Vaccines and Institutions: four lessons from the Economy

By Jesús Fernández-Villaverde*

“Today, April 3, I am inoculated with the second dose of the covid-19 vaccine. Broadly speaking, and with many exceptions, in the United States, Pfizer-BioNTech vaccines are being sent to large cities, due to the logistical difficulties associated with their supply; those from Moderna to dormitory cities and rural areas; and those from Johnson & Johnson’s Janssen to elementary and middle school teachers to speed up the reopening of schools for being a single dose. Following this pattern, I received the Moderna one.

 It may seem like forever, but it was only about 15 months ago that the first news reached us that a strange coronavirus was spreading in China. You don't have to tell what happened next. Being immunized against COVID-19, as is approximately 31% of the United States population with at least one dose, in such a short time is an unprecedented achievement. It is also one of the few bright spots in a crisis management that has been quite disappointing in almost all Western countries, regardless of the political color of their governments.

 Why do I already have the vaccine and many people in other countries, much older and more at risk than me, do not? Because the development and distribution of the vaccine have a clear economic component. Certain institutions and policies maximize the likelihood of developing an effective and safe vaccine and its prompt distribution. Specifically, the four lessons that we will obtain from answering the previous questions will be a good practical illustration of the arguments that I am presenting and, therefore, reason to insert this entry in it.

 Moderna, the company that developed my vaccine, is based in Cambridge, Massachusetts. This city, just north of Boston, is historically famous for being the headquarters of Harvard and MIT and, more recently, for the large number of technology companies that have proliferated there. This concentration of technology is not a coincidence: time and again we see how great silos of innovation are created around leading universities. While in Cambridge it is Harvard and MIT, in Silicon Valley it is Stanford, in Austin it is the University of Texas and in Cambridge (UK) it is the University of Cambridge. In these university campuses and the adjacent neighborhoods, ideas are in the 'air' and one company emerges after another to try to become the new 'unicorn' in its sector.

 Moderna follows this model perfectly. The company was founded in 2010 by Derrick Rossi, then a professor at Harvard, to commercialize his research on messenger RNA. In fact, the name of the company is a pun on this technology (called mRNA in English, you just need to put 'ode' in the middle). While in Cambridge it was easy for him to recruit many employees and get started.

 The first lesson we learn is that having universities that prioritize academic excellence over 'coffee for all', with good funding and a governance structure, has first-rate multiplicative effects.

 But Moderna, with Rossi's original ideas alone, could have accomplished little (Rossi, in fact, left the company in 2014). The second element for startups to grow is financing. An almost unique aspect of the US economy is the key role of venture capital funds that have been behind companies as diverse as Amazon, Facebook or Netflix. Although venture capital funds have grown a lot in Europe over the last decade, in 2020 venture capital investments in the United States (about 119 billion euros) still represent about three and a half times those made in Europe (about 34 billion euros). In addition, it should be noted that a large part of these investments are concentrated in the United Kingdom, already outside the European Union. This financing allows companies to launch, after a while, to the stock market.

 In Moderna's case, the company was able to find record amounts of funding and surviving the skepticism of many 'experts' who, especially between 2015 and 2017, heralded a bleak future for messenger RNA technology.

 Furthermore, and contrary to what is often claimed, financial markets have shown a more than remarkable degree of patience in recent decades with tech startups. Another of the companies with a vaccine that may be approved in the near future, Novavax, was founded in 1987 and has not yet been able to have a licensed product. And yet investors have held out for 34 years.

 Why do these venture capital funds exist in the United States and, more generally, more flexible financial markets than in Europe? Several reasons are key. First, inadequate European regulation. Second, high entry barriers in financial markets. Third, a slow and inefficient legal system, excessively formalistic and with judges who, in most cases, lack the knowledge of finance and economics necessary to decide commercial law litigation.

 The second lesson we learn, therefore, is that having efficient financial markets is key to prosperity and innovation.

 But Moderna's vaccine would not have reached the market without a notable effort from the American federal government. Operation Warp Speed distributed some 9 billion euros to accelerate the development of vaccines and treatments against covid-19. Moderna, in particular, received a total of more than 2 billion euros. While the European Union was concerned about the cost of the program or with the fear that some pharmaceutical company would obtain disproportionate benefits, the American Administration preferred to irrigate with dollars left and right, diversifying the risk and with little attention to the possibility of cost overruns and redundancies.

 Given the economic consequences of covid-19, this was the right decision. If there is one thing that can be criticized about the Warp Speed operation, it is that it was not even more aggressive. Pfizer and BioNTech, which did not receive financing for the development of their vaccine (Pfizer had sufficient funds for this and preferred the extra freedom of action that was supposed not to depend on federal funds), offered the Administration 200 million doses (for 100 million people) in the summer of 2020. Already concerned about the excessive cost, the federal Administration chose to order just 100 million doses. Had he accepted the 200 million doses, it is likely that vaccination would have been accelerated by about three weeks and saved the lives of about 10,000 or 15,000 people.

