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How to Protect your Wealth by Investing in AI Tech Stocks

Intellectual Property as the New Guild System

Economics / Economic Theory Nov 18, 2019 - 02:40 PM GMT

By: Frank_Hollenbeck

Economics

The standard justification for intellectual property — i.e., patents and copyrights and trademarks — is that the creative process would be significantly reduced if such protection did not exist. The underlying assumption is that the financial reward must be augmented by a grant of exclusivity enforced by the coercive power of government. Because we can freely copy an invention, innovation or other creative ideas, a financial reward is viewed as necessary for these intangible ideas unlike a tangible object sold in the marketplace.

But did inventors or artists starve before IP laws? The answer is no because they benefited from the first-to-market advantage. Boldrin and Levine  explain how during the 19th century British authors with IP protection in the UK would sometimes make more money off their non-IP protected US sales by reaching an agreement (a contract) with a US publisher and then flooding the US market with cheap original copies.1 Since any potential copycat will wait to see if an idea is successful, the gains of being first-to-market could be substantial. Many drug makers retain important market share on a drug even though their patent protection has expired and the market is awash with cheaper generic alternatives. There are also many other indirect ways to profit from creative ideas. Many artists make more money off concerts and other appearances than from the original digital sales of their song.


Also, many other factors besides money enter the creative process, such as freedom of expression, enjoyment, reputation, and autonomy. Vincent Van Gogh created over 900 paintings but sold only one. While examining classical music of the eighteenth and nineteenth centuries, F. M. Scherer found that the imposition of IP protection had an indeterminate impact on creativity. Although Bitcoin has been in existence for over ten years; its anonymous creator has yet to sell a single bitcoin or profit from his invention.2

We could provide a long list of historical examples3, but they would add little to our discussion. Since we cannot run a scientific experiment for a complex phenomenon such as inventions and innovations, it is impossible to distinguish between causation and association.4 In a recent study of 7198 important scientific events (innovations), Jonathan Huebner found they peaked in the 19th century and then rapidly declined.5 This drop-off could be due to IP laws or a multitude of other factors that affect innovations. It is even possible that without IP laws the drop-off could have been even more severe. Without the ability to run a scientific experiment on complex phenomena, we cannot determine causal links from historical or empirical evidence.

Yet, there is a reason that many past inventions like the electric motor, the sewing machine, photography, light bulb, telephone, or the airplane (flying machine) were discovered simultaneously by different people,6 often in different countries. The foundation of any great idea is built on an accumulation of ideas from other times and places. The airplane would not have been possible without the engine or the propeller. Leonardo Da Vinci had already drawn a prototype of the common airplane in the 15th century using a simple observation of the aerodynamics of birds in flight. Had lighter engines and propellers been available to him, he would probably have created the first functional airplane. The Wright brothers happened to be in the right place at the right time. Their 1906 patent was for a “flying machine” and the ensuing patent war greatly retarded aviation in the USA. So, was it justified to grant them a monopoly on all flying machines? What if other flying machines like the helicopters and drones had been created around the same time? WWI may have been lost if Germany had perfected these flying machines while US lawyers battled over ownership rights. The problem is that many times IP laws reward the entire idea and not just the value added by an inventor, author or songwriter.

If we reflect a moment, the intuitive logic behind IP laws is naïve. The purpose is to slow down the diffusion of new ideas in the hope that there will be more new ideas to diffuse later. It is to create a monopoly, hoping it will ultimately gently fade into the competitive woodwork. As expected, industries protected by IP laws have become more and more concentrated making it virtually impossible for individuals or small companies to incur the costs of both acquiring and defending a patent. Instead of being creative, these large oligopolistic firms have been using IP laws to limit any competition that might come from any tangential idea that is a little cheaper or better quality or to defend the status quo not to endanger royalties from existing patents or copyrights.

Creating Monopolies

The more things change the more they remain the same. The European guild system was created to ensure the status quo. Entry into a profession was strictly limited and monopoly privileges were given to a small minority who lived luxuriously while the bulk of the population lived in abject poverty. The goal was to strictly limit competition by using the coercive power of the king or government. How is our current economic system any different? Our living standards are higher, but IP laws have now created monopoly privileges for a different minority in practically all areas of business. This loss of general competitiveness is a direct result of the current trend to protect any and every idea.

