Russ Roberts

Heller on Gridlock and the Tragedy of the Anticommons

EconTalk Episode with Michael Heller
Hosted by Russ Roberts
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Michael Heller of Columbia Law School and author of The Gridlock Economy talks to EconTalk host Russ Roberts about the book and the idea that fragmented ownership is a barrier to innovation. Heller makes an analogy between the tragedy of the commons and what he calls the tragedy of the anticommons--the problem of bundling together numerous individual claims to a resource. Examples discussed include drug innovation when the innovator wants to use technologies of multiple patent holders, new music or visual media where the creator wants to use multiple copyrighted works, and allocation of spectrum rights and its role in wireless innovation.

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0:36Intro. [Recording date: October 29, 2009.] Quote from book:
Private ownership usually creates wealth, but too much ownership has the opposite effect. It creates gridlock. Gridlock is a free-market paradox, when too many people own too many pieces of one thing, cooperation breaks down, wealth disappears, and everybody loses.
Explain. Gridlock--too many owners--riff on familiar concept of tragedy of the commons. In a tragedy of the commons, too few owners, resulting in overuse of the resource. Too few owners in the ocean and people over-fish it; too few owners of the air, and people pollute it. Solution to tragedy of the commons is to privatize--single decision-maker who invests in the lake so there are more fish tomorrow. But privatization can overshoot. Instead of too few owners and a tragedy of the commons, we can have too many owners, and a tragedy of the anticommons. Instead of a resource being wasted in the economic sense through overuse, the resource can be equally wasted through underuse in an anti-commons. Too many owners creates potential of their blocking each other. Let's start with the commons: intuition and parallels and contradictions. Taping just a few weeks after Elinor Ostrom won the Nobel Prize; work talked about in book. What are some of the ways that societies deal with common property to avoid the tragedy? Privatization not the only one. Historically, when people thought about the commons they often thought about what is now called more precisely "open access"--that absolutely anyone can use a resource. Hard to have conservation outcomes in an open-access regime. What privatization does is align individual incentives with the resource. Historically two other solutions noted for the tragedy of the commons. One: state control. Command and control, regulation: state tells you how much you can do. Privatization often seen as a solution to over-regulation in a commons. Ostrom, basis for Nobel Prize: noticing the conditions under which commons property can succeed outside of state control on the one hand and privatization on the other. Circumstances that groups can manage resources effectively even though they are commons to the insiders and private to the outsiders. Ostrom noticed aspects like repeat play--having relationships that go across the resource and other resources; having a small number of people; sharing the same church. She's identified the circumstances in which commons resources can perform economically at a very high level.
4:54In those situations, norms or informal rules emerge through the cooperation of those players; and they are enforced not by the state but by repeat play or connections between people that would create affection or some sort of altruistic play between them. Altruistic on the one hand, but also wealth-maximizing on the other. Don't need to look to the leviathan or complete atomization--intermediate solution. Altruism: if I personally benefit and impose costs on the rest of the group, if I care about the rest of the group that tendency will be mitigated somewhat. What Ostrom showed was this whole range of possibilities between altruism and wealth-maximization between what has long been thought to be the entire spectrum of ownership. In the middle are some interesting institutions. Anticommons idea and what gridlock book suggests is that there is an entire half of property relations and a lot of economic problems on the other side of private property. Commons-to-private is only half the spectrum; the other half spans from private to anti-commons ownership. So, in the anti-commons--how would that work? The commons is familiar. "Overuse" has been a word in English for 400 years. The problem of underuse--of resources being destroyed by being wasted by not being deployed is almost completely invisible. "Underuse" only became a word in English--in Scrabble--three or four years ago. One-way ratchet. Many examples where the real economic problem is that there are multiple owners competing with each other, resource left economically idle. What is the most underused natural resource in America? Airwaves. Artifact of the way we define property rights in broadcast spectrum. We have thousands of owners with non-transferable limited use; virtually impossible to assemble national high-speed wireless network. Because so many fragmented owners, United States has fallen out of the top ten, almost out of the top twenty. Missing wireless and entertainment services that are available in the rest of the world. Tom Hazlett: tragedy of the telecommons, cost the U.S. economy trillions of dollars.
9:38Hard to take advantage of the potential of the system because of what we would call transactions costs--hard to negotiate with so many owners. One way to understand a tragedy of the anticommons, like a tragedy of the commons, is that these are both different versions of transactions costs failures. In the anticommons, in theory you could purchase all those rights and have control. In open-access story, harder to do. Everyone could agree not to fish. Perfectly symmetrical. Buchanan and Yoon paper: mathematical symmetry. Wireless life pleasant: what would a visitor from overseas notice that is missing? Possibility for a lot more remote medical work, easy and powerful video conferencing; real time multimedia; downloads watching TV in real time on cell phone; shopping beaming advertising and coupons to phone. Nextel network. Hard to know you are missing something if you only look within the United States. Podcast with Hazlett. What is the policy solution that would unlock those resources and get rid of the gridlock? First step is to notice that there is an economic loss from the misspecification of property rights. How we define property rights is more powerful than people realize. We don't know to be upset with the allocation of spectrum licenses because we don't know what we are missing. FCC policy. What can they do? Challenge is how to assemble resources in a low-transactions cost way. Wider array of uses and easier transferability. Make telecom licenses look more like ordinary property. Not so much fragmentation and number of owners as it is the nontransferability and restrictions on use.
