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< | Intellectual Property and Incentives to Innovation: does it really work? |
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> | Critique of intellectual monopoly over software |
| | Intellectual property rights have long been regarded as crucial incentives for innovation, providing creators and inventors with the protection and recognition they need to thrive in a competitive market. The traditional view is that giving a (limited in time) monopoly over an idea is the best way to reward those who came up with it, and that without the monopoly nobody would try to innovate.
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< | This is confirmed by Institutions such as the European Commission: “the primary function of intellectual property rights is to protect and stimulate the development and distribution of new products and the provision of new services”.
But the fact that the IP monopoly actually promotes creativity should not be accepted uncritically. In fact, criticisms exist and are expressed from a historical and economical point of view in the book “Against Intellectual Monopoly” by Professors Michele Boldrin and David Levine.
Inventions and Patents
The authors retrace the history of the technological development of our society in the last two centuries – starting with Watt’s steam engine - highlighting how often new ideas come up by chance while the inventor is working on something else, and the patent is obtained at a later stage to limit competition.
In the case of Watt, the authors observe how during the validity of his steam engine patent (granted in 1769) nothing much happened in terms of development in England’s steam engine capability. During that period, Watt’s energies were mostly devoted to preventing competitors from copying his engine. He also went after inventors who had developed better products, such as the “Hornblower” engine. Eventually, after the expiry of his patents, the production and efficiency of steam engines skyrocketed, driven by improvements that were kept off the market until then, like the Hornblower engine. What’s worth noting is that (i) Watt was limited by the rush to patents he himself had started, as further improvements he came up with were prevented by another inventor’s patent; (ii) the expiry did not hurt Watt’s business, instead he started selling more engines and could raise prices; and (iii) in 1812 a new improvement, the “Cornish” engine, was invented but not patented. This was followed by a rise of coal-efficiency by a factor of five, whereas coal-efficiency had remained unchanged during Watt’s monopoly.
The retardation of innovation and economic growth due to monopolies on the various versions of steam engines is an example of what the authors call the “IP inefficiency”. |
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> | But the fact that the IP monopoly actually promotes creativity should not be accepted uncritically. Criticisms exist and are expressed from a historical and economical point of view in the book “Against Intellectual Monopoly” by Michele Boldrin and David Levine. The authors retrace the history of the technological development of our society in the last two centuries, highlighting how the idea that intellectual property is the best way to increase innovation and creation by rewarding inventors/creators, is based on a misconception. On one hand, creators would still be incentivized to create in the absence of IP rights; on the other hand, the monopoly over ideas creates social costs, as it’s widely recognized for any kind of monopoly. |
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< | The argument that patents foster innovation is also not supported by numbers. In the 1990s there was an extraordinary increase in the number of new patents registered in the United States and Europe. However, this increase was not accompanied by a proportionate increase in the index that is used as common measure of technological improvement, the Total Factor Productivity (TFP). |
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> | As regards to patents, Boldrin and Levine note that the fact that they foster innovation is not supported by numbers. Indeed, in the 1990s there was an extraordinary increase in the number of new patents registered in the United States and Europe. However, this increase was not accompanied by a proportionate increase in the index that is used as common measure of technological improvement, the Total Factor Productivity (TFP). |
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< | Creativity and Copyright |
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> | When it comes to copyright, they note how artistic works have been created throughout history also in the absence of any kind of monopolistic protection. Copyright originated first as a form of censorship and then as a tax instrument. Only towards the end of the 19th Century it became the cornerstone of the business strategy of publishing houses in America and Europe. Since then, the life of copyright has been progressively extended, with any extension benefiting mostly the media companies rather than the artist (who is dead when copyright expires). The extension of the monopoly period does not seem to have produced an increase or improvement in artistic production. |
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< | Copyright gives an astonishingly long monopoly over the production of copies of an idea: 70 years after the death of the author. Traditionally, we justify this by asking: ‘Without copyright, how would an author get paid?’.
