I. Introduction

Considered in isolation from public policies intended to grant protection in some form to the discoverers of new technologies, new knowledge, new creative works and new products (patents, copyrights, and trademarks are the most familiar means), intellectual property (IP) is a pure public good. Once investments of time, effort and money leading to such innovations have been made (“sunk”) and the underlying ideas have been articulated, others can copy and use them in ways that expropriate some or all of the returns to investment by the first and true inventor or discoverer, thereby potentially rendering the inventive process itself unprofitable ex post. It thus seems that intervention by the state to grant and enforce the originators’ property rights “for limited Times” is essential so that the creators of new knowledge can capture returns to their investments sufficient to make inventive activities worthwhile.

On the other hand, many critics of formal IP regimes argue nowadays that “information should be free,” although, as one commentator puts it, “By ‘free’ I am not referring to price, but rather to the freedom to copy the information and to adapt it to one’s own uses…. When information is generally useful, redistributing it makes humanity wealthier no matter who is distributing and no matter who is receiving.”² The trade-off between freely flowing ideas and the willingness of creative people to invest resources in the search for new, commercially successful knowledge was captured nicely more than a half-century ago by the late Joan Robinson, who wrote that formal intellectual property rights (patents, in her discussion) slow down the diffusion of technical progress for a reason: “to insure that there will be more progress to diffuse.”³

This Article delves more deeply into that trade-off. We do so, first, by accepting the conclusion that, in the abstract and once produced, intellectual property is a pure public good, being both nonrival in consumption and (frequently) nonexcludable. Second, we discuss the benefits and costs, including rent seeking, of existing formal (statutory) systems designed to help overcome IP’s public goods character. Such formal legal systems provide the institutional framework thought necessary by the Founders and others to allow the discoverers of new knowledge to appropriate (commercialize) the fruits of their prior investments in research and development.⁴ Third, we identify and summarize some of the many informal (private) mechanisms for protecting intellectual property against appropriation that have emerged over time and, what is more important, often are considered to offer stronger protections for those rights than patent and copyright law. Trade secrets, lead-time over imitators, “first-copy costs,” and sales of goods and services complementary to IP, among other private mechanisms, supply alternative means of capturing returns to creative activities that are large enough to make creativity and innovation “pay.”

One key defect in current intellectual property laws is that they are “one size fits all” policies: no matter how “novel,” “nonobvious,” or “useful” an innovation may be, the terms of all patent rights, except for pharmaceuticals, extend for twenty years from the date of issue; copyrights for creative works now run for seventy years beyond the creator’s death. Another major defect is that because the grantor of patent rights in the United States—the U.S. Patent and Trademark Office (USPTO)—nowadays receives more than 500,000 applications for new patents every year, the default option for harried patent examiners in uncertain cases seems to be to grant new patent rights and rely on the courts to resolve disputes about possible infringement of existing rights.

Rather than abolishing formal protections for IP altogether, considering some piecemeal reforms in current practice, such as varying patent terms according to the pace of technological change across industries, may help inform current debates about the trade-offs inherent in formal IP regimes. It is worth emphasizing in that regard that one should not frame the debate as choosing between protecting IP fully and offering no protections for it at all. As a matter of fact, in light of the harsh reality that most R&D projects never pay off, innovators and creative people (along with the organizations that strive to commercialize additions to the IP “commons”) often rely on various combinations of formal and informal institutions in their attempts to capture the anticipated, but frequently disappointing returns to prior investments. We also are well aware that any proposal for reform will trigger socially wasteful rent-seeking, rent defending, and rent extracting activities by parties with important stakes in the current legal regime governing intellectual property rights.⁵

II. Public Goods Character of Knowledge

It has long been accepted as a “stylized fact” by many social scientists that technological progress is a crucial determinant of economic growth and development.⁶ But acceptance of that link raises two important questions. First, when, where, and from whom does innovation arise? Second, is the innovative process so fragile that new ideas, new products, new production methods and new creative works require protection, at least temporarily, in the form of exclusive rights granted to their discoverers or creators enforced by the state?