14:23Use of patents: medicine and music. Hidden example of gridlock. A lot of cutting edge treatments, gene therapy, require intervention across a whole range of genes, and each of those genes is separately patented. Diagnostic tool for cancer. Imagine walking into an auditorium and it's filled with all the owners of all the relevant patents. Unless you can get agreement from everyone in the room, the tool or therapy doesn't work. Each of those is usually some small biotech startup and each is usually very committed to the value of their individual patent and each demand the corresponding price. Hold-up problem; complementary input--need all the sections of train track to get from here to there, and if you miss any one of them you get nothing. Separate ownership is sub-optimal. In the drug context, as drug development has moved from a single patent, single molecule, innovation is increasingly breaking down. In the last year, 40,000 gene patents granted; steady increase in drug R&D investment. Number of drugs that treat disease has been going steadily down. Drug discovery gap, due to many problems such as FDA approval; but an important part is patent gridlock. Drugs that could and should exist that aren't being created. Patent system is suppose to spur innovation; paradoxically, too many patents can mean fewer life-saving innovations. Golden rice: tension between over and under patenting. If you want to have some high tech innovation in the world of plants, it use to be the case that you hybridized traits you wanted. Produced the green revolution. Inputs used to all be in the public domain, just like drug discovery. More and more those inputs are being separately patented. Freedom to create new plant products is more and more hedged in by the patents that you confront. Scientists Potrykus and Beyer: child blindness stems from Vitamin A deficiency around the world. Simple way to solve that would be to have the Vitamin A produced by the ordinary rice that is eaten. Figured out a way to do this, but in the process of engineering that new golden rice, they discovered that it infringed on roughly 70 U.S. patents. Rice is ready to go and could save millions of lives, but couldn't bring it to market because to do so they would have to negotiate dozens of separate patents. Already had this valuable product in hand; were able to shame the patent owners to create a humanitarian license. But for similar examples are ones we don't even hear about. Anger that these property rights were preventing him from getting the product to market, but realized that these patents had created the techniques that allowed him ultimately to create his product. Tension there. Fundamental policy question. Some examples in book result of accidents; some result of policy decisions made in the past or private decisions where it's hard to anticipate problems would come down the road. Is it a mistake to allow people to patent a particular gene? Is suggestion that we should have less? zero? What about products that are very expensive to bring to market because of the cost of assembling property rights? Want to extend the debate to include the possibility of hidden cost. Patents are a good thing. If it weren't for patents, there wouldn't be the biotech revolution. Massive inflow of money into biotech research arises because it's possible to get production. What gridlock discussion suggests is that against that general backdrop of patents being a good thing, we need to think about what are the potential costs. Privatization isn't the endpoint--it's an optimum between overuse and underuse, between commons and anticommons. What we are aiming for is not the most amount of property rights, but the best design for property rights. A lot of implications for that insight for patent law. Past week conference on the gridlock economy, podcast online. Particularly salient for semiconductors and telecomm, banking, internet shopping--require assembly of thousands of patents. Several thousand patents involved in a cell phone; no way to do online banking without dealing with ten thousand patents. Impossible to discover the patents you need, and impossible to know whether the claims cover your product or not. Cannot design high tech product that isn't infringing on hundreds of patents. Products that are most successful are subject to hold up by patent owners who can claim willful infringement even if you didn't even know their patent was involved.
25:00Anticipating that legal cost, a lot of people are uninterested in innovation. Tragedy of anticommons. With a tragedy of the commons, very visible--you can see the pollution in the air or that you are not catching the same number of fish in the ocean. Tragedy of the anticommons tends to be invisible. It's the drugs that aren't invented, cellphones that don't come to market. Invisible tragedy. Michele Boldrin podcast: getting rid of patents. Legal scholars and economists on how to treat intellectual property relative to past treatment. Where are we going? We should be paying more attention to the gridlock features of patents. Mike Meurer , Jim Bessen: Patent Failure. Tried to measure overall effect of patents on economic growth. Leaving aside pharmaceuticals and chemicals, where patents seem to be wealth-producing, the net is that patents are wealth-destroying. Googles of the world would rather live in a world where property is not protected through patents but through other means. Encouraging if true: patent environment is a sort of commons; if all players think we are degrading it then we will probably move toward a different environment down the road. Talk to staffers on the Hill: how do we get patent reform? Bill aimed at patent gridlock; Congress won't go forward without bipartisan agreement, where bipartisan is not Democrat and Republican but pharmaceuticals and Information Technology (IT). True of any common solution--existing set of owners, have to find a way to compensate them if you need their support for a transition. Patent law written in 1952 to support a style of innovation, not the way America innovates any more. Compromise reached fifty years ago. Patent law is not tuned to the new style of innovation.
30:52Music and documentaries: mashup or bundling of the nature of innovation. In the world of patent, one-patent, one-product. In the world of artistic expression--music or film or TV--today much less trying to put together separate pieces. Eyes on the Prize, documentary on Dr. Martin Luther King put together 20 years ago, Henry Hampton. Hampton pulled video clips from 80 archives; had 300 photos; about 120 fonts; won an Emmy, but disappeared. Couldn't be burned on a DVD, couldn't be shown on TV, because he didn't control all those small pieces of copyrights he needed. Most important film account of the American civil rights movement couldn't be seen. No central registry of copyright owners; even if you can identify them, have to bargain with each of them; can't assemble all the licenses. Clearing rights in the copyright world: half-Sherlock Holmes, half-Monty Hall. Many products don't come to market because even a second can become very costly. Nature of rap music has changed because of this gridlock; if you are a fan of old hip hop, Chuck D, Public Enemy, used to rap over a collage of sound. Rappers today don't do