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| Rethinking Intellectual Property |
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The Economic Power of Ideas
It is at this point that Paul Romer, named one of America's 25 most influential people by Time magazine in 1997, steps into the fray. Spelling out his position on the special status of ideas as the engine of economic growth in 1986 in a groundbreaking article in the Journal of Political Economy - 'Increasing Returns and Long run Growth' - he drew attention to the fact that ideas are intangible and thus what he calls 'non-rival'. Ideas being non-rival can benefit all at the same time and be transmitted at practically zero cost. His 'new growth theory' is thus driven by a fuel that in his view should never run out because ideas are virtually limitless. Tipped for a Nobel prize himself, Romer's new growth theory is praised by many including Nobel laureate Robert Solow. All agree that ideas are precious to any progressive society with a vision for the future.
So how should ideas be promoted? Romer has been an ardent advocate of the need for controversial increases in State support to be injected into Scientific Research. He has also taken on board the standard arguments, which his work has invigorated, for strong intellectual property laws to provide the right level of incentive for inventors to keep producing ideas. In this call for subsidies and monopoly rights upon ideas he reiterates the disturbing conclusion of Kenneth Arrow some 40 years ago that if the free market were left to itself it would, "under invest in invention and research".
Escape from the conundrum of the law of marginal returns seems, however, to have dropped economists into a new paradox. The fundamental principle of the free market economy, which Western politicians and economists alike espouse with passionate vigour, decries monopoly power. Adam Smith in his foundational 'Inquiry into the Nature and Causes of the Wealth of Nations', published in March 1776 - four months before the American Declaration of Independence, berated all forms of monopoly. Monopolists, he wrote, "by keeping the market constantly understocked, by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profit, greatly above their natural rate." He went on to say, "The natural price, or the price of free competition, on the contrary, is the lowest which can be taken."xvi The espousal of monopoly power is a clear contradiction within capitalist economies.
Romer argues that monopoly power is essential so that inventors can recover their costs. Giving an example from the software industry he says "Developing new and better instructions is equivalent to incurring a fixed cost… Once the cost of creating a new set of instructions has been incurred, the instructions can be used over and over again at no additional cost … it follows directly that an equilibrium with price taking cannot be supported".xvii, xviii So the huge fixed cost of development and the negligible cost of reproduction are the two obstacles he sees in the path of invention which can be addressed by monopoly power.
Now, with the price mechanism broken, governments must set the extent to which companies can monopolise ideas. The problem according to Romer is setting the right balance between the best cost from the perspective of production, which ought to be the highest possible, and the best price for efficiently using new ideas in society, which should be zero.
This is an impossible balancing act. Monopolists have a disproportionate ability to make their voices heard by democratic politicians because they are the ones who provide the funding to their parties. As for the electorate in whose name they govern: it is easy to manufacture consent and sell it through the same media giants that have most to gain by powerful patent and copyright law. The draconian EU Property Rights Enforcement Directive is a chilling example. It is giving powers to the music and software industry to spy on people's home computers and prosecute individuals found copying files over the Internet and empowers police to raid the homes of those found visiting file sharing sites. The bill was put forward by French MEP Janelly Fourtou. Her husband is the head of Vivendi Universal, which owns several record labels.
The received wisdom is not without its critics from within the economic science community. Two UCLA economists, Michele Boldrin and David K Levine have recently caused a stir amongst their fellow economists by attacking, in a series of publications over the last three years, the economic justifications for the widely held utility of copyrights and patents. They separate intellectual property into two components.xix Firstly, "the right to own and sell ideas", and second, "the right to control the use of those ideas after sale". They accept the first component and reject the second as, "a socially inefficient monopoly". They argue,
"What is commonly called intellectual property might be better called, 'intellectual monopoly.' When you buy a potato you can eat it, throw it away, plant it or make it into a sculpture. Current law allows producers of CDs and books to take this freedom away from you. When you buy a potato you can use the 'idea' of a potato embodied in it to make better potatoes or to invent french fries. Current law allows producers of computer software or medical drugs to take this freedom away from you."
They argue against Romer's theory proposing that the cost of, "creation is not a fixed but a sunk cost" which is "very ordinary in economics and poses no particular threat to perfect competition. As far as we know there is no organized movement to provide producers of potatoes, or any other commodity involving sunk costs, with a government monopoly".xx They further argue that ideas have no economic value until they are embodied in something and this allows a 'slim element of rivalry'.xxi They put their case in the technical mathematical language of economic modelling but leave no shortage of examples in plain language. Invention in their view gives a huge "first mover" advantage establishing a company as a market leader that others cannot copy immediately. The first mover advantage establishes reputation for quality, opens the door to demand for lucrative live musical performances and autographed copies, establishes the expert status that people remember and trust for years to come. While any businessman would love monopoly on a plate, most know that they have to invest huge sums in capital equipment along with manpower training, that others might poach, in order to seek out and maintain a lead. The key is ingenuity and dynamism.
Debate is ongoing in economic circles. LSE's Danny Quah, for example, finds that his mathematical models generally endorse the findings of Boldrin and Levine. However the debate proceeds one thing is clear-the simple dogmatic slogans portraying patents as the way of rewarding innovation cannot be accepted from an economic standpoint at face value. Furthermore, there exist many clear examples of recent innovation spurred on without monopoly power.
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