The best evidence that intellectual property laws are counterproductive is the phenomenal growth of open source software which can be freely examined, modified and enhanced. Here programmers voluntarily relinquish intellectual monopoly rights to operate under conditions of free competition. The profits from being first to market are enough to induce programmers to voluntarily surrender future monopoly profits. A great deal of the websites or data you find on the internet was created or built using open-sourced software. Another example is the widespread existence of patent pools, where private companies, generally within the same industry, share patents at no cost. A patent pool of all existing companies would be a world without patent protection. Patent pools reflect a market response to the constraints IP laws impose on the synthesis of ideas.7

Extending IP Protections to Even Longer Time Horizons

Even if one strongly believes that IP laws are essential for creativity, it is difficult to justify the expansion of IP protections that have taken place in recent decades. In fact, the length of time for protection should have been significantly reduced as markets expanded, increasing the profitability of first-to-market. The first IP law in the USA was the patent act of 1790 and was limited to workmen or artisans and was for 14 years. This is closer to what was intended in Article I, Section 8 of the Constitution, which provides, among other powers, “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.”

The world population in 1790 was under 1 billion people. The potential market for an application or expression of an idea was limited to a small fraction of this population because of illiteracy rates, low living standards, language barriers, and a host of other factors. Today, the population is more than 7.7 billion. Advances in telecommunication, education, standards of living and cost of transportation have made the potential market for IP ideas a much larger percentage of the population; possibly a thousand times larger than in 1790. Of course, on the flip side, we have also seen improvements in re-engineering and copying technologies. The growth in market size for IP products should have led to a significant reduction in this initial 14-year protection period. But today, patent protection lasts 20 years.

Copyright protections last much longer. The Sonny Bono Copyright Term extension act of 1998 pushed copyright protection to the life of the author plus 70 years, or 95 years for work produced a corporate "author." This was an increase from life-plus-50-years for authors or 75 years for corporate authorship. The bill also allowed copyright protection to be imposed retroactively, covering many of Disney’s classic characters and films that were initially taken from the public pool: so much for quietly fading into the competitive woodwork.

What are possible solutions? One option is that intellectual property, as some early common laws on copyrights, is lost once it is released to the public. Another is greater use of contract law to replace IP laws. This is the more free-market solution since both parties to the contract are making voluntary choices. At the very least, the length of time for protection should be significantly reduced with no possibility for extensions. Let the market find a solution for drugs requiring large upfront investments in time and money. Just because it is hard to imagine a market solution, does not mean one does not exist.

1.
Boldrin and Levine (2008), Against Intellectual Monopoly, Cambridge University Press.
2.
F. M. Scherer, (2004) Quarter Notes and Bank Notes: The Economics of Music Composition in the Eighteenth and Nineteenth Centuries, Princeton University Press
3.
There are books and articles, including Boldrin and Levine (2008), that cite historical evidence in support of, or against, IP protection. In general, the empirical results ae mixed on the impact of IP laws on creativity.
4.
A good discussion of the constraints of complex phenomena is Hayek’s Nobel lecture, “the Pretense of Knowledge.”
5.
Jonathan Huebner (2005), “A possible declining trend in worldwide innovation,” Technological Forecasting and Social Change, vol.72
6.
William F. Ogburn, Dorothy Thomas, "Are Inventions Inevitable? A Note on Social Evolution," Political Science Quarterly. Vol. 37, No. 1 (Mar., 1922), Ogburn and Thomas identified 148 major inventions and discoveries that were discovered simultaneously by two or more inventors.
7.
The information in this paragraph is from Boldrin and Levine (2008). They point out that patent pools also reduce competition since they are essentially clubs with restricted club membership.

Frank Hollenbeck has held positions at international universities and organizations.

Frank Hollenbeck

Frank Hollenbeck is a financial consultant who worked for the State Department as senior economist, Caterpillar overseas as chief economist, and Director of Research at the Banque Eduard Constant in Geneva.

© 2019 Copyright Frank Hollenbeck - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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