion, early 21st century Canadian national economic policy appears to be a variation on a Physiocratic theme.  The past is present in the future.

 

4.0  END 

4.01  This final paper in the series is sub-titled ‘Some Artful Reasoning about Biotech”.  It is appropriate for two reasons.  First, as noted above (Findings, para. 1.01c), the word ‘technology’ derives from the Greek techne meaning art and logos meaning reason, i.e. reasoned art.  An alternative wording, however, would be “artful reasoning”.  The policy or ‘technology’ of economics involves much artful reasoning.

4.02  Second, the economics of biotechnology, at present, amounts to little more than artful reasoning for a number of reasons: 

  • as the scion of a fundamental scientific paradigm shift, the biotech sector is just beginning.  It has no baseline like automobiles, retailing or even computers (there is no ‘Moore’s Law” regarding biotechnology) to fully assess present or project future performance; 

  • unlike previous paradigm shifts, biotechnology is unfolding in the full glare of public scrutiny.  Its development is subject to an evolving set of public licensing, patenting and regulatory controls never experienced during any previous technological revolution.  These controls, and especially their cultural and political elasticity, means the economics of biotechnology must engage not just production cost and price, but also cultural, moral and religious values that vary dramatically between countries and cultures; and,

  • finally, economics, as a discipline, must re-tool.  It confronts, among other things, an industry displaying an almost ‘right-angled’ average cost curve, i.e., creation of the first in the line of a new ‘organism’ is expensive but all subsequent units have a relatively, if not absolutely, low cost.  Thus if biotechnology succeeds in cloning a goat to lactate spider silk (Noble 2002), the cost of the first ‘breeder’ will be high but subsequent units will cost little more than the price of hay.  Accordingly, my findings and conclusions remain but ‘artful reasoning’ about biotechnology.

References 

Chartrand, H.H., The Compleat Canadian Copyright Act, 1921 to 1997: Current, Past and Proposed Provisions of the Act plus Annual Updates to 2000, ISBN 0-9689523-1-3, Compiler Press, Saskatoon, October 31, 1997.

Chartrand, H.H., “Copyright C.P.U. - Creators, Proprietors & Users”, Journal of Arts Management, Law & Society, Vol. 30, No. 3, Fall 2000.

Commons, John R., The Legal Foundations of Capitalism - Chapter VII: The Price Bargain, © 1924, Macmillan, NYC, 1939.

Department of Economics, New School University, History of Economic Thought Website,  http://cepa.newschool.edu/het/schools/physioc.htm

Noble, I., “Spider scientists spin tough yarn”, BBC News, January 17, 2002.

Rothbard, M., N., Biography of A.R.J. TURGOT (1727-1781) ,  Ludwig von Mises Institute, http://www.mises.org/turgot.asp

Samuels,W.J., "The Physiocratic Theory of Property and State", Quarterly Journal of Economics, 75(1), Feb. 1961, pp. 96-111.

Samuels, W.J., "The Physiocratic Theory of Economic Policy", Quarterly Journal of Economics, 76(1), Feb. 1962, pp. 145-162.

Savage, L. (1985). The history of art education and social history: Text and context in a British case of art school history. In B. Wilson & H. Hoffa (Eds.), The history of art education: Proceedings from the Penn State Conference. University Park: Pennsylvania State University.

 

Addendum

The Economics of Biotechnology & Intellectual Property Rights

Ultimately the biotechnology sector rests on the legal foundation of intellectual property rights (IPRs).  It is ‘fueled’ by new knowledge generated, for example, by biotech ‘star’ innovators (Zucker et al 1998) that then becomes economic property through the agency of IPRs and thereby provides the legal foundation for the industrial organization of the sector.

 

Economics Helps

Economics illuminates the matter by recognizing that IPRs ‘commodify’ knowledge allowing it to be bought and sold in spite of its nature as a non-rivalrous and non-exclusionary good.   Such rights are created by the State as a protection of, and incentive to, creativity which otherwise could be used freely by others.  In economic terms, without legislation, knowledge suffers the free-rider problem.  In return, the State expects creators to make their work available and that a market will be created in which such work can be bought and sold.  But while the State wishes to encourage creativity, it does not want to foster harmful market or ‘monopoly’ power.  Accordingly, the State builds in limitations embracing both time and space.  Rights are granted for a fixed period of time, and protect only the fixation of creativity in material form.  Eventually, therefore, intellectual property enters the public domain where it may be used by everyone without charge or limitation.

