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Why Intellectual Property?

Imagine yourself starting a society from scratch. Perhaps you fought

a revolution, or perhaps you led a party of adventurers into some
empty land, conveniently free of indigenous peoples. Now your task
is to make the society work. You have a preference for democracy and
liberty and you want a vibrant culture: a culture with a little chunk
of everything, one that offers hundreds of ways to live and thousands
of ideals of beauty. You don’t want everything to be high culture; you
want beer and skittles and trashy delights as well as brilliant news re-
porting, avant-garde theater, and shocking sculpture. You can see a role
for highbrow, state-supported media or publicly financed artworks,
but your initial working assumption is that the final arbiter of cul-
ture should be the people who watch, read, and listen to it, and who
remake it every day. And even if you are dubious about the way pop-
ular choice gets formed, you prefer it to some government funding
body or coterie of art mavens.
At the same time as you are developing your culture, you want a
flourishing economy—and not just in literature or film. You want ___-1
innovation and invention. You want drugs that cure terrible diseases, ___0
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and designs for more fuel-efficient stoves, and useful little doodads, like
mousetraps, or Post-it notes, or solar-powered backscratchers. To be exact,
you want lots of innovation but you do not know exactly what innovation or
even what types of innovation you want.
Given scarce time and resources, should we try to improve typewriters or
render them obsolete with word processors, or develop functional voice recog-
nition software, or just concentrate on making solar-powered backscratchers?
Who knew that they needed Post-it notes or surgical stents or specialized rice
planters until those things were actually developed? How do you make prior-
ities when the priorities include things you cannot rationally value because
you do not have them yet? How do you decide what to fund and when to
fund it, what desires to trade off against each other?
The society you have founded normally relies on market signals to allocate
resources. If a lot of people want petunias for their gardens, and are willing to
pay handsomely for them, then some farmer who was formerly growing soy-
beans or gourds will devote a field to petunias instead. He will compete with
the other petunia sellers to sell them to you. Voila! We do not need a state plan-
ner to consult the vegetable five-year plan and decree “Petunias for the People!”
Instead, the decision about how to deploy society’s productive resources is be-
ing made “automatically,” cybernetically even, by rational individuals respond-
ing to price signals. And in a competitive market, you will get your petunias at
very close to the cost of growing them and bringing them to market. Consumer
desires are satisfied and productive resources are allocated efficiently. It’s a tour
de force.
Of course, there are problems. The market measures the value of a good by
whether people have the ability and willingness to pay for it, so the whims
of the rich may be more “valuable” than the needs of the destitute. We may
spend more on pet psychiatry for the traumatized poodles on East 71st Street
than on developing a cure for sleeping sickness, because the emotional well-
being of the pets of the wealthy is “worth more” than the lives of the tropical
world’s poor. But for a lot of products, in a lot of areas, the market works—
and that is a fact not to be taken for granted.
Why not use this mechanism to meet your cultural and innovation needs?
If people need Madame Bovary or The New York Times or a new kind of an-
tibiotic, surely the market will provide it? Apparently not. You have brought
economists with you into your brave new world—perhaps out of nostalgia, or
-1 ___ because a lot of packing got done at the last minute. The economists shake
0 ___ their heads.1 The petunia farmer is selling something that is “a rivalrous
1 ___
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Why Intellectual Property? 3

