Creation Myths: Does Innovation Require Intellectual Property Rights?

Article excerpt

THE MOST FORCEFUL performance at last year's Grammy ceremony was a speech by Michael Greene, then president of the National Academy of Recording Arts and Sciences. Speaking not long after the 9/11 attacks, Greene gravely warned of a worldwide threat--"pervasive, out of control, and oh so criminal"--and implored his audience to "embrace this life-and-death issue."

Greene was not referring to international terrorism. "The most insidious virus in our midst," he said sternly, "is the illegal downloading of music on the Net."

Greene's sermon may have been a bit overwrought, but he's not alone in his fears. During the last decade, the captains of many industries--music, movies, publishing, software, pharmaceuticals--have railed against the "piracy" of their profits. Copyright and patent protections have been breached by new technologies that quickly copy and distribute their products to mass markets. And as quickly as a producer figures a way to encrypt a DVD or software program to prevent duplication, some hacker in Seattle, Reykjavik, or Manila figures a way around it.

The music industry has tried to squelch the threat, most conspicuously by suing Napster, the wildly popular Internet service that matched patrons with the songs they wanted, allowing them to download digital music files without charge. Napster lost the lawsuit and was liquidated, while similar services survive.

But the struggle over Napster-like services has accented a much broader issue: How does an economy best promote innovation? Do patents and copyrights nurture or stifle it? Have we gone too far in protecting intellectual property?

In a paper that has gained wide attention (and caught serious flak) for challenging the conventional wisdom, economists Michele Boldrin and David K. Levine answer the final question with a resounding yes. Copyrights, patents, and similar government-granted rights serve only to reinforce monopoly control, with its attendant damages of inefficiently high prices, low quantities, and stifled future innovation, they write in "Perfectly Competitive Innovation," a report published by the Federal Reserve Bank of Minneapolis. More to the point, they argue, economic theory shows that perfectly competitive markets are entirely capable of rewarding (and thereby stimulating) innovation, making copyrights and patents superfluous and wasteful.

Reactions to the paper have been mixed. Robert Solow, the MIT economist who won a Nobel Prize in 1987 for his work on growth theory, wrote Boldrin and Levine a letter calling the paper "an eye-opener" and making suggestions for further refinements. Danny Quah of the London School of Economics calls their analysis "an important and profound development" that "seeks to overturn nearly half a century of formal economic thinking on intellectual property." But UCLA economist Benjamin Klein finds their work "unrealistic," and Paul Romer, a Stanford economist whose path-breaking development of new growth theory is the focus of much of Boldrin and Levine's critique, considers their logic flawed and their assumptions implausible.

"We're not claiming to have invented anything new, really," says Boldrin. "We're recognizing something that we think has been around ever since there has been innovation. In fact, patents and copyrights are a very recent distortion." Even so, they're working against a well-established conventional wisdom that has sanctioned if not embraced intellectual property rights, and theirs is a decidedly uphill battle.

The Conventional Wisdom

In the 1950s Solow showed that technological change was a primary source of economic growth, but his models treated that change as a given determined by elements beyond pure economic forces. In the 1960s Kenneth Arrow, Karl Shell, and William Nordhaus analyzed the relationship between markets and technological change. They concluded that free markets might fail to bring about optimal levels of innovation. …