IPRs, technological development, and economic development.

Author:Dolfsma, Wilfred
Position:Intellectual property rights

Since it is rooted in a contradiction, there can be no such thing as an ideally beneficial patent system, and it is bound to produce negative results in particular instances.

--Joan Robinson

[O]wnership ... gives the owner not only the right of use over the community's immaterial equipment, but also the right of abuse and of neglect and inhibition.

--Thorstein Veblen

In 2000 some $142 billion in royalties were paid internationally by users of a specific piece of knowledge that was protected under intellectual property right (IPR) law to parties that owned these rights. (1) Under current circumstances where knowledge and innovation play an increasingly significant role in the economy (Foray and Lundvall 1996; Cowan, David, and Foray 2000; Cooke 2002; Dolfsma and Soete 2006; Dolfsma 2005), IPRs have become increasingly prominent in debates and are almost unanimously deemed to favor economic development by policy makers and certainly by policy makers in developed countries. While it has been acknowledged that some parties may benefit more from a system of IPRs than others, in relative terms a Pareto improvement is the expected outcome (Langford 1997). This has been the motivation to include IPRs in the WTO negotiations. The TRIPS agreement (Trade-Related Aspects of Intellectual Property Rights) resulted in 1994 from these negotiations. Especially during the 1990s the number of patents granted has grown tremendously despite the fact that many a scholar still supports Fritz Machlup's (1958, 28) conclusion that "it would be irresponsible, on the basis of our present knowledge of its consequences, to recommend instituting one. But since we have had a patent system for a long time, it would be irresponsible, on the basis of our present knowledge, to recommend abolishing it." The academic (economic) community is almost unanimous about the system of IPR overshooting its goals. (2)

From other corners, where specific effects of IPRs are considered, a different and less circumspect sound may be heard. Examples of this are attempts to make available HIV/AIDS drugs at a reduced price compared with what the pharmaceutical companies that have the patents on these drugs demand. (3) I will focus on patents.

Empirical and theoretical findings bearing on the question of IPRs' effect on technological development, and thus prospect for economic development, are reviewed. Static and dynamic effects are distinguished. Areas where static effects may be expected include transfer of knowledge, balance of payment effects, effects for large as opposed to small firms, and effect on the "extent of the market." Areas for dynamic effects include technological development and technological preemption. (4) The list may not be exhaustive, and effects are interlocking: they may be mutually reinforcing or they may conflict. I will mostly focus on "dynamic" effects.

Intellectual Property Rights

Intellectual objects are nonexclusive: consumption or use by nonpayers cannot be excluded. In addition, intellectual objects are partly nonrivalrous as well: they are not consumed by their use. This makes intellectual objects (quasi-)public goods, giving governments a reason to influence relevant processes in society. As costs of imitating or communicating intellectual objects tend to be low, there may be a tendency for these to be underproduced (Nelson 1959; Romer 2002). IPRs would provide a way to compensate creative individuals that is saving on transactions costs by stipulating that the commercial use of knowledge is exclusive to the right-holder. Discussion of the need for society of IPRs has waxed and waned (Towse and Holzhauer 2002). Notwithstanding such discussions, the scope and duration of IPRs has increased steadily over time.

Rationales for IPRs fall into four partly related categories (Hettinger 1989). The extent to which rationales are stressed in law differs between countries, reflected in the authority that administers them. In the United Kingdom and the United States, the incentive for creative individuals or organizations that IPRs offer is emphasized: development and diffusion of new knowledge is promoted by the prospect of a period of time in which one is able to commercially exploit the innovation. (5) Similarly, IPRs are said to be necessary for firms to entice them to invest in facilities for the production of goods based on the intellectual object protected under IPR. Without it, firms would face more than the usual business risk and refrain from the production of such goods. In the United Kingdom and the United States, these are the rationales emphasized, and this is reflected in the fact that the Commerce Department administers such rights. The two other rationales are not related to such utilitarian considerations and are specifically emphasized in the legal systems of continental Europe (and those based on or influenced by them). The first is one of dessert. If someone has produced an intellectual object, she deserves some kind and measure of reward. The final rationale is a personal/ moral one. In creating an intellectual object, someone expresses one's personality. (6)

Over time, the first and second rationales have become increasingly dominant in the discussions. Philosopher John Locke's argument in his Second Treatise of Civil Government (1690) for a "natural" property right in what one makes has a strong intuitive appeal. In reality, however, it is a government that creates and polices IPRs; they are a socially created privilege. Intellectual objects differ from physical ones. In their creation, for instance, one draws on work done (by others) in the past; creation is often not de novo. When use of existing work is restricted, society may be hurt. As intellectual objects are public goods, granting a (temporary) monopoly on their commercial exploitation may not leave "enough and as good." (7) Independent inventors are hurt as they may be prohibited from using something they have developed themselves but another party was granted a patent for earlier. It is further argued that intellectual objects are more often than physical ones the result of cooperation-a cooperation that may or may not be promoted by IPRs (Dolfsma 2007).

This paper does not call into question the need for a system of IPR per se, yet it does elaborate on criticisms...

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