Tim Lee

Van Lindberg on “Intellectual Property”

I’m reviewing Van Lindberg’s Intellectual Property and Open Source for Ars Technica. The first chapter is an introduction to the theoretical concepts that Lindberg describes as the “foundations of intellectual property law”—public goods, free-riding, market failure, and so forth. I’ve found several of the assertions in this chapter frustrating.

For example, on p. 8, Lindberg writes:

We want more knowledge (or more generally, more information) in society. As discussed above, however, normal market mechanisms do not provide incentives for individuals to create and share new knowledge

Italics mine. Now, this claim is simply untrue. Normal market mechanisms do, in fact, create incentives for individuals to create and share new knowledge. Mike Masnick has offered one excellent explanation of how they do so. See also Chris Sprigman and Jacob Loshin and the restaurant industry. Plainly, lots of new knowledge is created without the benefit of copyright, patent, or trade secret protection.

It’s likely that Lindberg is just being sloppy here, that he meant that markets do not provide sufficient incentives for creativity. This is a perfectly plausible view—indeed, it’s the mainstream view among scholars of patent and copyright policy. But even this weaker formulation is controversial. Boldrin and Levine, for example, are two respected economists who deny it. Even this weaker formulation, therefore, is too strong. Certainly many scholars (myself included) believe markets produce insufficient creative expression, but the point has certainly not been proven conclusively.

Then, on p. 18, Lindberg writes:

For the past 50 years—and especially the past 30—there has been a tide of stronger intellectual property protections across industries. This growth in IP has encouraged people to invest heavily in the development of new intellectual property, and has moved IP to the core of many business strategies. For most businesses in the United States, in fact, the intellectual property part of the business is the most valuable aspect of the business.

The first obvious point to make here is that correlation does not prove causation. It’s true that patent and copyright protections have been strengthened over the last half-century, and it’s equally true that innovation has occurred at a rapid pace. But there’s no particular reason to think that these developments are connected. Indeed, Bessen and Meurer have persuasively argued that outside the pharmaceutical industry, patents created a net negative incentive for invention during the 1990s. For industries such as IT where the patent system is poorly calibrated, patents appear to have made it less profitable than it otherwise would to “invest heavily in the development of new intellectual property”—the potential profits from obtaining patents of one’s own are swamped by the costs of defending against patent lawsuits from others.

It is certainly not the case that “the intellectual property part of the business is the most valuable aspect of the business.” Bessen and Meurer estimate that revenues attributable to patents during the 1990s averaged around $15 billion annually, almost all of which was in the pharmaceutical industry. In a $10 trillion economy, this is rounding error. I’m not aware of an analogous estimate for copyrights, but when we consider that the software industry (the majority of which is services companies that don’t rely heavily on copyright) enjoys revenues of less than $400 billion, and the movie and music industries have revenues in the tens of billions of dollars, the total value of all “intellectual property” activities in the economy cannot be much more than 5 percent of our $13 trillion economy.

It’s certainly true that innovative activity in general is a large part of many businesses. But it’s a category error to attribute all innovative activity to the copyright or patent systems. The market provides large positive incentives for innovative activities in most industries. In a few industries the patent and copyright systems seem to provide significant additional incentives for innovation, although in others they seem to be a net disincentive, albeit a small one.

Perhaps it’s not fair to pick on Lindberg for this. The chapter is a competent summary of the orthodox view of the “foundations” of patent and copyright law. His explanations closely track those you’ll find in most other treatises on the subject. But one reason I found the chapter disappointing is that this is a book aimed at open source developers. That audience, of all people, should be skeptical of claims that patent and copyright privileges are essential for the production of creative works. Plainly, the patent system has nothing to do with the success of Linux, Apache, and Firefox, and copyright has played a peripheral role at best. Lindberg acknowledges Richard Stallman’s views on the subject, and must be aware of other skeptical arguments that are staples of Slashdot discussions on the subject. Given the audience, I would have liked to see him at least give a serious consideration to some of those arguments, if for no other reason then simply to explain why he doesn’t agree with them. Yet the closest he gets is a single short paragraph on p. 16 where he mentions Stallman’s dislike of the term “intellectual property.”

Of course, the book is not designed to be a treatise on the economics of patent law, but a practical handbook for developers seeking to work within that system. So I certainly wouldn’t expect an in-depth treatment of the subject. But Lindberg took the time to explain concepts like “club goods” and “common pool goods” that don’t appear necessary for a developer wanting to learn the rules of the road of patent and copyright law. He could have cut some of that abstract discussion, replaced it with a more balanced discussion of competing views on “intellectual property,” and wound up with a book that arms his audience to better understand the shape of the contemporary copyright and patent debates.

August 27, 2008 | Comments |

Viewing 7 Comments

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    The claim that "the intellectual property part of the business is the most valuable aspect of the business" is certainly not true for "most businesses in the United States", but it is strictly true for folks who merely accumulate intellectual property and use it as an investment (eg Yoko Ono, Intellectual Ventures, Ocean Tomo), and those are the most frightening cases to me. If the intellectual property of your business is in fact the most valuable part of your business, then you are in the business of extorting licensing fees from and suing the pants off legitimate producers of culture and innovation.
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    The agriculture business is about 10% of our economy or more, if I remember correctly. I wonder, what part of their business relies on intellectual property law, aside from trademarks? Just sayin...

    In most cases, the only patents that are of significant value are ones on cutting edge innovations that others cannot make. Tesla Motors is a good example here, but the patents on different engines made by the Big Three and their japanese counterparts are probably all but interchangeable in design by comparison to those doing cutting edge work on consumer-grade alternative fuel vehicles.
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    "markets produce insufficient creative expression"

    The pro-copyright argument in a nutshell. A scary one for libertarians to be making.
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    Tim -

    There are two specific statements that you have trouble with. Let me answer each in turn.

