Russ Roberts

Boldrin on Intellectual Property

EconTalk Episode with Michele Boldrin
Hosted by Russ Roberts
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Michele Boldrin of Washington University in St. Louis talks with EconTalk host Russ Roberts about intellectual property and Boldrin's book, co-written with David Levine, Against Intellectual Monopoly. Boldrin argues that copyright and patent are used by the politically powerful to maintain monopoly profits. He argues that the incentive effects that have been used to justify copyright and patents are exaggerated--few examples from history suggest that the temporary and not-so-temporary monopoly power from copyright and patents were necessary to induce innovation. Boldrin reviews some of that evidence and talks about the nature of competition.

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0:36Intro. [Recording date: May 7, 2009] Standard argument: Invention, ideas need to be protected by copyright and patent to give people incentives to produce them. Existence of intellectual property: property rights should be clearly defined and protected, but this particular one is inefficient. Neither theoretical nor practical reason. Standard argument: come up with new idea, work hard, invest; if no exclusive rights to concept, new competitors can quickly come in and use that hard work, so no incentive. Seems logical. Two different points of view. First, practical: new idea--open pizza parlor, sell jeans in a particular street, making this gadget rather than that gadget, cell phone that is a little computer. We would not like the idea that the first person to open a jeans shop in that area to have exclusive rights. We want competition, lower cost, better quality. Sounds like it works--we want to have imitation. Imitation is price-taking in mathematical model; in reality, we look at what others do and see if it is good and try to do the good things and not the bad things; price equalization to extent things are similar. Do again: Very high fixed costs, so if you don't allow person to have some rents over and above the opportunity costs, people would not be willing to afford the initial fixed costs. Idea is not new--dates to Alfred Marshall, late 1800s. Market for shoes with laces: sets up factory, implies fixed cost, with constant returns to scale up to that capacity, certain marginal cost. Below that capacity, he is earning a rent, because this initially has low capacity and high demand as a new product. The rent will cover the fixed cost and more, per Marshall. Somebody looks and imitates, sets up another factory for shoes with laces; capacity goes up, quantity sold goes up, price goes down along demand curve, till eventually the price goes the point where the extra rents over the marginal cost covers just right the fixed cost of the last plant built. Long run competitive equilibrium, no further entry. Why doesn't this work for most innovation? Patents are subset. So maybe patents aren't really needed.
9:02Many innovations take place without patents. Innovator has a choice. Patent has cost: out of pocket cost and risk that by patenting the idea that you open the opportunity for competitors to work around it. In back of our minds, patents are the seed that lead to the potential and then the fruit; but historically, patents come in after the fact to keep out competitors after the innovation has taken place. Look at all of the innovation of the 20th century. Origin of the industry, flurry of small innovators competing, with very little patenting. Bill Gates, PC and the internet; his words: if we had had patents and copyright in the 1970s there would be no software industry. When a new industry comes around, like cellphones, all copy each other like crazy. Exactly what Marshall was describing. Possibilities to improve is large. Opportunity cost of wasting time fighting legally is great when instead can be improving the new product. Sufficient profits in the early days. Technical work that led to the conclusions of the book is that it does allow for patents to be useful in special circumstances. If cost of innovating is gigantic and it is really easy to imitate, really easy to expand capacity very easily, then argument fails. Empirical argument. Book available online free or at Amazon. Historical case studies.
15:01Two things come to mind about it being an empirical question. Economists look for proofs: high fixed costs justify patents. But lots of cases where fixed costs are not particularly large or where so much opportunity for innovation and profits that the fixed-cost issue isn't important; and then you have to look at the incentives. Turn to the government to keep out competitors even if there is no good economic case. But economists have given people the cover. Socially productive: while it may be true that imitation can quickly lower the returns to all the effort and hurt profits and reduce incentives, what that does it is encourages inventors to compete on things other than just price. So, find firms looking for ways to make their products more useful, more customized. Should I turn efforts to rent-seeking and the government or to the consumer to make product more valuable? Only when the industry matures that innovating becomes harder, rate of return has gone down, that having patents available becomes a way of making money. Presence of patents is huge incentive to put efforts into rent seeking. Empirical part: externality new discovery of last 25 years in economics. One way of justifying patents is through externalities--big externality of imitation. I'm copying you and you know that so you under-invest. Good argument; how relevant in practice. Singapore colleague. Travel Pro example: first company to come up with the