that--instead use single sample because licensing 300 is impossible. Whole style of expression is illegal. Also true for film and television. Would think there would be an exemption for fair use; but publishers and music companies are uneasy about testing that limit. In Russ's last book, wanted to use a quote of about 3 words from a movie; publisher, Princeton U. Press, insisted on permission; negotiation with multiple sources. Copyright in American law is never an absolute right. Want to give authors some protection in order to promote the writing of books. Don't want to give too much or in cases where it will reduce speech. Exemptions where permission isn't required--fair use, built into copyright laws going back to the 1700s. Previously unnoticed virtue of the fair use exemption is that it becomes a place where you can solve gridlock. Wider that exception is, the easier to assemble a collage of small snippets. University presses often on the wrong side of this debate, in favor of strong copyright and limited fair use. Usually professors want the widest dissemination of their work; often willing to give it away for free. Payment to faculty is more in prestige and recognition. Fair use policies are not decided by faculty, but by universities' general counsel office; worried about potential costs of being sued. Reasonable use--what people are actually doing. Trying to brush you back from the plate, like baseball; changes the strike zone. Only way to get right to use that 35 words is to assert it. The person who wrote those 35 words wouldn't mind seeing those words in the book. K-Pax, Kevin Spacey movie--not hurting their sales. Got the rights, easy once right person to talk to was found; relatively cheap. Eye on the Prize--also got the rights. Part of the reason in both cases that that happened is that it had a little of the flavor of the golden rice story--can cajole people when the cause is noble and desirable. Want to design a property rights system that creates a lot of wealth. Gridlock book written at non-technical level, lots of photos--each had to be licensed. Deed to a square inch of land in Alaska from Quaker Oats cereal in boxes in the late 1950s. What if you needed to assemble that land for some purpose? Picture took weeks to track down; worked out a quitclaim agreement. University press books look so boring because most people don't have the patience and curiosity to do all these negotiations.
42:25One of the costs of this isn't just the back and forth of negotiation--long time listeners, right to use the opening music for EconTalk was given. First choice was the opening bars of If I Had a Million Dollars, by Bare Naked Ladies; had a lot of trouble trying to get the publisher to agree; wanted a very high price. Would like to think that the men of Bare Naked Ladies would be proud to give us the rights. But they don't control those rights. World Copyright Summit. Piracy a big concern. Biggest concern is not piracy any more but gridlock. So difficult to assemble the rights people need that people end up either not using them or being pirates. Piracy is an artifact of breaking through gridlock. Fragmented rights. No central registry: wouldn't that help? There is no central clearing house. Would that be an enterprise worth pushing? Costs and who bears them? We have a registry for land; can pretty much figure out who controls land. Cars--we have the DMV. For copyright, have an enormous number of works and an enormous number of rights in them, which fragments quickly over time as the original creator dies. In music context--lyrics, performer, all different kinds of rights which fragment. Google Books trying to address this problem of fragmented ownership by scanning all the world's books, central pile, jump start a registry of books. Right now they have digitized many works that are in the public domain. Lots of digitized versions of books written before 1923. There are books that are in copyright and in print: publishers control them, can negotiate. But there are roughly 20 million books that are under copyright but not in print. Can't go to publisher and buy them. Bulk of knowledge from 20th century: unless you live near a library no way to access them or search it easily. Google is scanning those books and trying to make them available at the word level--can search by word; if you want to download it, you pay a fee, which goes to the central registry. How can Google do that if they don't own the rights to the books? Suit between authors' guild and Google, which claims what they are doing is fair use. Since they are out of print, the owners aren't making money off them anyway. Can discover it, quote it. Hasn't been settled. Negotiated settlement attracted opposition over the last few months; other countries have objected, anti-trust; settlement pending. Trying to solve a basic gridlock problem. Class action mechanism, aggregates a series of claims no one of which is worth pursuing individually but collectively generates a lot of value.
52:11Two issues: Example of air space. How did that evolve--flying over your house: could you stop an airplane for trespassing? Intuition: When you own a piece of land you own up to the heavens and down the center of the earth, a column of ownership. Makes sense for 50 feet up, but how about 1000 feet up? Not an issue till the invention of airplanes in the 20th century; no one had ever thought about it before. Overfly from NYC to DC means flying over the property of thousands of people, each one of whom would potentially have a claim against you. Lawyers and policy makers struggled how to make it possible. Part of solution was to say that you own up to the heavens, but as a matter of law, the heavens is 1000 feet up. Solved the gridlock problem and made it possible to fly by a timely redefinition. Airports: hard to build an airport. Public policy solution sometimes invokes eminent domain. A lot of private solutions also work--don't make a public announcement, buy land privately. Public solution feasible for Martin Luther King documentary--could pass a law saying this documentary that showed on TV with all of its citations and visuals, the documentary maker is entitled to them all; same way as with for an airport or shopping mall. Is that likely? Has it been abused? Public choice problems. People hate having their homes taken by eminent domain. You can always solve the problem by eliminating private ownership. Last-best solution in every case. Kelo. In intellectual property rights, in drug area, there already exists a "march in" right--the government already has the right to march in and take patents. If ever exercised, would crush the incentive of drug firms to spend a billion dollars to create a new drug and get it through the FDA approval process. First and most important step is to note that there is a problem. Then think about tools for making it easier for entrepreneurs in the market to assemble rights. Radio play; patent pools: you can pop a DVD disk into a DVD player is the several hundred patents required to make that work have been pooled together and you play one licensing fee to the pool together. What kinds of market institutions might be able to facilitate?

