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Creation Myths

Does innovation require intellectual property rights?

(Page 4 of 5)

But what happens as reproduction technologies im-prove: as printing presses get quicker, or as the Internet lets teenagers share music files faster and farther? Won't that drive authors and musicians into utter poverty?

In fact, Boldrin and Levine argue, the opposite should occur. Increasing rates of reproduction will drop marginal production costs and, therefore, prices. If demand for the good is elastic -- that is, if demand rises disproportionately when prices drop -- then total revenue will increase.

And since creators with strong rights of first sale are paid the current value of future revenue, their pay will climb. "The point we're making is the invention of things like Napster or electronic publishing and so on are actually creating more opportunities for writers, musicians, for people in general to produce intellectual value, to sell their stuff and actually make money," says Boldrin. "The costs I suffer to write down one of my books or songs have not changed, so overall we actually have a bigger incentive, not smaller incentive."

Conventional wisdom admits that monopoly rights impose short-term costs on an economy. They give an undue share of the economic pie to those who own copyrights and patents; they misallocate resources by allowing innovators to command too high a price; they allow innovators to produce less than the socially optimal level of the new invention. But these costs are all considered reasonable because innovation creates economic growth: The static costs are eclipsed by dynamic development.

Boldrin and Levine say this is a false dilemma. Monopoly rights are not only unnecessary for innovation but may stifle it, particularly when an innovation reduces the cost of expanding production. "Monopolists as a rule do not like to produce much output," they write. "Insofar as the benefit of an innovation is that it reduces the cost of producing additional units of output but not the cost of producing at the current level, it is not of great use to a monopolist." Monopolists, after all, can set prices and quantities to maximize their profits; they may have no incentive to find faster reproduction technologies.

More broadly, producers are likely to engage in what economists call "rent-seeking behavior" -- efforts to protect or expand turf (and profits) by fighting for government-granted monopoly protection -- and that behavior is likely to stifle innovation. Expensive patent races, defensive patenting (in which firms create a wall of patents to prevent competitors from coming up with anything remotely resembling their product), and costly infringement battles are common functions of corporate law departments. Such activity chokes off creative efforts by others, particularly the small and middle-sized firms that are typically more innovative.

The Critics

Like any radical innovation, Boldrin and Levine's argument has its critics. "We've been presenting it in quite a few key places, and I have to admit that every time there was a riot," says Boldrin. "There was a riot at Stanford last Thursday. It was a huge riot at Chicago two weeks ago. I know it was a riot at Toulouse when David presented it."

A "riot" among economists might not call for crowd control, but the paper does evoke strong reactions. UCLA's Klein says the paper is "unrealistic modeling with little to do with the real world." In a paper with Kevin Murphy of the University of Chicago and Andres Lerner of Economic Analysis LLC, Klein writes that Boldrin and Levine's model works only under the "arbitrary demand assumption" that demand for copies is elastic, so that as price falls over time output increases more than proportionately and profit rises. In the case of Napster and the music industry, this "clearly conflicts with record company pricing. That is, if Boldrin and Levine were correct, why are record companies not pricing CDs as low as possible?"

Romer has a broader set of objections. As a co-author and graduate school classmate of Levine's and a former teacher of Boldrin's at the University of Rochester, Romer has no desire to brawl with his respected colleagues. Moreover, he agrees that property rights for intellectual goods are sometimes too strong; in some cases, society might benefit from weaker restrictions. Music file sharing, for example, might increase social welfare even if it hurts the current music industry. And he stresses that alternative mechanisms for bringing forth innovation -- government support for technology education, for example -- might well be superior to copyrights and patents. Nonetheless, Romer does have serious problems with the new theory.

First of all, the first-sale rights Boldrin and Levine would assign to innovators "would truly be an empty promise." In their model, if a pharmaceutical firm discovers a new compound, it can sell the first pills but not restrict their downstream use. A generic drug manufacturer could then buy one pill, analyze it, and start stamping out copies.