rolling suitcase. Quickly imitated, anyone can see carry-ons. Took a while to see that even four wheels could be better. Didn't patent the idea, but still in business, making profits. Had some lead time. Copyright: completely confused. argument is that if the musician doesn't make tens of millions of dollars, he won't sing any more. Become a ditch-digger; we'll lose Beethoven, Paul Simon, etc. Do we encourage it too much? Could be too little. Copyright in music is late, second half of 19th century; son of Bach complains to Parliament. In that short period, extended. Market size multiplied greatly. Now, superstar musicians make so much compared to Frank Sinatra that there is no comparison. Should lead us to pause. Is opportunity cost to Britney Spears so large that she has to make ten times as much as Frank Sinatra? Beatles had low opportunity costs, good at nothing; but some stars today would be doing derivatives, quantitative finance. Compensate them to keep them in the music world. Obviously the profits will go down if you cut copyright to ten years. But would open doors to many more musicians.
24:17Friends who are intellectual property lawyers; like the artists, self-interested. Have to concede that profits will go down. Worry is that they'll go to zero. Napster came along, was thriving. Listeners wanted Napster to thrive; artists not so happy; what should economists on the outside argue? Napster certainly dented CD sales. If it was legal, would the profits be sufficient, or is that an empirical question we don't have the answer to? We did at the time. "Why Napster is Right"--webpage. Napster was legal given the laws at the time. Showed what current technology allowed. Useful provocation. But in 1999-2000 couldn't tell what final outcome would have been; but now we can tell. Check what's online. Pirate for scientific permission; university was blocking it. Time-consuming to use it. Everything available, but not a big dent in CD market. Time-consuming to find things, sometimes don't find it or it is incomplete, quality not good. Invention of digital distribution of music has not been exploited by the industry because there are no incentives because of the copyright. Fat and happy. In the ten years, music industry has made only small steps toward doing what Napster was doing. Proof that badly allocated intellectual property creates bad incentives for innovation. Two arguments about that kind of example. Quality not as high, but quality is really quite good, good enough for a lot of people; save the $10 from iTunes to get free copy from elsewhere. Russ's article on Napster. It ignored the potential for private solutions to emerge to make those distribution methods useful to consumers. Minimum example: maybe you won't make money on recorded music, but on concerts. Maybe find ways to make your music more usable--come with the lyric sheet, video, who knows what people would come up with. Video tape--Larry Lessig story--movie industry initially afraid that it would destroy their industry. Worried people would crowd into the room, private neighborhood theaters. But movie theaters have gotten better. Round-table discussion: in music industry, technological progress. Nothing to do with the pirates. Those hurt will try to fight it. Same in other industries: GM, Chrysler; steel. Some losers, want to spread around the extra butter, but legal defense of the monopoly position won't hold water. Can still have to pay $20 for a CD for music that you could pay on the internet only a couple of bucks. Surprised iTunes is still $9.99 for a CD. Policy statement. Pay for one tune and share with 9 buddies. Buy about 10-15% of what is on an iPod. Close to the marginal cost. If you could download it for $5, lots of people would refrain from doing the free downloading. Ethical things: it costs so little so why risk it. Distribution system is providing something of value.
35:34Going to get to pharmaceuticals, but first: Who disagrees? Some would be lawyers; some people who currently have monopoly power; any in economics profession? What is counter-argument? One area from the start for warm reception was actually the academic legal side. Legal scholars who work on intellectual are painfully aware that it is problematic. Mark Lemly, copyright so out of control that it has to be scaled back, pure rent seeking. Practicing lawyers don't react very well. In economic profession, most negative reaction from new growth, endogenous growth literature, Paul Romer: argument was that fixed costs play a role in spurring growth. Paul's argument (Boldrin was a student of Romer and Roberts while at Rochester): innovation technology, "blueprints" in a production function, are public goods and as such they are non-rivalrous and without legal protection non-excludable. Hence there is increasing return. Increasing return comes from the externality and the externality from the blueprint. Productive ideas, once discovered, can be used by everybody at essentially zero cost. We want a lot of those because they are productive; since profitability is tough to sell, we want to protect them temporarily with monopoly. That is wrong at the start: confuses abstract ideas with actual productive ideas. Productive ideas, that have social value, are completely rivalrous and excludable. How do Russ and Michele earn a living? Complete mystery. Give away tons of stuff--podcast, blog, express themselves, teaching strange activity, why do people pay as much as they do for it? Undergrads are paying for Russ and other economists to explain demand curves, which have been around for a century and can be read about for free. Students irrational? Because it's not true that the idea once discovered can be used by everyone. There are a lot of potential ideas. 2 + 2 = 4 is nonrivalrous. Copy in my brain and your brain, but it's the copy in my brain that is useful and that is totally rivalrous. Non-rivalrous means that more people can enjoy it at the same time than just the owner.