COMMENTS (15 to date)
jacek writes:

I think you have posted wrong month (2nd December instead 2nd November).
If I wrong, in next four days there will be some presents.
Best
Jacek

[Good catch! Thanks. It was entirely my fault, and I've fixed it now. I so would have loved some presents, though.--Econlib Ed.]

NormD writes:

Excellent podcast.

The problem with copyright is simply that it lasts too long. Almost all problems would disappear if a copyright expired after 20 or so years.

Comparing invalidating patents to Kelo seems like a stretch. In Kelo, there is only one house and only one person can own it. Patents grant one person the right to an idea and preclude others from using the idea even if they independently developed it, even if they had been using the idea for years before the patentee was granted the patent. The current system is a farce and a tragedy.

Many of today's patents are much more akin to a Spanish King granting California to some favored individual. I have no doubt that the king had the legal right to do this, but the individuals who live in California will properly ignore the king.

With regards to wireless spectrum issue, Heller ignores unlicensed spectrum, which is, by far, the most productive spectrum in use today. We need more unlicensed spectrum. There are new technologies that would even allow most spectrum to become unlicensed where a radio checks lots of frequencies to find an unused band and claims it for the duration of its communication. This could increase wireless bandwidth by orders of magnitude. Who objects? The government (who wants the power that comes from selling/granting ownership) and the current owners (who paid the government). I wonder if most people realize that part of what they pay for their cellphone every month is the amortized amount the owner paid the government. Its a hidden tax.