However, artistic works have been created throughout history also in the absence of any kind of monopolistic protection. Copyright originated first as a form of censorship and then as a tax instrument. Only towards the end of the 19th Century it became the cornerstone of the business strategy of publishing houses in America and Europe. Since then, the life of copyright has been progressively extended, with any extension benefiting mostly the media companies rather than the artist (who is dead when copyright expires). The extension of the monopoly period does not seem to have produced an increase or improvement in artistic production. |
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> | Another form of IP rights, trade secrets, are considered to be even more harmful to inventors’ productivity. First, they prevent the sharing of ideas from different fields, experiences, and organizations. In addition, confidentiality obligations that are imposed to employees for keeping a technology secret decrease their incentive to switch firms and to demonstrate their productivity in a different work environment. |
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Software |
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< | The inconsistency within the doctrine asserting that intellectual property fosters innovation becomes glaringly evident when examining the realm of information technology and software. In the context of information technology, the rapid pace of advancement and the collaborative nature of software development stand in contrast to the traditional model of intellectual property. Boldrin & Levine argue that most of the innovation in this industry – including the internet – took place without the protection of intellectual property. |
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> | The inconsistency within the doctrine asserting that intellectual property fosters innovation becomes evident when examining the realm of information technology and software. In this context, the rapid pace of advancement and the collaborative nature of software development stand in contrast to the traditional model of intellectual property. Boldrin & Levine argue that most of the innovation in this industry – including the internet – took place without the protection of intellectual property. |
| | Patent protection was extended to computers programs by the Supreme Court 1981 decision in Diamond v. Dier. Therefore, each of the inventions made in the field before that case did not benefit from patent protection. In addition, before the rise of Microsoft copyright played a little role in the software industry. |
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| | The best evidence that copyright and patents are not needed to make better software is the existence of the free software movement, pioneered by Richard Stallman. Open-source software is released under licenses that allow copying and modifying to the extent that the new software is released under the same license. Many flourishing companies and highly paid programmers voluntarily choose to develop open-source software, like in the case of RedHat? , the market leader of Linux-based software products, and Canonical, the developer of Ubuntu. |
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> | A company like RedHat? provides a good explanation of the free software movement’s motto “free as in freedom, not free as in beer.” RedHat? operates on an open-source business model, providing a customized and tested version of the Linux operating system. Although the foundational Linux system is freely available, RedHat? provides services like customization and testing, selling its modified Linux system with easy installation and additional features. RedHat? must make the code available to competitors, and throughout the years some companies have come up with cheaper versions of the same software. However, Red Hat's reputation for reliability and customer support allowed it not only to stay in business but to remain the market leader.
Cost and quality
Another critique of IP in the realm of software arises from the unique economics of the digital domain. Unlike physical goods, the marginal cost of reproducing a copy of software is effectively zero. Economic principles dictate that in a competitive market, price should equate to marginal cost. Applying this logic to software implies a price of zero, so why exactly are we paying? |
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< | Conclusion |
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> | According to Stallman, paying does not give us a better software. Software development works better when a large number of people is able to take an existing program and rewrite and test its parts, and then another person would do the same and so on. Ownership of software prevents this, forcing instead to start from scratch when developing a program. It also prevents students from being able to study the source code of a large program with detriment to the overall know-how of software developers. |
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< | A closer examination reveals that the idea that intellectual property is the best way to increase innovation and creation by rewarding inventors/creators, is based on a misconception. On one hand, creators would still be incentivized to create in the absence of IP right; on the other hand, the monopoly over ideas creates social costs, as it’s widely recognized for any kind of monopoly. |
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> | In a nutshell, I believe that the software industry stands as the ideal starting point for rethinking intellectual property. This stems from the convergence of three key factors: 1) the widely acknowledged failure of the incentive argument, evidenced by clear facts: a multitude of very smart people are happy to write code for free (or for a reasonable amount of money) and software companies may still prosper in a free software world, 2) the economic model's contradiction with fundamental economic principles, and 3) the detrimental impact of copyright on output quality. Within this context, challenging traditional notions of intellectual property in software becomes imperative. |
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< | IP rights are recognized by the US Constitution “To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries”. |
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< | However, as noted by Stallman, the bargain that currently exists between the rights of the authors and those of the public is not the only possible bargain. Better bargain might be found by reducing copyright privileges in stages, in terms of duration over time or extent of the fair use. |
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I think the best route to improvement is to get less general. You spend more time on James Watt than the entire history of computing. I explained at length the economics of zero marginal cost production and your actual economic analysis is limited to pro-monopoly quotes from, of all things, the European Commission . In a discussion of "intellectual property," patents (which are used by two industries in the world, basically) are discussed, but "trade secrets," which are the only form of "IP" law actually of any use to most businesses, are never mentioned.
If we were going to be general, we could say that monopolies reduce output and quality, raise price, and reduce social surplus. We would then say that government-awarded monopolies have a justly repugnant history and that their rhetorical conversion into "the source of innovation" is an obvious swindle. So if you want to be (as you seem to want) more moderate, less generality seems desirable.
-- By LudovicoColetti - 23 Nov 2023
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