43:43History of economic thought; told Ken Arrow ten years ago. Paper, 1962, Nelson, Arrow, on information. Talks briefly about innovation: ideas of innovation are public goods and as such should be financed by the public purse. Ken is making a mistake: confusing abstract ideas with actual ideas that are the opposite. New growth theory in the 1980s. Ken Arrow was pushing the National Science Foundation (NSF). Government support of research argued to be crucial because of externalities; but in fact it's been very useful for the economists who got the checks but benefits that spilled over to others are limited, some maybe negative. Have cake and eat it. Case of medicine, pharmaceuticals: publicly funded research, patentable ideas turned into private monopoly. Most of the benefits captured by the monopoly. Bhide podcast: distinction between most public ideas and how they are implemented. Camera in a phone. In 1970, would have been laughable. Someone has that idea; once produced, can't be hidden. But the whole value of that is the implementation--how it's put into the phone, what you do with the phone, can you email it, put it on a website, what's the quality? Much less public than the idea itself. One-click button. Patenting of everything no matter how small can block thousands of other products. Political process favors existing competitor at expense of would-be competitor. Wouldn't abolish patents and copyright overnight. Shortening, not lengthening, the term would be a good experiment.
50:49Pharmaceuticals. Standard argument is that the fixed costs are extremely high; research is very uncertain; so return is very uncertain; so without patent protection people would not seek out new products. True answer is that we don't know enough about it. Companies are very secretive about it. Both true and false. Most of the cost has nothing to do with the process of invention, but with clinical trials. About 80% is clinical trials, necessary to get FDA approval. Second point: look at where in recent two decades at where the effective active components come from, they come from small labs. University labs mostly financed by public money and licensed to large company, NIH, NSF. Create a small company, one-product company, patent it, develop it, then call big pharmaceutical to sell it to do the legal work and marketing. Brilliant researcher in small lab--what would he be doing in absence of this patent process? Don't have an answer, not enough data. Bayh-Dole Act. Pharmaceutical profits have gone up. Others look at that and "blame" pharmaceutical companies. Legal side. Swiss chemical pharmaceutical industry most amazing--thrived without patents until 1978. No patents because of the constitution, French-speaking part of Switzerland. Huge lobbying pressure mostly from Anglo-Saxons all over Europe. Italy. Germany--big chemical industry origin, we took technology after WWII. Natural product can't be patented, but processes can be. Led to German industry becoming the dominant one at end of the 19th century.
59:47Pharmaceuticals: clinical trials. Public money if anything should be there. We want the tests as a public concern, afraid of principal/agent problem: they have an interest in saying it's safe. Also could argue that private testing agencies with reputations would emerge. Two approaches: let's redesign old mechanism, or don't trust market, political reality, public monitoring. NIH money produces private goods; should go to clinical tests on competitive basis instead. Licensing model, mandatory license, price is the cost. Indian case: Ron Jones. Jury is out. India had thriving pharmaceutical industry. Experiment is being carried out.
1:05:10Nature of competition. Book is story of Schumpeterian competition, new industry gets created out of nowhere, sometimes destroys existing competitors; others come along and compete price down. Creative destruction. That view pushed out by game theoretic approach: being first naturally important, get an advantage. Schumpeterian view confusing, two books, like Dr. Jekyll and Mr. Hyde, before and after going to Harvard. 1911 book, lesser known book. Later book, 1942-43. Socialism works, but bad thing because it limits my freedom. The way to innovate is to have a big oligopoly. Ability to plan, need planning, roundabout, complex processes. Sees market system weaker than socialism. George Stigler, did not pick fights he was bound to lose. Demsetz: Stigler paper on 25th anniversary of social science building at U. of Chicago: competition produces innovation. 1956 paper data: measured competition, growth rate of labor productivity. Can have too much effort, winner takes all, lottery story. Focus on competition. Stigler's The Theory of Price, chapter "The Quicksilver Nature of Competition." Most game theorists see the world as not very competitive, other ways to seize the upper hand. Threaten to create ten stores to drive someone out. General equilibrium theories taking too abstract a view, lost the dynamic. Game theory can be useful to understand why some theories don't make sense. Basic model we are trying to kill: fix cost, profits will not pay for the fixed costs. Assuming that people will play Bertrand. Wrong even in their own arguments. Russell moves first, decides to innovate; Michele looks at him and says he can imitate. If you work it out logically, get to conclusion that first guy always gets a monopoly and no one ever challenges. Bertrand, 19th century game theorist. Unbounded capacity. Being close is not the same thing.

