Intellectual Property and Incentives to Innovation: does it really work?

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.

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”.

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).

Creativity and Copyright

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.

Software

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.

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.

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.

Conclusion

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.

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”.

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.

-- By LudovicoColetti - 23 Nov 2023