Along with national defense, knowledge, ideas, and information may be one of the few concrete examples of what economists call a pure public good. That is, once new knowledge has been uncovered and “fixed” in some medium, others can in principle take advantage of it freely. Because one person’s use of an idea does not diminish the “amount” of the idea available to others, intellectual property (IP) is nonrival in consumption. IP also is in principle nonexcludable. Unlike tangible goods and services, it may be very costly for the producer to prevent others from using new knowledge once it has been articulated, even if those other users have not contributed any of the money or effort required to generate the idea in the first place.⁷

The knowledge or information contained in a recipe, a musical composition, a painting, a blueprint, a chemical formula or a literary work is neither excludable nor rivalrous if access to the medium through which it is transmitted is not restricted as, for example, by the monopoly granted to printing presses in England before the Statute of Anne (1710). With the rise of the Internet, the nonrival and nonexcludable characteristics of IP have become even more pronounced as it is now much easier to retrieve, to reproduce and to share information.⁸ As such, IP may now be a kind of super-Lockean commons from which anyone can take as much as he or she wants and still leave “enough and as good” of it for others to consume.⁹

IP’s nonrivalry is at the core of why it differs in form and substance from real property.¹⁰ As Jerry Brito points out, the reason property rights emerge for land and other kinds of real property, even in the absence of government intervention, is that as a particular resource becomes scarcer, conflicts over its use predictably trigger the emergence of institutions that secure private property rights.¹¹ Because intellectual property is not subject to such constraints and, in fact, arguably has become even less rivalrous and excludable with the expansion of the Internet, rights to it do not arise in the same way they do for real property, especially when it comes to artistically creative works.

Like other pure public goods, such as national defense, the concern is that IP creates a species of “market failure” in which new ideas and technical knowledge will not be supplied at all (or supplied in less than optimal quantities) if innovation and the discovery of new ideas are left in the hands of the private sector.¹² Nevertheless, intellectual property rights have for a very long time been provinces of the state, as illustrated by this paper’s first epigraph. As a matter of fact, patent laws go back as far as fifteenth-century Venice, and maybe earlier.

In order to create incentives for discovering new knowledge and then spurring its diffusion later on, patent laws in the Western world nowadays require the applicants for patent protection to disclose information about their innovations such that those innovations can be reproduced by anyone schooled in the relevant art, science or engineering practice once the patent has expired and the knowledge underlying it moves into the “public domain.” The disclosure requirement may in some but not all cases facilitate knowledge transmission, but it also allows rivals of the original discoverer to “patent around” the innovation and thereby enter the marketplace with a patented product or process that is a good substitute for the first commercially successful one. Patent rights therefore may be two-edged swords. Even though they are designed to provide incentives for the discovery of new knowledge, they also invite others to find ways of using the information disclosed in the patent application to patent products and processes that are sufficiently different (in the eyes of patent examiners) to warrant their own “protection,” but nevertheless supply margins of competition that cut into the “first and true” inventor’s ability to appropriate the returns to his or her prior investments in research and development.¹³

III. Some Discussion of Property Rights, Trademarks, Copyrights and Patents

While everyone benefits from knowledge spillovers, the super-Lockean nature of intellectual property also presents an economic challenge: knowledge creation suffers, like all common-pool resources—and maybe more so—from underprovision. At least in theory, individual producers have weak incentives to discover and develop new knowledge into commercially successful products and processes because they cannot recoup all (or only some) of the upfront investments required at the invention stage as long as free riders can exploit the new knowledge without payment.¹⁴

The intellectual case for state-granted intellectual property rights is that they allow producers to recoup the high fixed cost of prior investments in research and development, by granting to inventors or creative people “for limited Times” exclusive privileges that preclude the entry of competitors, who might otherwise freely copy or reproduce their new technologies or creative works.¹⁵ In doing so, intellectual property rights strengthen incentives to invest in the discovery of new ideas or the production of new literary works, musical compositions, and so on, activities that are uncertain (most research efforts do not yield anything of commercial value), time consuming, and therefore costly. They allow producers of new knowledge to internalize the positive externalities from their discoveries (at least for awhile) and thereby incentivize additions to the intellectual commons.¹⁶