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COMMENTS (32 to date)
Adam writes:

Professor Roberts,

In your class last Fall you brought up the story from The Economic Organization of a POW Camp, and asked us what the value was of having one price rather than just bartering.

A lot of us came up with some straightforward answers, including that it reduces the costs of trade and of acquiring information, etc, etc.

Much later something else occurred to me. Without one price there are arbitrage opportunities; people who have information about who will pay more for something, and who will sell at a lower price than anyone else, can make bigger profits by buying low and selling high.

Once competition drives everyone to one price, that arbitrage opportunity disappears. The only way to increase your earning is to innovate; to figure out some way to save costs or increase the benefit of what you've got to offer that no one else has figured out. So you figure out that meat is going to be more scarce in a couple of weeks and start buying it up now to sell at a higher price then. Or you come up with a new recipe that no one else knows that is popular, and have people pay you to either buy the final product or to make it with what they have.

This podcast made me think of that again. If competition already puts pressure on profit-seeking individuals to be innovative and creative, is there really any point to granting them patents and copyrights other than making those specific individuals more wealthy? Surely we don't think that the Ancients Greeks were without great inventors or great artists since they lacked intellectual property laws!

A great interview; I hope to get the opportunity to read this book in the near future. Especially since they put their money where their mouths are and put up a free online version! :D

Mads Lindstrøm writes:

Only answering the easy question!

I am not an economist. Still it seems a no-brainier to me, that copyright terms of life+70 years is way too long, from an economic efficiency standpoint. Rarely, do people make decisions based on what happens 70 years after they are dead. I would guess that most economist would agree. And I think it would be easy to convince people to shorten copyright terms if economic efficiency was the only issue.

But many people just do not look at copyright in terms of economic efficiency, but in term of morals. They believe that a creator have a right to whatever song, movie, book, ... they have produced. I do find this idea of moral right to an immaterial object like a song to be dubious at best. But it is a lot harder to argue against some kind of moral right, than arguing that the current system is economic inefficient.

Therefore, I think if one wants to shorten copyright terms, it is not effective to just look at copyright in economic terms, but one must also look at it in moral terms.

Adam writes:

Mads,

It's true that people may not make decisions based on what happens 70 years after they are dead. But the length of the copyright effects its value to someone you might potentially want to sell it to. Just like it adds value to the land you own when you plant a tree that might not become something impressive until your grandchildren are old and gray; it isn't as much value as it would have at the point where the tree is fully grown but it is additional value none the less.

That said, I do agree with you on the importance of the moral arguments for or against intellectual property. Personally, I don't feel like a musician's moral rights are being violated when I download copies of his song from my friend's computer, any more than when I listen to his music being played on my friend's CD player. But that discussion, while important, is outside the realm of economic analysis.

Russ Roberts writes:

Mads (and Adam),

The tougher moral question is: who has a right to what material? Authors and musicians use work that came before them in all kinds of ways. Should they have to get permission or pay a fee for everything other than parody? If I mention Willie Loman in an article on salesmen, do I have to get Arthur Miller's permission? Does Arthur Miller own Willie Loman? And even if he does, as his creator, is the world a better place to be a writer with that concept of ownership or without it?

Should the first guitarist who comes up with the CFG chord progression get a share of everything that comes afterward?

I don't think these are straightforward moral questions. They inevitably involve incentives and monitoring and enforcement, all of which are economic matters.

mjh writes:

I wonder whether or not there are areas in which patents (in particular) work relatively well at producing the results that were intended by patent law, and other areas that they work very poorly at producing the intended results. This is described on the book "Patent Failure", which was well reviewed by Tim Lee when he subbed for Megan McArdle.

Review Part 1
Review Part 2
Review Part 3

Bessen and Meurer argue that the pharmaceutical industry is an example where patents work, but that other areas, especially in the software industry, they don't work.

Mads Lindstrøm writes:

Adam,

This was not clear from my comment, but it is not so much the life part, as the 70 years I am skeptical of. Actually, I find linking copyright terms to an artist's dead to be weird, but that is another discussion. What I am skeptical of, is the idea that income from copyright 70 (or more) years into the future, has a significant influence on today's decision.

Let's try a thought experiment, and look at this from a potential investor in copyrighted materials point of view. He would find that historically, most money from a work is made within the first few years of publishing. Also, it is very difficult to predict what is going to be popular 70 years from now. So the investor must consider this a high-risk investment. Riskier than the stock market. The high risk and the low return far into the future, will make this an unattractive investment and thus have little bearing on today.

Now I will try a more formal economic argument. I might get into deep water, as I have no formal training in economics, Feel free to correct me. As the risk is higher when investing in copyrighted material, than investing in stocks, the investor should expect higher return. As far as I remember, the average return from stocks is 7%. So lets say he expects 10% returns. Now every 100 dollar earned 70 years from now will have a present day value of:

$100 * (1-0.1) ^ 70 = $0.0627

If his is really optimistic and set the interest at the same level as stock, 7%, we get:

$100 * (1-0.07) ^ 70 = $0.622

So even if, he is wildly optimistic and expecting a work to sell as much 70 years from now, as it does today, the present day value of his future earnings is still very low. Thus, I assume that we could easily shorten copyright terms, without affecting incentives to create artistic works significantly.

Hope nobody spilled their coffee while reading my calculations :-)

Adam writes:

First, the risk analysis, while interesting, I don't think is the most fruitful way to look at this.