Conservative economists seem to become trapped by insistence that the greatest productivity always occurs when everything is owned by someone, but there are many situations where ownership is specious. Does anyone (government?) really own the middle of the sea? Space? The moon? Should they? At one point no one owned large swaths of land and ownership was claimed by people who took the land and put it to use.

It would be nice to see a new theory of ownership developed (rediscovered) where some part of ownership derives from using an asset. We own that patch of space because our satellite is parked there. We own that crater of the moon because we built a base there. We temporarily own this piece of the ocean because our ship is traveling through it. We temporarily own this channel of the spectrum because we are currently using it. We own the right to use this idea because we developed it on our own.

Lee Kelly writes:

Russ,

Thanks, this was a another very interesting podcast. (Though we need a better term than "anti-commons.")

In your podcast with Richard Epstein, he mentioned the impracticality of establishing road networks through multiple private lands. That has been in the back of my mind ever since I heard it; it suggested a circumstance where too many claims to small parcels of property seemed to inhibit a wealth enhancing outcome. I suppose this situation could be spun as a tragedy of the anti-commons.

It was interesting to hear someone elucidate and unpack the principle.

agnostic writes:

A larger problem that wasn't explicitly covered is the fear that the voting public and the government has about concentrated ownership. The simple solution of many tiny parcels is to pool them into a single large parcel -- but that would represent a new Standard Oil, IBM, Microsoft, or other boogeyman.

Stan Liebowitz would make an excellent guest on EconTalk (he's even written some articles for the CEE). He just co-wrote an article about how antitrust policies have served to "de-bundle" many things that are sensible bundles -- that is, to magnify the "too many owners" problem. In fact, two of the government's targets have been patent pools and blanket licenses in copyright!

Liebowitz and Margolis' article has special sections on these two forms of solving the hold-up problem, but that have come under antitrust fire. Article is available here ("Bundles of Joy..."):

http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=59984#

Solutions like patent pools and blanket licenses emerged from the minds of those directly involved, and are thus like what Ostrom documents. The real problem has not been with patents (as Heller acknowledges) but with the know-nothings in the antitrust camp struggling to break apart such solutions, fearing concentrated ownership.

And as Bryan Caplan would say, they probably couldn't get away this with tomfoolery if the man in the street didn't also imagine Microsoft as a threat to be contained. Humans have an innate aversion to concentrated ownership -- it just feels scary.

That's understandable for the man in the street. But the antitrust people should be better educated. They would do us all a favor by just getting a life, butting out, and finding something productive to do with their time. (Like commenting on podcasts.)

agnostic writes:

And to tie this back to last week's discussion with Calomiris, he mentioned that one of the best predictors of good corporate governance (among banks) was how concentrated the ownership is -- if there are lots of people, each with little stake in the outcomes, you tend to find poorer corporate governance. Fewer people, each with plenty of skin in the game, predicts better governance.

So why wouldn't firms naturally choose more concentrated ownership? Because of regulations that limit it! Again, we see how destructive the irrational fear of concentrated ownership is.

Timothy B. Lee writes:

I wanted to offer a correction and a point of information about this week's show with Michael Heller. Heller described Google's book sale program, in which users could purchase out-of-print books and Google would place the revenue in a book rights registry. You asked him if Google was currently doing this, and he said yes.

I'm not sure if Heller misunderstood the question or hasn't been following the GBS issue closely, but either way this is incorrect. The current GBS program only gives users access to the full text of books if they're in the public domain or they have the consent of the copyright owner. The default for in-copyright books is only to show "snippets" of books. The class action settlement now before the courts would *create* a book rights registry and give Google what amounts to a compulsory license to use books whose copyright holders can't be contacted.

By the way, I argue here that libertarians should oppose the settlement.

Second, in the podcast, you mentioned that it would be a good idea to set up a centralized registry for copyrighted works. Such a registry actually exists, and it used to be mandatory for copyright holders to register with it. Then Congress joined an international agreement called the Berne Convention, which prohibited signatories from requiring registration (or other "formalities" such as copyright notices and term renewals) as a condition of copyright protection. In my view reinstating these formalities would be a big step to solving copyright's orphan works problem, but doing so would theoretically require re-negotiating or withdrawing from the Berne Convention, which would be hard to do. There are various proposals to encourage authors to register, and to improve the copyright office's registry, but in my view unless participation is mandatory it's not going to do much good.

Cato writes:

Perhaps I got up on the wrong side of the bed this morning, but I found this podcast to be far less strong than the usual--which are usually unusually good.