However, survey evidence points to the conclusion that formal, state-granted patent rights are seen as the single most important way of protecting IP only by executives in the pharmaceutical industry.¹⁷ The formulas for “new chemical entities” (NCEs) that potentially cure or ameliorate disease, infections, or other causes of human morbidity and mortality obviously can be reverse-engineered at low cost by anyone with little training in chemistry beyond the high-school level. As such, securing patent rights to a medicinal formula is indispensable if widespread copying is to be blocked and the returns to investments in R&D protected thereby. But, as mentioned before, the process for obtaining a patent requires disclosure of the underlying chemical formula, meaning that rivals schooled in the relevant art or science are afforded opportunities to patent formulas that yield other NCEs competing commercially with the first-to-market innovation.¹⁸ To reiterate, patents define the properties of products, but not the contours of the markets in which one new, patented good or service ultimately will compete for the attentions of prospective buyers.

All intellectual property rights, whether copyrights, patents, or trademarks secure to their originators use rights in the underlying intangible goods. A registered trademark protects intangibles that generate value only because they help consumers identify one producer’s product. The REAL^® trademark, for example, which is owned by the National Milk Producers Federation, signifies to consumers that they are buying a genuine dairy product (not an imitation or substitute) made from U.S.-produced cow’s milk.¹⁹ Trademarks must be registered at the USPTO and are enforceable in perpetuity; protection ends only if the trademarked item no longer is produced and sold. Disputes over trade names and trademarks do end up in court occasionally,²⁰ but the social value of formal protections for them is not controversial from an economist’s perspective.

Patents and copyrights, on the other hand, protect intellectual property that is valuable intrinsically.²¹ Within that category of intrinsically valuable intangible goods, copyrights protect creative works that primarily are expressive in nature, namely, original works of authorship, expression, or composition. The copyright’s owner is granted the exclusive right to reproduce the original work, prepare derivative works, distribute copies, perform, or display the copyrighted work;²² obvious parodies and “fair use” of copyrighted materials in the classroom represent exceptions to the exclusivity rule.²³

In the past, copyrights could be claimed and enforced only if registered with the appropriate government agency; copyrights nowadays can be exerted simply by inserting © and a date next to the author’s name. Ever since Congress passed and President Clinton signed the Sonny Bono Copyright Term Extension Act of 1998, the term of copyright runs for seventy years beyond the creator’s death.²⁴

Patents protect intangible ideas that are functional, that is, have commercial value. More specifically, patents grant inventors “the right to exclude others from making, using, offering for sale, or selling’ the invention in the United States or ’importing’ the invention into the United States.”²⁵ In addition, the standard way in which patents are granted, combined with their public disclosure requirement, guarantee, at least in theory, widespread diffusion and imitation once the patent expires.²⁶

Patents are granted to “the first and true inventor,” which must be an individual, although in a corporate setting, the inventor may agree (and often is required) to reassign the patent to his or her employer, usually in return for a predetermined share in the subsequent commercial returns to the discovery. Patents are issued only for inventions of new products or processes that are deemed by the USPTO’s examiners to be “novel,” that is, not based on “prior art” and “nonobvious,” that is, not discernable to someone familiar with existing technology or existing practices in the relevant science or industry. Because the USPTO nowadays must evaluate considerably more than one-half million applications for new patents every year,²⁷ the default option for the harried bureaucrats seems to be to approve most applications and to force the interested parties to resolve disputes about validity or infringement in court.²⁸ Because of “diversity” issues, such disputes frequently are tried in federal district court; “venue-shopping” is not unusual.²⁹

IV. Purposely Slows Down the Diffusion of Knowledge

By limiting the exploitation and replication of knowledge, intellectual property rights slow down the diffusion of knowledge as well as the expansion of today’s intellectual commons.³⁰ An important function of the intellectual commons is to provide a base for the expansion of economic activity and the discovery of new knowledge. While the use of an original idea in the sense the inventor anticipated and intended facilitates economic progress, its use in a different context and combination with other inputs can also provide an important engine of economic growth. Excessive limitations on the use of the intellectual commons or parts of it can therefore be detrimental from an economic perspective.³¹ The fundamental trade-off inherent in policies that are meant to secure the rights to and thereby to promote the development of intellectual property is therefore between “‘appropriability’ of returns to make inventive activity worthwhile and the speed of diffusion of the benefits consumers derive from invention.”³²