    Regarding the statement on page 8, you are right that my wording is too broad, and that my intended meaning is that markets do not provide /sufficient/ incentives for creativity. I have submitted an erratum so that will be fixed.

    Regarding the statement on page 18, I respectfully disagree - but I need to make sure that I explain my terms. When I discuss intellectual property in that particular paragraph, I am taking a far broader view of IP than just copyrights and patents. If you include brands (trademarks), internal how-to (trade secrets), and semi-protectable areas such as design, I would argue that over the past years the collective value of what we know in this country has surpassed the value of the capital equipment and labor used in this country. It is a natural consequence of the shift in our country to a knowledge- and service-based economy.

    So would I ever say that the patents and copyrights held by a business are the most valuable part of the business? No - unless you have a very peculiar business like Myrhvold's Intellectual Ventures. Would I argue that my broader formulation is correct? You bet.

    For example, take a company like Disney, or GM, or Intel. All of those companies have substantial capital assets. What makes those companies tick, however, is the know-how that goes into the production, protection, and marketing of their products. Other examples are Walmart and Dell. The most highly valued assets within those companies are the business processes that make them efficient, not their land holdings and manufacturing facilities.

    You are also frustrated that I don't give broader emphasis to alternative theories of intellectual property. While I am aware of the arguments you cite, I don't think that they would have been appropriate in this book.

    The reason why is because those theories in general have not had a substantial impact on the development of the intellectual property laws of the United States. There are many people - like yourself - trying to get those theories into broader circulation. But relative to the history of intellectual property in this country, I don't believe they have had substantial impact. Given the space and attention constraints within the book, they were simply one of the many interesting things I chose to leave out.
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    Thanks for your thoughtful response!

    When I discuss intellectual property in that particular paragraph, I am taking a far broader view of IP than just copyrights and patents. If you include brands (trademarks), internal how-to (trade secrets), and semi-protectable areas such as design, I would argue that over the past years the collective value of what we know in this country has surpassed the value of the capital equipment and labor used in this country.

    Well, OK. If you're just using "IP" as a synonym for "knowledge," then the statement may be true, although I don't know how you'd measure it in a rigorous way. But that means that in the passage I quoted, you're conflating two very different sense of the term "intellectual property." Only a small fraction of "what we know in this country" is subject to legal constraints such as copyrights, patents, trade secrets, etc. There are entire industries, including fashion and the culinary arts, whose core products are not eligible for any significant legal protections. And every business relies on a ton of information that's not subject to any significant legal constraints.

    This is one of the reasons that, like Richard Stallman, I like to avoid using the phrase "intellectual property" altogether. Knowledge and the various legal regimes protecting it are very different things, and in my experience using a single word to denote both tends to impede clear thought. There's genuine uncertainty about whether intellectual property (copyrights, patents, trade secrets) promotes intellectual property ("what we know in this country"), but it's difficult to have an intelligent discussion when we use the same word for all of them and mix-and-match different senses of the term in the same paragraph.
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    I don't think - either in my response or in the book - that I was quite conflating intellectual property (copyrights, patents, trade secrets) with a catch-all "what we know in this country." As you will notice, I specified "copyrights and patents. . . . brands (trademarks), internal how-to (trade secrets), and semi-protectable areas such as design." In the broader context of the chapter, I also identify the same four branches (patent, copyright, trademark, and trade secret) as intellectual property. All of these are recognizably intellectual property in the legal sense without necessarily incorporating all of our knowledge and know-how.

    To qualify a bit further, I said that I wasn't "quite" conflating the two. One of the unheralded expansions of intellectual property over the past 50 years has been in the area of trade secrets. Companies *do* claim "all that you know" as proprietary information, protectable under trade secret law. The claims are so expansive that they are in many cases unenforceable, but there is a lot of day-to-day working knowledge that is theoretically secret and protected by trade secret laws.

    Regarding judging the value of intellectual property, it would be hard but doable. Off the top of my head, I would start with direct revenues from licensing, include money spent on internal operations (trade secrets again), goodwill (implied value of trademarks), and add in the output of knowledge service workers.

    This metric would not capture everything, but that was never my point. Even in the restaurant and fashion industries, considerable internal operations expertise would come via trade secrets under the label of "intellectual property."

    Finally, regarding the term "Intellectual Property," you are correct that it is inexact, because it is a term for a category of goods. I don't agree that it "impedes clear thought," it is just inexact. Nevertheless, category terms - like "intellectual property" or "fruit" - are still useful. You just need to specify when appropriate whether the yellow fruit you are discussing is a banana, and when it is an apple. :)
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    Regarding judging the value of intellectual property, it would be hard but doable. Off the top of my head, I would start with direct revenues from licensing, include money spent on internal operations (trade secrets again), goodwill (implied value of trademarks), and add in the output of knowledge service workers.

    OK, but you started your paragraph off by talking about "a tide of stronger intellectual property protections." The stuff you're talking about here is not even plausibly attributable to "a tide of stronger intellectual property protections." The increased value of company goodwill, for example, clearly isn't due to stronger trademark protections. So yes, for a sufficiently broad definition of "intellectual property," you can make a plausible case that intellectual property is at the heart of of most businesses. But when you look at the economy as a whole, the trend toward stronger copyright, patent, and trade secret laws has been a minor factor, at best, in the trend toward increasingly knowledge-oriented businesses.

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