First, Heller makes two assertions that I think should be more closely examined, because they appear to me to be fundamentally flawed. He identifies the coordination problem in the overflight example, but then, if I'm remembering correctly, he implicitly treats it as an exemplar of the anti-commons problem, apparently with applicability to other commercial settings. (I may have the flow of the argument wrong, but that was the gist I took away--admittedly while surfing other websites while I listened.) The problem with this analysis, however, is basic: while, under the common law, a small landowner may have owned the land "upwards unto Heaven" (as I remember it from law school), that landowner invested nothing to develop the airspace at 30,000 feet. More to the point, not only is there no financial investment, there's also no value-add, and certainly nothing that would warrant the moniker "innovation."

By contrast, the inventor of a particularly groovy gizmo in your cellphone presumably did invest intellectual capital, time, and money, and rightly wants to get paid for those investments. Heller overdraws his argument when he complains that the patent holder is just holding up social progress and so should be steamrolled into submission so that the newest generation of device can be born. Hogwash. It's not that simple. If there are no protected rights then comparatively fewer people will take the time, expend the effort, and invest the money to create all the little gizmos that go in to a product like the cellphone. Consequently, the flyover example is a poor one to illustrate anything except the pure coordination problem.

As an aside, I know a guy who created one of those gizmos and it actually sits in cellphones worldwide. For each patent holder for the patented parts in a cellphone, there's a person who created something and who wants to get paid for that creation. Doesn't seem so shameful in the light of day. That fact cannot be easily glossed over, but I think that Heller did gloss over it, even if, at times, he rightly identified the sometimes daunting coordination problem.

Heller tends to characterize the multiple patent-holder situation as being inherently abusive. That's a normative judgment (or bias) that's at best half right. I suppose it would depend in part on whether you were one of the patent holders, or if you were one, whether you felt that a feasible deal was being squandered by a hold-out. But we could view other property rights as also contributing to potential abuse, no? Wasn't it Proudhon who claimed that all "property is theft"? There are advantages and disadvantages to every restriction.

Heller should not pine for a future with sharply reduced patent rights, at least without addressing the very real costs incurred by not having those patents or the current scope and extent of those patents. Patents are a trade-off. It makes little sense for Heller to discuss one end of that trade-off (what a better world it would be if we all just chipped in cooperatively), essentially pretending that all things will be equal in such a future. All things will not be equal, however: there will be a real dearth of gizmos, in my opinion, because they won't be developed in the first place.

There is an academic, or progressive, bias to Heller's worldview that I find troubling. I find this viewpoint expressed mostly by people whose salaries are paid on a regular basis by an institution, and particularly where that institution does not directly track their value-add as a result of created value that is sold in a market. In other words, if Prof. Heller wrote a book and had to flog it to put bread on his table, he might be a little more solicitous of the feelings he would experience if his book--out of print, say--suddenly were copied and sold by Google. Google might take in $10 per book and decide to pay him 17 cents as a royalty. Or better yet, 1.7 cents. How's that feel? Would his refusal to agree to such terms be a hold-up? And is it really right (in some normative sense) for a third party to decide whether that book should be copied or sold within the period of copyright restriction, e.g., in the name of progress? Where'd they get that right?

Second, I thought that Econtalk was unashamedly slanted toward liberty, including the "freedom to choose," which by definition includes the freedom "not" to choose. If a gizmo inventor chooses not to sell his gizmo (perhaps thinking that the licensing offer is beneath his dignity), then that is his choice. (It is akin to my painting an oil painting; rejecting an offer of purchase; and then staring at it for a couple of decades. Shouldn't be a huge problem for the freedom-to-choose crowd.) In that event, however, two things can happen: 1) roughly twenty years later, anyone can commercialize that gizmo; or 2) someone else can use their imagination today to design around the patent. Happens all the time. And for a great example of the power of this method, look at what Joel Segre and David Green did with Project Impact and the Aravind Eye Hospital. Intraocular lenses used to be over $200. These guys hired some really smart bioengineers and designed around the existing lens patent, using similar materials, but materials and designs that were different enough to warrant their own patent. Eventually, they drove costs down to less than $2.30 per lens. Now they are bringing sight to hundreds of thousands of Indians and replicating the model in other countries. Another of your guests, Paul Romer, speaks eloquently about the combinatorial possibilities that are out there. If there's a hold-up on the main highway, there may be any number of possibilities of four-wheeling across the land. Should be appealing to the wild Hayekians out there.