The breadth of protection afforded by intellectual property rights depends crucially on the inherent characteristics of the protected invention itself. Relatively broad ideas and abstract principles, when protected through formal intellectual property rights, can “become gatekeepers to all sorts of new markets” and may be found to violate U.S. antitrust laws.³³ Patents that merely improve upon existing ones often can be “invented around” and thereby offer weaker protections for the original patent owners.³⁴

Many scholars have argued recently that the lengthening of copyright terms and the addition of an anticircumvention provision and a safe harbor for Internet and online service providers has extended legal protections too far.³⁵ Rather than incentivizing economic growth, the current U.S. copyright regime is characterized as undermining it by limiting access to the intellectual commons too much.³⁶

And even when public policy succeeds in balancing appropriability concerns with the speed of the benefits of knowledge dispersion to consumers, as was the original purpose of the U.S. patent system, producers can find ways to extract monopoly rents above and beyond anticipated returns to the initial discovery. The literature on the practice of patenting documents many examples of misuses of the property rights regime, ranging from firms “‘pyramiding’ the monopoly derived from a single invention by systematically patenting all feasible variations of that invention to ‘fence in’ an entire field of technology,” patenting minor improvements to extend the duration of their monopoly positions, or suppressing new inventions to secure monopoly-like returns to existing patents.³⁷

V. Networks, “Lock Ins,” and Innovation

As argued earlier, intellectual property can be thought of as a public good or as a contribution to the knowledge commons that generates spillovers (positive externalities). One can also call upon the theory of networks as a way of thinking about IP. A network good, such as a telephone, a fax machine, a computer operating system (or an application running on it) is one whose value to users rises as more of them connect to the same network.³⁸ As such, each new connection to the network confers an external benefit both on existing users and on those who link to the network later on. Given this demand-side characteristic, one expects and often observes markets dominated by a small number of large suppliers or a sequence of dominant firms that arise and disappear as a network’s underlying technology progresses.³⁹ Network goods, like IP, typically require large investments before the first unit can be produced and sold; the second and subsequent copies of the good can be supplied at relatively (compared to the initial investment) little additional cost.

The positive externalities associated with a network good plausibly spur the diffusion of new technologies across the network because the benefits of linking to it are larger than buying a non-networked good, whose value is captured entirely by one buyer.⁴⁰ On the other hand, some scholars have suggested that technological diffusion might be slower across networks because technical progress is “path-dependent” and consumers can be “locked into” inferior technologies owing to the cost of switching to a new network. An older example of lock-in is the QWERTY typewriter keyboard, developed at a time when keys hit by typists could overstrike one another if located too closely on the keyboard’s layout. An alternative (Dvorak) keyboard configuration supposedly solved the overstriking problem, but did not displace QWERTY—even now when word processors do not use keys on arms hitting typewriter ribbons—because of the difficulty of learning to use Dvorak’s innovation. Liebowitz and Margolis raise substantial doubts about Dvorak’s claims about the practical superiority of his keyboard’s layout.⁴¹

As demonstrated by analyses of other network goods, “lock-in” to inferior technologies may be a unicorn. Microsoft’s Word eventually displaced Novell’s WordPerfect when large numbers of users concluded that Word had improved beyond its former rival. The VHS standard for recording and replaying movies displaced Sony’s Betamax, even though Betamax widely was thought to be technically superior in reproducing sound and video images. VHS attracted home users owing to its edge in running times, allowing the recording and/or playback of movie-length features.⁴² The VHS technology then fell victim to DVDs, which in turn were displaced by Blue Ray videodiscs. Recordings of musical performances on vinyl records revolving at 45 rpm gave way to 33-1/3 LPs, which gave way to CDs. Consumers apparently were willing to bear the costs of switching, even though upgrading also required purchasing new equipment to take advantage of the advances in recording and playback technologies.⁴³