It may be true that most movies or songs or books make gigantically more in their first year or month or even week than in any other year after that. But it can also be true that the vast majority of the money collected comes from all of the years after the initial release; even if it is spread out over the course of 70 or 100. I don't know whether or not it is true, but I wouldn't be surprised if the rights on Alfred Hitchcock movies had earned more money since the initial release of those movies than they did at the time, even if no single year was as big as the first one.

So the right would be priced based on how much it was expected to earn its holder over the remaining period of time that it was good for. The longer that period is, the more the expected returns will be. Even if it's only a penny a year over the course of a decade, that's still ten pennies more than the zero it would have earned if the right had expired ten years sooner.

So, in general, more years on the copyright = greater value. It might not be a lot greater, but it isn't going to be negative, either (unless you buy it at a price that is overly optimistic about its returns, but that's a side issue).

Pedro writes:

The only 1956 Stigler publication I can find is the book "Industrial Organization and Economic Progress". Is this what Boldrin was referring to?

Per Kurowski writes:

The Intellectual Property Right tax: Society, for its reasons, has decided it needs to award and defend intellectual-property rights. The downside is that awarding temporary monopoly rights could lead to these being abusively exploited. Also, awarding these rights impose on society the obligation to defend them, which costs money.

Since it does not seem fair to assess taxes on a business venture that has to compete in the market without any kind of protection at the same rate than projects that have been awarded intellectual-property rights, there should be a special tax levied on all profits generated from intellectual-property rights.

Adam writes:

Professor Roberts,

I completely agree. In the podcast (and a previous one on growth, I think with Romer) you point out that the ability to claim intellectual property rights also creates the incentive to try and patent/copyright/trademark everything from the toothbrush and paperclip to everyday words. What exactly is the line?

Personally I'm with Boldrin (and Lessig, and Benkler, and that whole crowd); people should be free to remix and learn from one another. The incentives to innovate exist without IP, and people like to create art and express themselves enough already without granting them monopoly privileges.

Adam writes:

Kurowski,

I submit to you that society does not "decide" anything. The law has emerged not from a decision made by some abstract social entity, but as a result of the pressures faced by individual politicians, bureaucrats, judges, and people with a stake in the outcome.

Ankit writes:

Prof Roberts,

First, I would like to make a distinction between patents and copyrights.

I think that the premise of this podcast is based on an incorrect assumption.
A patent is a set of exclusive rights granted by a state to an inventor or his assignee for a limited period of time in "exchange for a disclosure of an invention".

People innovate, and then use the rent seeking authority, granted to them by patents, to generate income from their idea. The podcast argues that innovation is driven by profits due to patents.
This assumption is misplaced. Patents came into origination, to encourage the innovator to release the knowledge in public domain.
From Wikipedia 'In accordance with the original definition of the term "patent," patents facilitate and encourage disclosure of innovations into the public domain for the common good. If inventors did not have the legal protection of patents, in many cases, they would prefer or tend to keep their inventions secret. Awarding patents generally makes the details of new technology publicly available, for exploitation by anyone after the patent expires, or for further improvement by other inventors. Furthermore, when a patent's term has expired, the public record ensures that the patentee's idea is not lost to humanity.'


Anecdotally, if you look at historical scriptures, you will find a lot of discourse about religion, However, very little information can be obtained in historical writing about industrial processes. How to make a wheel, how to make steel, etc. were passed down from generation to generation through apprenticeship which was a sort of trade secret passed from generation to generation.
Only after the introduction of some sort of patents, writings appeared describing industrial processes.

Copyrights are a different beast. If the purpose of writing something original is to
make money (economic returns) through distribution of that work, then copyrights are a necessary requirement. If information can be copied (through writing, recording, digitizing, etc.) the only form of income an artist can generate will be through a live concert or book reading.

If the purpose of artistic creation is not economic, then copyrights are immaterial. Blogging is exactly such an activity. Political discourse
and a large part of academic discourse is not driven by economic motives. I can argue that the motivation is fame and hence copyrights are not
relevant.

If the whole premise of the podcast is to make a case for patents/copyrights should expire sooner, I am all for it. But doing away with
patents will hurt much more than monopoly granted by them.

wbond writes:

I'm very interested in the response to the "industrial-secret" point that Ankit raises.

Pietro Poggi-Corradini writes:

I could be off-base but I view patents and copy-rights as contracts between the inventors and the enforcers. As such there should be a price to obtaining a patent (and there is), but I'm not sure how flexible it is.

To make an analogy: when I pay with my credit-card I'm making a contract with the store, with the credit-card company, and with law-enforcement. If someone comes along and impersonates me (by imitating my card), this person would violate my personal agreement with the store, the card co., and law-enforcement.