 

Economics Fails

Currently, economics does not provide an adequate or holistic explanation of the complex nature, formulation, optimal application and exchange of IPRs.  Partially this reflects that, as with microeconomic data (Part I, para 2.02), economics relies on other disciplines, specifically law and political studies, to create, monitor and mutate these rights and thereby determine what is actually bought and sold in economic exchange.   In effect, mainstream economic thought reifies the legal complexity and economic richness of IPRs into ‘goods and services’.  This, in turn, reflects a more general failure to ‘root’ in economic theory (i.e., married to, or otherwise associated with, utility and marginal revenue), the evolutionary nature of property rights.  The closest the mainstream has come to the legal foundations of capitalism is “New Institutional” or the ‘transaction cost’ school of thought (Coase 1937; 1974, 1978, 1992, 1998).

Only two schools of thought, both long ‘dead’, raised the elemental question of what is actually bought and sold in an economic transaction.  A third touched a related chord.  A fourth rang the bell of innovation or ‘creative destruction’ but in the legal stratosphere of Capitalism, Socialism & Democracy (Schumpeter 1950), i.e., corporate vs. public property rights - democratically defined.

The first was the Physiocrats (Part IV).  To quote Samuels:

Thus did the Physiocrats implicitly recognize that the basic economic institutions (the organization of economy) are legal in character; that law is an instrument for the attainment of economic objectives and that economy is an object of legal control. (Samuels 1962, 162)

The second was the ‘Old Institutionalism’ of John R. Commons (Commons 1924).  In addition to the legal implications of economic futurity (Commons 1950), Commons characterized the evolutionary nature of property rights as the trend towards increasing command over the future actions of economic agents.  Both the Physiocrats and Commons became marooned in the backwaters of economic thought.

The third was the Austrian school in general but specifically the ‘economy of knowledge’ or ‘price system’ school of F.A. von Hayek (Hayek 1945; 1989) that struck a related chord.  Like the price system, the legal system has a life of its own which, particularly in the Anglo-American Common Law tradition, is not fully subject to conscious centralized control.  In law, the legislature responds to changing political tides leaving resulting uncertainty to the courts wherein ‘precedent’ is set on which future disputes will be settled.  The court is the fifth wheel of a ‘transaction’ in ‘Old Institutionalist’ terms (Commons 1931).  The other four are: actual and ‘next-best’ buyers and sellers.

 

The Problem

Taking the microeconomic term ‘minimax’ to stand for the economic criterion of minimizing cost and maximizing revenue:

  • To minimax one must know what is being minimaxed!  Thus, as I understand it, in the past, and on “the Continent” (as the British would say), one first became a lawyer then an economist;

  • Each of the major forms of intellectual property (copyrights, patents, registered designs and trademarks) are, in law, ‘bundles of rights’ (Samuels 1962)

  • most of the economic literature has focused on knowledge spillovers (Audretsh and Stephan 1999) and appropriation due to the inadequacy of IPRs; little has dealt with manipulation of these ‘bundles” to efficiently direct the innovation process, e.g., in the way the Physiocrats wanted to direct the laissez faire, laissez passer marketplace

The Physiocratic theory of economic policy is fundamentally related to a theory of property: state relations in which private property is the dominant institutional form but wherein the public interest is manifest in the continuing modification or reconstitution of the bundle of rights that comprise private property at any given time. (Samuels 1962, 161)

 

A BUNDLE OF RIGHTS APPROACH TO IPRs

Drawing on Adler – a lawyer (1984), a bundle of IPRs could include:

Statutory Requirements

Subject Matter

Novelty

Unobviousness

Enablement

Infringement

Alternatively, if one were to imagine each major class of IPRs (copyrights, patents, registered designs and trademarks) as different and distinct types of ‘gears’ with many blades or teeth of varying thicknesses and lengths then each State (subject to international convention) may sharpen, lengthen, thicken or otherwise vary a bundle of generic rights to fashion the national motor of innovation. Such rights include, among others, (Exhibit 1):

Adaptation

Assignment

Breadth

Duration

Eligibility

Licensing

National Treatment

Scope

Subject Matter

Transfer

Translation

 

 

 

An elementary demonstration of the explanatory and policy potential of a ‘bundle of rights’ approach can be drawn from Eswaran and Gallini (1996).  In essence, they propose that after a pioneering innovation there follows two alternative patent development paths:

  • process innovation – the vertical improvement of the now existing product; and/or,

  • product innovation – the horizontal addition to the market of a new product exhibiting product differentiation reflecting different tastes or needs of ‘consumers’ rather than a new or ‘superior’ product per se.