VI. But Given IP’s Public Good Nature, Protection by the State is not Always the First-Best Option

Alternative ways of securing the returns from innovation may be preferable not just from a public policy perspective, but even more so from the perspective of the innovator. Contributions to the economics literature suggest that for many firms and industries, other means of appropriating returns to innovative activities, such as secrecy, lead time over imitators, confidentiality agreements, complexity, or learning by doing are preferred in practice.⁴⁴ Especially smaller firms that operate in more competitive environments and have to adapt to changing conditions more quickly use such informal methods. They are, however, almost always combined with formal means of protecting intellectual property and, moreover, formal means of protection become more prevalent as firm size increases and as firms do more international business.⁴⁵ In fact, existing evidence suggests that secrecy rather than patents often protect the most valuable inventions. Hall et al., cite statistics that put the average cost of obtaining a patent from the USPTO at $370,000 in 2012,⁴⁶ while the average value of a trade secret in a 2011 federal court ruling was $6.3 million. The firm-level survey evidence summarized in the same study suggests that secrecy and lead-time over imitators (both of which represent informal means of protection) are the most important ways of appropriating the returns to intellectual property rights for most firms. Only for firms in the pharmaceutical and chemical industries are patents more important than any other means of protecting intellectual property.

Theoretically, the elasticity of demand for a firm’s patentable product determines whether it is in that firm’s interest to pursue a patent.⁴⁷ The relative cost of enforcing a formal intellectual property right versus the expected costs and benefits of using informal means of IP protection determines the choice between different enforcement regimes.⁴⁸ Formal IP protection can be enforced with the help of government institutions, but, as mentioned earlier, requires full disclosure of the new knowledge in the patent application so that the new knowledge passes into the public domain immediately after the statutory monopoly has expired. The returns to an informal property right, on the other hand, may be more difficult to enforce, but are, at least potentially, unlimited in duration.

Empirically, firms seem to be more likely to pursue informal rather than formal patent protection, if their innovation is a process rather than a product innovation. Firms that pursue patents often do so because they value the reputation effect patents bring about rather than the patent itself, which seems to be the case for start-ups more than for established firms,⁴⁹ while other firms avoid patents for cost reasons or because they worry about the effect of disclosure requirements on competition after the patent term expires.

Copyrights are somewhat different. Charles Dickens, for instance, copyrighted his writings in England, but not in the United States, which supplied incentives for American publishers to station agents in London tasked with responsibilities to obtain copies of new Dickens’ works, take the first possible ship to New York, hand them over to an American publisher’s representative to be copied (not without error) and then sold to paying customers. Dickens was not uncompensated, though, because he collected revenue from sold-out public readings of his own works at venues around the former colonies.

Such an alternative way of generating returns to original works is known as the “street-performer protocol,”⁵⁰ which is evident in mimes and saxophone players on big-city thoroughfares, among musicians who sell tickets (t-shirts, CD recordings, posters and other branded items) to the audiences at live performances, and to college professors who sell textbooks to students they have authored personally.⁵¹ The unpaid contributors to “open-source” computer operating systems and the applications that run on them likewise can profit from commercializing the name-brand capital signaled by their creative activities, perhaps in the form of job offers from existing software developers, start-ups in that industry, and from firms marketing solutions to hacking threats.

The “street performer protocol” also has much in common with a threshold pledge system or now widely publicized crowd-funding projects such as Kickstarter, an electronic-commerce mechanism created to facilitate the private financing of public goods. Rather than publishing a work of art (music or print) in the traditional way of contracting with a publisher or a record label, artists relying on the threshold pledge system reach their consumers directly before releasing their works by making “a public statement on the order of: ‘When I get $100,000 in donations, I will release the next novel in this series [or the next track on this album].’ Readers [listeners] can go to the author’s [musician’s] web site, see how much money has already been donated, and donate money to the cause of getting his novel out.”⁵² Kickstarter projects of various types have gained publicity in recent years because they have enabled the commercialization of products ranging from garments to computer software. Crowd-funding projects are particularly effective in solving the appropriability problem in a manner that allows for variation in the compensation to inventors in a much more effective way than one-size-fits-all formal IP regimes do. For crowd-funding sites like Kickstarter, artists’ willingness to accept is matched with consumers’ willingness to pay in a market-like manner; projects for which demand does not meet supply remain unfunded.

