Friday, June 19, 2015

Backward Reasoning on IP Protectionism

The folks over at IP Watchdog recently responded to a question from a reader who asked for proof that innovation would not happen in the absence of “sufficient IP protections.” As is often the case with IP advocates, the Watchdog writer thinks the case is glaringly obvious but chose to respond anyway because it is a “message worth repeating.”

Apparently she also thinks the case for intellectual property regulation is so obvious that it is not worth giving sound evidence. The arguments put forward are amazingly unperceptive and do not hold up to critical analysis.

The article begins with the standard argument of “economic fundamentals;” high R&D costs plus low marginal cost of replication and production means that innovation will not happen in the absence of patents. The jump is then quickly made to a pharmaceutical example to show the importance of patents in general. This is a misleading example because the question of IP protection is always an empirical one. Are fixed costs of development actually high enough and are marginal costs of duplication actually low enough that there will be a net loss of innovation in the absence of IP protection? The argument of myself and others is that they are not.

Pharmaceuticals are one of the only conceivable realm in which there is a possibility of the balance being so out of whack that some kind of IP protection scheme may be desirable. (Parenthetically, this does not mean that the present system of US patents is the most desirable form of protection. It is even likely that some non-governmental solution is preferable to any centralized regulation.)

The particulars of pharmaceutical patents aside, their uniqueness makes them poor candidates for analogies to the rest of the IP system. There is conceivably a case for IP protection of new drugs, but that has almost no relation to whether a farmer should be allowed to modify his tractor, and it is quite different from saying that patents on off the shelf Wi-Fi equipment should be able to be owned by patent assertion entities and asserted against small end users. Trying to set up pharmaceuticals as a blanket justification for all patents and copyrights as currently conceived is misleading at best.

The main thrust of the article is to argue that a correlation between countries with strong IP regulations and those with a lot of innovation. Even ignoring the dubious proposition of calculating an innovation score for individual countries, this reasoning is backwards. Innovation does not result from IP laws; IP laws result from rent seeking after innovation occurs. Every businessman would like to have a monopoly on the good or service he produces, and this desire, while usually frowned upon, finds social acceptance when couched in terms “intellectual property.”

But, of course, there must be inventions before inventors (or other IP holders) can lobby for monopolies. It should not be surprising that innovative countries have strong IP regulations because where there is much innovation there is much incentive to monopolize one’s piece of it. The presence of strong IP laws in innovative countries does not indicate that the IP laws where the cause of innovation any more than the presence of sick people at a hospital indicates that the hospital is the cause of the sickness.