Lastly, the coordination problem in medical devices and other such industries presents a serious challenge. I'm not here to claim that a 70 stakeholder negotiation is quick or easy; however, there are mechanisms, like patent pools or social shaming, that can address these issues. Again, however, and at a fundamental level, Heller's analysis seems weak: the 70th gizmo owner can only extract what the underlying business model will support. He either licenses his particular gizmo or he stares at the prototype for 20+ years. If the business model really can only support (just for purposes of discussion) a 10% royalty--total--on a $20 product, then all of the various gizmo patent owners have to split the $2 to make the deal go. If the "hold-out" threatens to extract a share greater than $2, then this is just an unremarkable consequence of commercial idiocy and greed, of which there are doubtless other examples. Life is sometimes like that, especially in a society that values freedom.

If the last gizmo owner tries to take a "disproportionate" amount within the $2 slice (and how would you know that? or measure that outside of a negotiation?), then he's just pitting his aggressiveness against that of the other patent holders, who would have to reduce their cut to make the deal work. (Sort of like my not putting up with a lot of nonsense from aggressive new BMW drivers on the road when they move to cut me off in heavy traffic. As the proud owner of a 13 year old, somewhat ratty looking, Toyota, I routinely hold my ground and that ground is routinely yielded by the (sometimes very surprised) BMW owner: go ahead--run into me with your new BMW. I didn't think you'd go through with it either....) Our free society is robust in a way that few academics credit. The correlation of forces on the ground render, in many cases, however, a rough kind of justice that has served us well this last century. Reform may be needed in the patent system, but honestly crediting what has worked in the current model might be a very good starting point, i.e. one man's hold-up is another man's justified negotiation.

I thought that one of the cardinal insights of libertarianism is that we're better off as a people with a system of truly independent, voluntary trade and a similar system of self-governance. The better argument for Heller is an empirical one, but I didn't hear it (or, more correctly, he only ran half the argument, i.e., that these patent-heavy industries are currently experiencing a wealth-destroying moment.) To which I'd reply: compared to what? Patent holders already capture a truly small percentage of value from a societal perspective--I think that in Baumol, Littan, and Schramm's Good Capitalism, Bad Capitalism, they quote a figure that's something like 7% or 17% of value. Society has already become enormously wealthy, in part because of the basic patent system that we have. So it's gilding the lilly for Heller to claim that we, as a society, have been given the shaft because we don't have our very newest iPod yet, or our very newest drug. If this newest, newest device is the dog that didn't bark, well then so, too, is the diminished productivity of inventors who, if these proposed policy changes are not carefully handled, will see less reason to continue to devote their efforts to invention.

Cato writes:

I had another listen to the podcast to make sure that I understood Heller's point.

Couple of things to discuss: Russ: I'll be traveling to the D.C. area in the future and I noticed that you had an extra bedroom. I've spoken with a number of individuals facing the same predicament, and we were thinking that--like Google--the greater wealth of the world would be advanced if you would just let us crash there. It's really an asset that's under-utilized.

Of course, if you decide to be a "hold-out," then I'm afraid that I am left no choice but to institute a class action lawsuit. I'm sure that you're proud of the investment you've made in your home, but seriously, we need to work this out. I'll be arriving around December 10th, but should warn you that my notions of law and economics extend to your refrigerator as well. And you are married, I take it?

The judiciary will, no doubt, in its wisdom, and taking in all appropriate factors, adjust the rights and obligations of the parties--from each according to his well-developed property rights to each according to his needs. Have I got that right?

Heller makes contradictory arguments. On the one hand, he is careful--and I want to acknowledge it--that he's a fan of patents. He also does trumpet the virtues of the "front-side" investments into drug development--a fact that I may have missed on first listening. But I don't believe that I missed his preferred solution to the gridlock problem. After paying obeisance to the need to protect the investor's interests, he then just goes ahead and, in practice, calls for a different regulatory scheme to change the returns to creators and aggregators.

Here's a telling admission: in finding photos for his book, Heller insisted that the copyright owners were asking for "ridiculous" amounts of money. Perhaps. But the alternative is for Heller to step on a plane, go to the site he wants to capture, and take the photo himself. What's that cost?

It's easy--all too easy--to characterize your way into reasonableness, or at least the semblance of it.

Please do have my room ready, Russ.