Development of an ‘optimum’ public patent policy involves varying:

  • product breadth: proximity of an  imitator product to infringement; and/or,

  • process breadth: proximity of an imitator process to infringement; that is,

  • the legal definition (legislature and court) of what constitutes defense against infringement, e.g., better, cheaper or novel, and under what circumstances and in what industries.

Optimum public patent policy would foster, according to Eswaran and Gallini:

  • more efficient entry if it favoured broad process but narrow product patents when a pioneer’s R&D costs are low; and/or,

  • greater product differentiation if it favoured broad product but narrow process patents when a pioneer’s R&D costs are high.

Conclusion

Economics aids understanding of IPRs by ‘commodifying’ them.  In the process, however, mainstream economics has lost sight of what John R. Commons and the Physiocrats saw: the foundation of the economy is property rights whose definition evolves and mutates creating or foreclosing new market opportunities.  In the case of biotechnology and intellectual property it is fitting to end with the recent ‘hybrid vigour’ proposal to ‘translate’ DNA sequences into music, so-called “DNA Ditties” to gain not just patent but also copyright protection for new biotech knowledge (Fountain 2002).

 

References

Adler, R. G., Biotechnology as an Intellectual Property, Science, 224 4647, 1984/04/27, 357-363.

Audretsch, D. B and Stephan P. E., “Knowledge spillovers in biotechnology: sources and incentives”, Journal of Evolutionary Economics, 1999, 9 97-107.

Coase, R. H. "Evolution, Selection and the Economic Principle - Discussion." American Economic Review, May 1978, 68 (2), 244-245.

Coase, R. H. "The Institutional Structure of Production." American Economic Review, September 1992, 82 ( 4), 713-719.

Coase, R. H. "The Market for Goods and the Market for Ideas." American Economic Review, May 1974, 64 ( 2), 384-391.

Coase, R. H. "The Nature of the Firm." Economica, November 1937, 4 (16), 396-405.

 Coase, R. H. "The New Institutional Economics." American Economic Review, May 1998, 88 ( 2), 72-74.

Commons, John R., The Legal Foundations of Capitalism - Chapter VII: The Price Bargain, © 1924, Macmillan, NYC, 1939.

Commons, "Institutional Economics", American Economic Review, vol. 21 (1931), pp.648-657.

Commons, J.R., The Economics of Collective Action: Chapter viii. FUTURITY University of Wisconsin Press © 1950, Madison, 1970, pp. 104-109.

Eswaran, M. and Gallini N., Patent Policy and the Direction of Technological Change, RAND Journal of Economics, 27 4, 1996/Winter, 722-746.  [product/process optimality]

Fountain, H., DNA Ditties: Song of Myself, New York Times, March 31, 2002.

Hayek, F.A., "The Use of Knowledge in Society", American Economic Review, Vol. 35, No. 4, Sept, 1945, pp. 519-530.

Hayek, F.A., "The Pretence of Knowledge", American Economic Review, Vol. 79, No. 6, Dec. 1989, pp. 3-7.

Samuels,W.J., "The Physiocratic Theory of Property and State", Quarterly Journal of Economics, 75(1), Feb. 1961, pp. 96-111.

Samuels, W.J., "The Physiocratic Theory of Economic Policy", Quarterly Journal of Economics, 76(1), Feb. 1962, pp. 145-162.

Schumpeter, J.A., Capitalism, Socialism and Democracy, 3rd Ed., - Chapter VII - The Process of Creative Destruction, 1950, Harper Torchbooks, New York, 1962.

Zucker, L. G. et al, “Intellectual Capital and the Birth of U.S. Biotechnology Enterprises”, American Economic Review, March 1998, 88 (1), 290-306.