"So what Boldrin and Levine call 'no downstream licensing' is instant generic status for drugs," Romer complains. And while they argue that the inventor "can sell a few pills for millions of dollars," this is unrealistic if everyone who buys a pill can copy it. "You can make a set of mathematical assumptions so that this is all logically consistent," says Romer, "but those assumptions are wildly at odds with the underlying facts in the pharmaceutical industry."

If Boldrin and Levine are unrealistic about appropriability, they are even more at sea re-garding rivalry, Romer adds. While it's true that ideas must be embodied to be economically useful, it's false to say that there is no distinction between the idea and its physical instantiation. A formula must be written down, but the formula is far more valuable than the piece of paper on which it's written. In a large market, the formula could be so valuable that "the cost of the extra paper is trivial -- so small that it is a reasonable approximation to neglect it entirely." If Romer's approximation is right -- if it truly is reasonable to neglect that "trivial" cost -- then out goes the slim element of rivalry on which the Boldrin/Levine argument rests.

Romer also objects to the contention that competition can deal well with sunk costs. And he suggests that Boldrin and Levine are wrong to object to copyright restriction of downstream use, since perfect competition allows sellers and buyers to enter contracts that impose such restrictions. "What justification is there," says Romer, "for preventing consenting adults from writing contracts that limit subsequent or downstream uses of a good?"

Boldrin's quick e-mail re-sponse: "We never say anything like that!! Patents and copyrights are NOT private contracts; they are monopoly rights given by governments."

Page: ‹ First 2 34 5

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time.

|4.20.10 @ 2:32PM|

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MIke|6.17.10 @ 10:03AM|

One illegal song download does not equal one sale less. In most cases it means you wouldn't buy it anyway if it wasn't available to "try". I said it before, I downloaded few popular songs to see what the fuss was all about, I didn't like it, I deleted the files, it's the same as going to a music store, asking to listen to the album, if you like it you buy it. this page

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I have to agree with mike.. the same things are said about cracked iPhone/iPad apps now. Maybe for every 10/20 or more downloads you "might" have lost a sale.. people who find things free often would not have bought it anyway.. but.. they do give free advertising to the product.. I have found today that artists are finding more creative ways of making money of their material anyway. I hear top hit songs already in commercials and television programs.. while they're STILL on the radio.. it's interesting. PLNDR Coupons - mannequin

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@greg - you might be right, BUT.. should we say that stealing a candy bar for the quickmart is not illegal as long as you wouldn't have taken it if had to pay for it? Think about it.. unique antiques
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|6.20.10 @ 1:42PM|

The second problem, what economists call inappropriability, is the divergence between social and private benefit -- in this case, the difference between the benefit society would reap from an invention and the benefit reaped by the inventor. Will I try to invent the wheel if all humanity would benefit immeasurably from my invention but I'd get only $1,000? car shipping instant quote
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|6.25.10 @ 2:29AM|

MIke has really got a point. There are real people putting real effort behind these things that we are just 'taking' mostly just because we can so easily and the mask that 'everyones does it'. We've become removed from the crime that we are committing. I wouldn't want someone stealing football shirts from my website. Immaterial things are the same as material things. Stealing is stealing.

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Intellectual Property Rights have been a big issue for a long time...it seems that foreign companies don't have to play by the rules like USA based companies.
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downloading music from internet is really an illegal act.
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Garbage in, garbage out. Music leaves you lost anyway. I think its a shame that music is so readily available. The point of dowloadable music being illegal increases the feelings of shame and furthermore lowlife mentality. Music TK Anyway, thanks for letting me share my thoughts.

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With that whole "current value" thing and the inventor being paid the value of what they expect the sales to be...that's just insanity? How could you possibly predict how well something is going to sell?

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I think this is the only reason why governing agencies from round the world are targeting to make internet as their sole property.

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