Of course, a contract could be unrealistic, say very hard to enforce. The price of such contracts would then reflect all the relevant information. The problem might arise if there is essentially only one enforcer, and it would therefore be better to grant local judges or other decentralized institutions the ability to issue patents and copyrights.

Per Kurowski writes:

One of the sad consequences of patents and copyrights is that it generates growth opportunities for the informal or outright illicit sectors of the economy and that as these seems to be growing at much faster rates than the legal and formal economy they could one day overtake us.

Another problem is that copyright or patents infringements do not carry sufficient societal support. In fact most certainly all of us discussing the issue here have in some or another occasion committed crimes of intellectual property violation… and so you end up with a society where fathers and sons go out and do a little crime together for better bonding... not a good thing.

malavel writes:

A minor correction. The Pirate Bay was started by the Pirate Bureau, not the Pirate Party.

David writes:

Granted, patents and copyrights do serve a purpose. I see the argument that they promote incentives for innovation and artistic work. But, when it gets down to it, why are they any different than other forms of protectionism, government-enforced monopoly, or for that matter a tariff or quota? Don't they result in the same inefficiencies? Perhaps, on balance the inefficiencies are a good trade-off. But, particularly in the case of copyright, I don't see why life+70 years is necessary to promote creativity and efficiency. The argument that Mickey Mouse should still be protected under copyright law, seems utterly ridiculous to me.

Tim writes:

I think an important point was not fully considered in the case of drug patents and the FDA.

Yes, FDA approval requires 10 years and a billion dollars, an obviously huge hurdle. Companies will rightfully tell you that they need patent protection or else their patents would expire before they could make the drug at all.

BUT, the FDA is able to make such ridiculous requirements BECAUSE of the patent protection. If we nixed intellectual property rights, Congress may be forced to cut the delaying abilities of the agency.

Kevin Pacheco writes:
Undergrads are paying for Russ and other economists to explain demand curves, which have been around for a century and can be read about for free. Students irrational? Because it's not true that the idea once discovered can be used by everyone.

You both totally missed the mark here. The undergrads are paying for a degree and all of its associated benefits.

David writes:

It seems necessary to separate what to me are very different aspects of intellectual property based on the underlying product derived from the idea. The first class might be considered manufactured durables such as pharmaceuticals, hardware, etc. where the idea results in a product that only be copied by copying the underlying process to manufacture and identical product. The second class are those products that could be called semi-durable, such as music and movies where the end product can itself serve as the source for the product to be copied (CDs or DVDs can be duplicated without the underlying process needing to be replicated). The third class encompasses those things that are intangible in nature (such as software) where it is the expression of the idea per se from which the product derives its value. Boldrin seems to indicate a possible fourth class, which I believe to be a bit of red herring. The example he used being opening a store that sells jeans and arguing (I assume facetiously) that the owner could then claim that it was his idea to sell jeans and no one else can do the same without owing some sort of rent. But this example is simply the instance (selling jeans) of a class (a place that sells things) and is not per se a unique class and it is only the class level that should be afforded some degree of legal protection. By differentiating IP into these different classes it gives us some guidelines for implementing legal protections.

Let’s use pharmaceuticals as an example. If I develop and market a drug it seems inarguable that I should be allowed to profit from my invention. It does not necessarily follow that I be granted monopoly for that product even if it is time bound. A better solution might require the payment of royalties to the developer if someone else wants to produce the same product (this condition could also be time bound). In this case, any potential competitor incurs a cost for market entry and royalties could be factored in that cost. This would seem to strike a balance between innovation (and its associated reward) and competition (if I can the product more cheaply while still paying the royalty it benefits all involved).

The second class might be controlled in a different fashion. Music or movies can be reproduced and distributed with little cost. For example, as recently as the early 1990s, the cost to produce a record was quite high (costs into the hundreds of thousands of dollars was not uncommon and even a "simple" DIY album could easily cost $25K). Furthermore, distribution and production were costly (physical albums or CDs needed to be produced and moved from place to place). But today, $10K can buy all the equipment and software needed to produce an album (actually, numerous albums) and distribution cost of the music via the internet is nearly zero. At the same time, the potential market has expanded dramatically with the music available to anyone in the world with a computer. As a consequence, the market has expanded several fold and the cost of entry has dropped in inverse proportion. Ideally then, IP law should reflect these changes in market conditions such that the punishment for unauthorized copying (taking) is related to the cost of production rather than market value.

The final class could be the most nuanced. As with music or movies, software can be copied and redistributed at little or no cost, but what if I arrive at the same final product from a different route? For example, I write a program that looks and acts exactly like say Microsoft Excel, but the code for doing so is my own. Do we protect the idea (a spreadsheet), the expression of the idea (the working code), or both? Software companies no doubt would like to protect both, but I think it can be argued that it is only reasonable to protect the expression of the idea. If the idea itself were protected we would most certainly stifle innovation and limit competition. It would be analogous to applying for a patent for the wheel, the airplane, or the automobile—which we most certainly would not allow.