Best regards,

Your new friend,

Cato

Pietro Poggi-Corradini writes:

I was not completely satisfied with the "tragedy of the anti-common" parabola, especially if applied to the intellectual property debate. My understanding is that the "tragedy of the commons" deals with a situation where there is scarcity and an incentive to free-ride that ultimately makes scarcity even more of a problem. However, the fact that a chaotic and diverse downtown area made up of many small owners might not be as aesthetically appealing (to some) as, say, a commercial center planned by a unique developer does not seem to me a tragedy of the common scenario. Even if one starts with a fragmented ownership situation it might be better to let deals, cooperation, and banding-together emerge in a slow, trial-and-error process (and be open about the many creative solutions that may arise), rather than try to 'design' a solution on paper.

In the realm of ideas, it is not immediately clear what is scarce. Maybe the profit opportunities, but aren't those always scarce? And if so where is the free-riding? As for the gridlock scenario, I'm not so worried about it as long as all possible care has been taken not to grant legal monopolies to any one participant.

I'm not sure I have a good understanding at this point.

Netsp writes:

With Copyright I agree that rights are too long & too rigidly enforced. What would happen if we gave it a drastic haircut? Reduced to 5-10 years with very lenient fair use rights.

How much value is usually derived from copyright after this period? I imagine that it is often very little. Films, novels, textbooks, magazines, pop music, newspapers. These mostly have content that expires fast. If fair use allowed you to pinch 35 pages instead of 35 words (say, 5-10 of the work), how many sales would the copyright owner really lose?

These economies are usually pretty fast moving. The majority of the benefits are very early. I wonder if noticeably less copyright material would be created if copyright was severely reduced.

What we would probably see is some mashup works with chapters & pieces from different sources glued together to make new books & films. In some cases these might compete directly with the original creators, but in most cases they would represent additional value.

With patents, I have no idea. It's such a tricky area. Part of the problem is that separating trivial from non-trivial is getting increasingly difficult. This is evident in the fact that after technology is created, it often is found to violate several patents. There is also this transaction cost issue. I am grateful to Michael Heller for giving me the terminology for dealing with this.

Dr. Duru writes:

Very informative. I had never given much thought into how patent law could be stifling certain innovations until this podcast. I like Heller's suggestion that there is hope for solution to the problem of the anti-commons by pointing out that policy makers figured out how to make flying legal at a time when (land) property rights were assumed to go to the heavens. The current problem seems 100x more complicated, but at least it sounds like there is some hope!

Tschäff writes:

Did anyone else wish he would have given us some more solutions? Ok, we all know patents encourage and stifle innovation, so what do you do about it?

NormD writes:

There are about a million patents applications each year.

Patents are written in obtuse language far beyond the capability of mere humans to understand, this is intentional as patent holders want to be able to catch as many infringers as possible.

No startup company, not one, could ever insure that its product does not infringe thousands of patents or patents-in-process.

How the hell libertarians can expect government patent examiners, courts and lawyers to determine things like "obviousness" is beyond me. You sit around trashing every aspect of the government as being incompetent and politically driven except for the patent process. Why????? The people examining patent applications are equivalent to DMV workers.

99% of patents are evil. They stifle innovation and suck huge amounts of productive resources down a rathole.

Libertarians keep ringing their hands staying the problem is very complex and hard to address and difficult. Cowards! There are only so many solutions and you must choose the least bad. Not choosing is a choice.

Solutions:

1. Hope the patent process becomes competent.
2. Eliminate most patents

“Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth.”

scott writes:

Russ, you let Heller mis-appropriate the entire podcast for not calling out the fallacy in the first statements. "Gridlock is a free-market paradox..." Yikes, Patents and Copyright are a perversion of free markets, not a paradox! Boldrin and others make it obvious that Patents and Copyright are not an extension of private property to intellectual property, but "rent-seeking" privileges. They pervert innovation, create rent-seeking trolls and put an enormous legal burden on any small company seeking to commercialize an invention. Trade secret law exists for all inventions, and only harm (including the well documented gridlock) comes from granting exceptions to certain industries by allowing patents and copyright.


Andrej writes:

Russ,

Great podcast, only sorry that more was not said onhow to solve the described conflits.

In my country we have a serious issue with this topic. Our strategy in tourism is based around golf courses but the problem is that in order to construct a golf course you need vast spaces of attractive land. Usually the ownership of such land is very fragmented and the prices the owners are asking kill-off any investor interest. The government decided to force the owners to sell at 'reasonable' prices. One problem, offcourse, is how does the goverment decide on the 'reasonable' price and the second and a more alarming one is that is breaching personal property rights and human liberties in general.

Any ideas or resources you might suggest on where to look for economic solutions to such problems?

Thank you in advance.

Regards from Croatia!

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