 This collaboration between the public and private sectors has always been key in technological innovation. Many aspects of basic research are either too generic or uncertain to have a market value that allows companies to finance it at the socially optimal level. I check it in my daily work. My research is based on two techniques called Monte Carlo Markov chain methods and Monte Carlo sequential methods. These techniques were developed in the heat of the United States nuclear program and, later, the space program. The originator of the Monte Carlo method, from which the most recent techniques are derived, was Stanislaw Ulam, who discovered how to solve hitherto impossible problems in physics using simulations on the first general-purpose and full-Turing computer in the United States. the ENIAC, which was right at my university, Penn (my office is about 200 yards from where ENIAC was located).

The "mother algorithm"

In 1945, when Ulam proposed the Monte Carlo method, it had no commercial use. It took several decades for scientists and engineers to become familiar with the method, for new, more sophisticated algorithms to emerge from the "mother algorithm," and for computers to become cheap enough for these techniques to have monetary value.

 Today, however, these techniques are present even in the most unexpected places, from machine learning (if you have clicked on a movie recommended by Netflix after watching similar ones, you have used a product designed with a Monte Carlo method in neural network training) to avionics, distribution logistics, genetics or financial derivatives.

 The third lesson of this post is that having people like Ulam, John Von Neumann or Nicholas Metropolis thinking about a class of problems far removed from any close commercial use requires the constant support of governments.  

 At the same time, not everything can be left in the hands of governments, which are very capable of providing research resources when they want but are usually very bad at transforming basic research into successful commercial products.

 An iPhone can use a lot of technology that originated in public support, but it also needs an attractive design, the ability to ensure that there are iPhones in every store in the world before the Christmas campaign and that customer service is acceptable.

 The incentives that the market offers in terms of benefits are much more powerful than any regulation or public distribution system. The Coca Cola company sells about 1.8 billion drinks every day. If we could administer vaccines at the same rate that Coca Cola sells beverages, 100% of the planet's population (including children under 16 years of age) would have received the first dose of the vaccine in 4.28 days. Of course, this comparison is very unfair: manufacturing, distributing and supplying a vaccine is far more difficult than bottling beverages. But Coca Cola proves, every day, that having an incredibly complex logistics network is perfectly feasible.

 At the same time, and in the opposite direction, we know that supermarkets in socialist countries were always short of supplies. One of my fellow students in the doctorate, who grew up in the Soviet Union, told me that her father, to celebrate her sixteenth birthday, gave her a dozen oranges, her favorite food, which she had obtained thanks to her contacts in the Ministry of Defense. (I did not want to ask what the father did to have so much 'plug'). My partner explained to me that the emotion of seeing 12 oranges together had been so great that she was crying with joy for several hours. Growing and distributing oranges is not that complex.

 This experience is verified in the United States on a daily basis, since private pharmacies (where I have been inoculated) are being much more efficient than federal vaccination centers in the distribution of the vaccine.

Monetary incentives matter a lot

The fourth and final lesson of this post is that monetary incentives matter a lot. It's no accident that a less-for-profit vaccine, AstraZeneca-Oxford, is causing the most problems, from bug-ridden clinical trials to lousy distribution and amateur public relations. Whenever I see many on social networks attacking Big Pharma, I wonder if it is out of sheer ignorance or child demagoguery. 99% of the 'critics' of the pharmaceutical industry respond in their daily lives to monetary incentives in exactly the same way as the companies that so much lash out.

 With these four lessons we can now answer the question of why I already have the vaccine. The United States has not done well in this epidemic, far from it. If I were writing for an American medium, it would be incredibly negative with the management that has been carried out. But, within the bad, the United States has managed to combine universities of excellence, efficient financial markets, generous public aid and private monetary incentives better than Europe.

 It is not only the case of vaccines. The examples in science and technology are numerous. I would bet that you, dear reader, have used at least one product or service from one of the following companies today: Amazon, Google, Microsoft, Apple, Facebook, Twitter or Netflix. He has done the same without even realizing it, looking at a web page that uses an Amazon server or Microsoft 'software'. All of them are US companies. If, on the other hand, I think about the products or services that I have used in the last few days, no European comes to mind except my two cars: both are German.

 And the fact that my two cars are German illustrates another key point: although half of Europe does worse, some countries, in particular Germany and the United Kingdom, do it "thankfully" (BioNTech is German, Oxford is British) and others " worse".

 If you are angry that you are not already vaccinated (or are unemployed or your company on the verge of bankruptcy) please think that this is not by chance. It is the consequence of decades of having neglected the selection and training of our public elites, of not defending the rule of law and the independence of justice, of irresponsible fiscal policies, of a lack of interest in education and research, of not to have adequate financial regulation. Things can be done well and can get back on track, but we have to get down to it right away”.

 * Jesús Fernández-Villaverde is a Professor of Economics, Director of Graduate Studies Department of Economics University of Pennsylvania.