The bottom line is that patent and copyright are at least as essential as contract enforcement for markets to function properly. Like contracts, we should seek a framework for intellectual property to operate within, but we cannot and should not simply take a blanket approach.

aub writes:

Anytime a speaker uses the words "monopoly" and "public good", my ears prick up. So let me paraphrase what I think the speaker is saying:

"But I believe I made it clear that I am in favor of it, because I am in favor of a free economy. A free economy cannot exist without competition. Therefore men must be forced to compete." [Simon Pritchett]

Let's take a second to look at Boldrin's idea of forcing "society" to pay for FDA testing for new drugs, since it is a "common good."

First, it's unlikely that the govt employee is as interested in getting new drugs through testing as quickly as the pharmaceutical company is. In order to get a drug to market faster, a pharmaceutical company (who no longer has the burden for the cost of clinical trials) will likely submit more drugs for clinical trials earlier in the development process.

Second, companies that produce generic drugs do not need to run the drug through FDA approval again. They merely have to show bioequivalence to the original. So Boldrin's idea of sharing cost of development among several companies, using FDA approval as a form of protection instead of patents, is flawed. Why would a generic drug company split the cost of development with the original creator of a new drug?

Yes, this idea may stir competition, which Boldrin and Russell believe is the heart of a free economy. But now the competition is through marketing rather than through innovative ideas. Small, creative innovators come out short - having paid for development but not able to compete with a larger incumbent that has distribution and marketing.

AngelM writes:

The paper Boldrin was referring to must be this one:
Kenneth Arrow: "Economic Welfare and the Allocation of Resources for Innovation", 1962, in Nelson, editor, The Rate and Direction of Inventive Activity.

James writes:

Just a word about the audio quality:

The poor audio on the guest's voice, combined with his large dynamic range, and his accent, make this podcast a very tough listen on certain headphones/speakers. Skype or Ventrilo can be used to get much higher quality recordings than the phone system.

John writes:

There was a pharmaceutical example given during the podcast. Company #1 pays the cost of bringing a drug to market; and then when Company #2 wanted to sell the same drug... the suggestion was made that Company #2 should pay Company #1 half the cost the clinical trials. And Company #3 should pay 1/3 of the clinical trial cost to Companies 1 and 2... and so on.

My question has two parts.
1. How do unsuccessful trials get paid for?
2. If we decouple the "trialing" from the "selling", how do we avoid companies claiming higher clinical trial costs than were really incurred?

Is there an analogous commercial model that works?

Alvin writes:

Kevin Pacheco writes that students are paying not for the information that their professor offers in class but for a degree which confers some assumption of capability. Russ and his guest state that much of their lectures is available freely from other resources (price theory, for example can be learned from books available in a public library, wikipedia, etc.)

I also see that many universities are now making lectures freely available on the web and I wonder:

1) Will MIT, U.C. Berkeley and the others soon stop this practice and make these available only to registered students? I can only see this happening in response to students who complain that they are subsidizing the public availability of these lectures.

2) Will it soon become clear that the baccalaureate is increasingly diluted in value since the information passed on to students can be obtained at a fraction of the cost of 4-year university tuition. That is, will the "business model" on which higher education rests change substantially in response to a widening recognition of the real product that is being purchased?

Just a few thoughts . . . . (by the way, I am behind on my EconTalk listening so that explains the delayed posting).

Zoltan writes:

The Napster argument -- that there is a real cost to using file-sharing in terms of time, effort, and reduced quality -- seemed to miss the point to me. The only reason file-sharing has these costs relative to iTunes is because it is illegal. As soon as you eliminate the copyright protection, you would have dozens of iTunes-type sites offering easy high-quality free or $0.01 downloads (probably using Apple's source code, to boot).

Russ also missed the key question that should be asked of any author promoting a book on copyright: "Should Amazon be allowed to buy a single copy of your book, scan it, and produce its own copies for sale without paying an additional a cent to you?"

Overall, I thought Russ' questions were much less probing and insightful than usual. There weren't really any tough questions on what a world without intellectual propoerty would look like. Boldrin might have had good answers to those questions, but we don't know.

Gandydancer writes:

aub writes: "...Second, companies that produce generic drugs do not need to run the drug through FDA approval again. They merely have to show bioequivalence to the original. So Boldrin's idea of sharing cost of development among several companies, using FDA approval as a form of protection instead of patents, is flawed. Why would a generic drug company split the cost of development with the original creator of a new drug?"