good.” If I have the petunia, you can’t have it. What’s more, petunias are “ex-
cludable.” The farmer only gives you petunias when you pay for them. It is
these factors that make the petunia market work. What about Madame
Bovary, or the antibiotic, or The New York Times? Well, it depends. If books
have to be copied out by hand, then Madame Bovary is just like the petunia.
But if thousands of copies of Madame Bovary can be printed on a printing
press, or photocopied, or downloaded from www.flaubertsparrot.com, then
the book becomes something that is nonrival; once Madame Bovary is written,
it can satisfy many readers with little additional effort or cost. Indeed, de-
pending on the technologies of reproduction, it may be very hard to exclude
people from Madame Bovary.
Imagine a Napster for French literature; everyone could have Madame
Bovary and only the first purchaser would have to pay for it. Because of these
“nonrival” and “nonexcludable” characteristics, Flaubert’s publisher would
have a more difficult time coming up with a business plan than the petunia
farmer. The same is true for the drug company that invests millions in screen-
ing and testing various drug candidates and ends up with a new antibiotic
that is both safe and effective, but which can be copied for pennies. Who will
invest the money, knowing that any product can be undercut by copies that
don’t have to pay the research costs? How are authors and publishers and drug
manufacturers to make money? And if they can’t make money, how are we to
induce people to be authors or to be the investors who put money into the
publishing or pharmaceutical business?
It is important to pause at this point and inquire how closely reality hews to
the economic story of “nonexcludable” and “nonrival” public goods. It turns
out that the reality is much more complex. First, there may be motivations for
creation that do not depend on the market mechanism. People sometimes
create because they seek fame, or out of altruism, or because an inherent cre-
ative force will not let them do otherwise. Where those motivations operate,
we may not need a financial incentive to create. Thus the “problem” of cheap
copying in fact becomes a virtue. Second, the same technologies that make
copying cheaper may also lower the costs of advertising and distribution, cut-
ting down on the need to finance expensive distribution chains. Third, even
in situations that do require incentives for creativity and for distribution, it
may be that being “first to market” with an innovation provides the innovator
with enough of a head start on the competition to support the innovation.2
Fourth, while some aspects of the innovation may truly be nonrival, other ___-1
aspects may not. Software is nonrival and hard to exclude people from, but it ___0
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is easy to exclude your customers from the help line or technical support. The
CD may be copied cheaply; the concert is easy to police. The innovator may
even be advantaged by being able to trade on the likely effects of her innova-
tion. If I know I have developed the digital camera, I may sell the conven-
tional film company’s shares short. Guarantees of authenticity, quality, and
ease of use may attract purchasers even if unauthorized copying is theoreti-
cally cheaper.
In other words, the economic model of pure public goods will track our
reality well in some areas and poorly in others—and the argument for state
intervention to fix the problems of public goods will therefore wax and wane
correspondingly. In the case of drug patents, for example, it is very strong. For
lots of low-level business innovation, however, we believe that adequate in-
centives are provided by being first to market, and so we see no need to give
monopoly power to the first business to come up with a new business plan—
at least we did not until some disastrous patent law decisions discussed later in
this book. Nor does a lowering of copying costs hurt every industry equally.
Digital copies of music were a threat to the traditional music business, but
digital copies of books? I am skeptical. This book will be freely and legally
available online to all who wish to copy it. Both the publisher and I believe
that this will increase rather than decrease sales.
Ignore these inconvenient complicating factors for a moment. Assume that
wherever things are cheap to copy and hard to exclude others from, we have a
potential collapse of the market. That book, that drug, that film will simply
not be produced in the first place—unless the state steps in somehow to
change the equation. This is the standard argument for intellectual property
rights. And a very good argument it is. In order to solve the potentially “market-
breaking” problem of goods that are expensive to make and cheap to copy, we
will use what my colleague Jerry Reichman calls the “market-making” device
of intellectual property. The state will create a right to exclude others from the
invention or the expression and confer it on the inventor or the author. The
most familiar rights of this kind are copyrights and patents. (Trademarks pres-
ent some special issues, which I will address a little later.) Having been given
the ability to forbid people to copy your invention or your novel, you can
make them pay for the privilege of getting access. You have been put back in
the position of the petunia farmer.
Pause for a moment and think of what a brilliant social innovation this is—
-1 ___ at least potentially. Focus not on the incentives alone, but on the decentraliza-
0 ___ tion of information processing and decision making that a market offers.
1 ___
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Why Intellectual Property? 5

Instead of having ministries of art that define the appropriate culture to be

produced this year, or turning the entire path of national innovation policy
over to the government, intellectual property decentralizes the choices about
what creative and innovative paths to pursue while retaining the possibility
that people will actually get paid for their innovation and creative expression.
The promise of copyright is this: if you are a radical environmentalist who
wants to alert the world to the danger posed by climate change, or a passion-
ate advocate of homeschooling, or a cartoonist with a uniquely twisted view
of life, or a musician who can make a slack key guitar do very strange things,
or a person who likes to take amazingly saccharine pictures of puppies and put
them on greeting cards—maybe you can quit your day job and actually make
a living from your expressive powers. If the market works, if the middlemen
and distributors are smart enough, competitive enough, and willing to take a
chance on expression that competes with their in-house talent, if you can make
it somehow into the public consciousness, then you can be paid for allowing
the world to copy, distribute, and perform your stuff. You risk your time and
your effort and your passion and, if the market likes it, you will be rewarded.
(At the very least, the giant producers of culture will be able to assemble vast
teams of animators and musicians and software gurus and meld their labors
into a videotape that will successfully anesthetize your children for two hours;
no small accomplishment, let me tell you, and one for which people will
certainly pay.)
More importantly, if the system works, the choices about the content of
our culture—the mix of earnest essays and saccharine greeting cards and
scantily clad singers and poetic renditions of Norse myths—will be decentral-
ized to the people who actually read, or listen to, or watch the stuff. This is
our cultural policy and it is driven, in part, by copyright.
The promise of patent is this: we have a multitude of human needs and a
multitude of individuals and firms who might be able to satisfy those needs
through innovation. Patent law offers us a decentralized system that, in prin-
ciple, will allow individuals and firms to pick the problem that they wish to
solve. Inventors and entrepreneurs can risk their time and their capital and, if
they produce a solution that finds favor in the marketplace, will be able to
reap the return provided by the legal right to exclude—by the legal monopoly
over the resulting invention. The market hints at some unmet need—for
drugs that might reduce obesity or cure multiple sclerosis, or for Post-it notes
or windshield wipers that come on intermittently in light rain—and the in- ___-1
novator and her investors make a bet that they can meet that need. (Not all of ___0
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