Volume 5, Issue 3 - The Kauffman Foundation Conference on Intellectual Property and Innovation

Introduction to the special issue on the Kauffman Foundation Conference on Intellectual Property and Innovation, held at St. Louis (USA) on April 2-3, 2009. This conference was organized by the Center on Law, Innovation and Economic Growth of the Washington University School of Law, and sponsored by the Ewing Marion Kauffman Foundation and the Skandalaris Center for Entrepreneurial Studies.

In this paper, we begin our analysis of copyrights and patents by asking: why should creators have the right to control how purchasers make use of an idea or new good? This gives creators a monopoly over the idea. We refer to this right as “intellectual monopoly,” to emphasize that it is this monopoly over all copies of an idea that is controversial, not the right to buy and sell copies. The government does not ordinarily enforce monopolies for producers of other goods. This is because it is widely recognized that monopoly creates many social costs. Intellectual monopoly is no different in this respect. The question we address is whether it also creates social benefits commensurate with these social costs.

In a 2008 paper, Michele Boldrin and David Levine offer a strong attack on intellectual property. While Boldrin and Levine make a plausible case, it is an exaggeration to say as they do that patents and copyrights are intellectual monopolies and are not necessary to encourage invention or creation. More significant is their claim that competition, not monopoly, drives innovation. Boldrin and Levine overstate the case for competitive innovation and understate the case for innovation driven by either market power or the prospect of acquiring market power through patent innovation. They are correct that we will get some innovation in many industries, and even the same level of innovation in some industries, without IP protection. But for most types of invention and creation we just can’t be confident that IP isn’t driving at least some innovation. On balance, IP protection will give us more benefit in the industries in which it spurs competitive innovation and fringe competition than the harm it causes in raising prices and constraining downstream innovation. It is, as Mike Scherer puts it, “a system that, despite its manifest imperfections, has worked tolerably well.” Nonetheless, Boldrin and Levine do point the way toward needed reforms of the IP system short of its abolition.

How should the economic performance of property systems be evaluated? Benefit-cost analysis is widely used to evaluate non-market based regulation when prices are not available. Market prices provide better information for property systems, but market prices are not necessarily socially optimal when property rights are imperfect. This paper discusses two practical approaches to evaluating the performance of property systems, one based on an analysis of institutional performance, the other based on measuring incentives. As an illustration, I show how these approaches might be used to evaluate the US patent system.

An increasing number of scholarly voices challenge the balance between incentives and deadweight losses created by intellectual property rights. In their book Against Intellectual Monopoly (2008), Boldrin and Levine) move beyond pragmatic calls to fine-tune the scope of intellectual property rights to question the very premises of the quid pro quo underlying the intellectual property rights system. In this brief essay, we contemplate the effects of removing traditional copyright protection. We draw upon the available literature in economic theory and copyright scholarship to examine the likely incentive effects of copyright abolition on authors, while considering the available non-legal forms of remuneration for authors. Furthermore, we contemplate a version of copyright protection grounded and limited to a mandatory right of attribution.

The two sides of the contemporary debate over intellectual property agree that the law needs to “strike a balance” between providing sufficient incentive for creation and the freedom to make use of existing ideas. Michele Boldrin and David Levine, on the other hand, boldly declare in their recent work “Against Intellectual Monopoly” that they have arrived at conclusions that “are at variance with both sides.” In this commentary, I examine 1) their assertion that intellectual property should be viewed as an “intellectual monopoly”; 2) their claim to have mustered evidence and authorities showing that innovators and creators can be well protected in the absence of intellectual property law; and 3) their rhetorical practices throughout the book. I conclude that 1) their assertion that intellectual property constitutes an “intellectual monopoly” is itself a bad analogy and an example of the logical fallacy of hasty generalization; 2) the evidence and authorities they muster in support of their claim that innovators and creators can be well protected in the absence of intellectual property law are unpersuasive, as they actually tend to support the opposite conclusion; and 3) their book as a whole is an example of bad rhetorical argumentation.

In an earlier comment on Boldrin and Levine’s 2003 lecture on patents and their effect on technology, we observed that their account of James Watt’s influence on the progress of steam technology contained factual errors which tended to exaggerate the negative consequences of Watt’s patent. We concluded that it was far from obvious that a corrected account would support Boldrin and Levine’s bold conjectures. While Boldrin and Levine’s 2008 “Against Intellectual Monopoly” begins with a new version of Watt’s story that claims to take our earlier criticisms into account, here we assess that version and conclude that it shares many of the shortcomings of the original.

Most would agree that a sound patent system is one in which the social benefits of the system exceed the social costs. Many would also agree that the current patent system imposes significant social costs, and that the current proposed patent reform legislation is largely motivated by a desire to address those costs. In their book, Against Intellectual Monopoly (2008), Boldrin and Levine base their policy recommendation to abolish the patent system on the claim that the social costs of having any patent system, even an “improved” or “reformed” one, will inevitably exceed its benefits. I argue that while Against Intellectual Monopoly falls short of establishing a case for abolishing the patent system, it succeeds in making a case for rethinking the law and economics paradigm of patents that has formed the foundation for much of patent law scholarship and policy. The arguments that Boldrin and Levine offer provide compelling reasons for re-examining the core assumptions underlying the dominant models of how patents impact innovation, paying greater attention to institutional alternatives and to historical lessons about the strength of competitive markets and the costs and benefits of regulatory intervention that dampens competition. I suggest we can meet the challenges highlighted by Boldrin and Levine by providing a more central role for New Institutional Economics (NIE) in the study of patent law, refocusing our analysis on the structure of activities and transactions that drive alternative processes of innovation and the roles that institutions (including but not limited to patent, contract and competition laws, and the informal rules governing collaboration and research activities) and organizations (both public and private) play in determining transactional structures and innovation outcomes.

We currently have no framework that allows us to really understand how a political system works, and how property rights and patent systems evolved, and so we do not have a body of theory that allows us to make predictive statements that would in fact lead to improving the function of property rights and patent systems. The body of neoclassical economic theory is very elegant and very useful, but it cannot describe how a system is evolving. If we want to understand how patent systems work, we may not simply rely on understanding the economics of patent systems, there must be developed a structure of incentives that will continue to encourage people to innovate and transform solutions to solve new and different problems that evolve over time. What we would ideally like in a world that is dynamic, where change is going on both in the political system and in the economic system, is to have an adaptively efficient structure.