Not a good objection. All pharmaceuticals would be eligible for "generic" reproduction as soon as introduced... but they wouldn't be approved merely for proving bioequivalence -- the manufacturer would have to cough up their split of the costs to get to market. In fact, by Boldrin's argument I don't see why they would have to pay for proving bioequivalence any more than the original manufacturer had to pay for clinical trials.

The idea of having the FDA pay for trials fails, however, because the FDA will not do a good job deciding what trials to fund and will, as has been pointed out, have no way of recovering the costs of failed trials.

Gandydancer writes:

...or for trials that succeed in proving efficacy, but at such a government bureaucracy-inflated cost as to be an insuperable barrier to entry. At least under the current system the originator can attempt to recover sunk costs of it's profitable to do so. Boldrin's idea here is really not a good one.

David writes:

"Time-consuming to use it. Everything available, but not a big dent in CD market. Time-consuming to find things, sometimes don't find it or it is incomplete, quality not good"

I don't personally find that to be the case. I download most of my music and movies through a private (invitation required) BitTorrent tracker. I never have any problems finding anything mainstream, and usually the limiting factor is the speed of my internet connection. For more obscure media, I still have better luck finding stuff that way than on iTunes or other legitimate sites. Movies are usually available in full DVD/Blue Ray quality, and music in high quality mp3 or FLAC. I haven't seen a mislabeled or corrupt file in over a year. The only quality difference between buying legitimately and pirating is that if you pirate you don't have to deal with DRM. Pirating has a time cost, but even before you take money into account I find it cheaper than buying legitimately.

I think a big reason our experiences differ is that I am using BitTorrent, while I would guess that he was using an application such as eMule. Most p2p clients will automatically share anything they download, which can create problems. If you download a corrupt or mislabeled file, you are now sharing it with the world, unless you manually delete it. With BitTorrent, you have to explicitly share files, which cuts down on bad files shared by mistake. Private trackers are even better, because they can ban users who share bad files.

R.A. writes:

The ideas of Boldrin are interesting, I generally agree, but not to the full extent.

The problem is: His examples are flawed.

1.) "Market for shoes with laces"
Example is IMHO nearly irrelevant.
The costs to build and operate a shoe factory is relatively high, the costs of getting the idea / researching the concept of "shoes with laces" is next to nothing.
With this relation, no intellectual property is needed.

The interesting question about the necessity/legitimacy of intellectual property is relevant only in examples of opposite structure: Relatively high cost of inventing the product vs. low costs of production.

2.) "Bill Gates, PC and the internet; his words: if we had had patents and copyright in the 1970s there would be no software industry"

One just shouldn't believe Bill Gates.
There were no software-patents in the 1970s - but there was copyright.
And while I do not think software patents are a good idea it is quite clear, that since introduction the innovation process has not slowed down.

Besides: Not the software industry, but Microsoft is what Gates is talking about.
He stole all the ideas before patents came up, then protecting his spoils when they where available.

3.) "Everything available, but not a big dent in CD market."
That's ridiculous.
The development of the CD market is no proof at all, because all the time there was intellectual property and laws protecting it (not always efficient, in case of Napster, but they were there).

If there had been no intellectual property at all, there would be no CD market (except for niches). Because then it would be possible to set up a complete e-shop like iTunes, which the complete range of music at lowest possible price (because of course the artist would get nothing).

May be the artist could find other sources of revenue (concerts ...), but he could never compete with his copiers.

"Video tape--Larry Lessig story--movie industry initially afraid that it would destroy their industry."
Just the same: No proof at all, because all the time there was intellectual property impeding free copying.

4.) Pharmaceuticals
Was already countered (John, May 25, 2009 10:32 AM)

vonb writes:

Ankit hit the nail on the head. The purpose of patents are to incent the inventor to disclose the details of their invention so future innovators can build upon it. The premise of Boldrin's argument seems to be based on a straw man, which makes this podcast a bit frustrating to listen to.

Also, the government does not defend or enforce patent-holders' rights; they only provide a forum (the courtroom) to hear your case. If you have a patent that you suspect is being infringed upon, you had better be ready to invest a lot of time and up to $100k or more in legal fees defending your patent -- the patent office won't do it for you.

Lastly, you cannot patent what is already in the public domain. So no one can make money by patenting toothbrushes or paperclips. They can, however, patent improvements on toothbrushes such as for more efficient or compact electronic components, or for combination toothbrush/paperclips for whatever use those might have.

PS Russ, thanks for hours and hours of education and entertainment. I have listened to most of the EconTalk archives, and this is the first time I am 'current' enough to post a comment. These podcasts are a brilliant body of work!!

Petrus writes:

I think that the 1956 Stigler paper is indeed "Industrial Organization and Economic Progress" which is available from http://www.econ.umn.edu/~mboldrin/Papers/stigler_1956.doc in MS-Word format. He compares employment and output in a few dozen industries.

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