VII. It is Not Clear that the Same Public Policies Should Apply to All New Knowledge

The foregoing discussion of the relative merits and demerits of different formal and informal enforcement regimes suggests that the one-size-fits-all solution provided by formal IP protection leaves much to be desired. The initial fourteen-year patent term apparently was thought too short to encourage socially beneficial innovation in the pharmaceutical industry,⁵³ but other industries may find the incentive of today’s twenty-year patent term to more than capture the returns to investments in R&D.⁵⁴ The current U.S. copyright regime, which grants protection to creative works for the life of the author plus seventy years, on the other hand, is likely more protection than is needed “To promote the Progress of … useful Arts.” Many scholars have argued persuasively that this particular provision exemplifies industry capture, especially because the recent Copyright Term Extension Act (the “Sony Bono law”) extended copyright protection retroactively to existing copyright holders who had already made their creative contributions.⁵⁵ In addition, Eli Dourado suggests that weak copyright enforcement may be desirable because, in an age of mass media, informal regimes allow creative people to capture more of the returns to their upfront investments than strong, formal means of IP enforcement.⁵⁶

Unless the cost of making the first copy of a literary or expository work is sufficiently high relative to the cost of producing additional copies of it, new entrants to the market are deterred in the absence of formal and informal IP protections. That observation helps explain why only a handful of different versions of works already in the public domain are “on the market” at any one time. Perhaps the publisher of a new edition of The Iliad must retain the services of a new translator; others must scan or reset and correct the text of A Christmas Carol prior to publication. Although technological advances in digitizing previously published works surely have lowered “first-copy costs,” different editions of such creative and popular additions to the intellectual commons far from flood the market.

VIII. Rent Seeking—Patent Cases

IX. Concluding Remarks

From where do incentives to contribute to the knowledge commons arise? An economic theory explaining the sources of new intellectual property has not yet been proposed, but we do know the preconditions necessary for generating economic growth and development, namely well-defined and well-enforced private property rights, observance of the rule of law, free minds, and free markets. Joel Mokyr directs attention to the values of the Scottish Enlightenment and its emphasis on “experimentation” in the light of the scientific method advanced by Robert Boyle, Isaac Newton, and their colleagues and followers.⁶⁵ It must be remembered that the advances in knowledge made in those days were not financed by some government agency or, indeed, necessarily undertaken in anticipation of exclusive commercialization rights granted by the state. Indeed, most scientific advances then were financed by curious people on their own accounts or by wealthy “angels” who offered prizes or other support to those who undertook the hard work, which might not necessarily lead to knowledge of immediate commercial value. The same is true of creative works, whose authors, like William Shakespeare and Charles Dickens, exploited other means of capturing returns to their effort.

Most innovations then and now are not the fruits of large corporate R&D departments, but of the efforts of engineers and workers who confront and solve problems encountered on the manufacturing shop floor.⁶⁶ The half-lives of copyrights and patents are in sharp decline nowadays.⁶⁷ The values of state-granted exclusive rights to commercialize contributions to the intellectual commons remain an open question.

It nevertheless remains true that the same IP protection regime (formal and publicly enforced versus informal and privately enforced) should not be considered optimal in the sense of promoting innovation and economic progress always and everywhere. “Public servants,” such as the people employed by the US Patent and Trademark Office, confront severe Hayekian knowledge problems and, hence, cannot be expected to make the right (socially optimal) “call.” Nevertheless, as the Founders of the American constitutional republic grasped, innovators must be granted incentives to innovate. The literature on the incentives necessary to promote innovation suggests that beyond rules and norms that define and enforce private property rights and encourage experimentation, we don’t know much about the wellsprings of economic progress or the contours of the public policies (IP regimes) that promote it reliably, but also trigger socially wasteful rent seeking and rent defending activities.

Policies intended to foster innovation have been exclusive provinces of the state from time immemorial. Indeed, the word “patent” once referred to a monarch’s grant of an exclusive franchise to a court favorite. But it should be remembered that the efforts of the major contributors to the advancement of Western civilization in the nineteenth century and earlier supported themselves financially or were backed by private “angels.” New discoveries, at least for some innovators, are rewards in and of themselves. It is in that sense that “information should be free.” Some serious rethinking of the need for state protection of contributions to the knowledge commons therefore is warranted.