Mind Control: Firms and the Production of Ideas

Publication year2012
CitationVol. 35 No. 04


Mind Control: Firms and the Production of Ideas

Anthony J. Casey(fn*)

I. Introduction

The central questions for economic theories of the firm concern how the production of a good is organized (in the market or within a firm) and why that organization prevails.(fn1) Derivative to these questions, legal scholars ask how the law affects and is affected by any particular organizational structure. Emerging literature looks at these questions in connection with the law of intellectual property.(fn2) The prevailing theories in that literature focus primarily, though not exclusively, on patent law and generally adopt a property-rights theory of the firm. Those theories, focusing on residual control and hold-up problems, have shown that as patent rights become stronger, firms may become smaller because property rights facilitate market transactions that would otherwise be too costly. Small, innovative suppliers will not invent component inputs if they cannot protect their invention against post-disclosure appropriation. The producers of the final product will therefore have to develop the technology in-house or the invention supplier will have to perform the post-invention development itself. These insights have important implications for the design of law.(fn3)

But, as with any emerging literature, there is a large swath of production that is still unexplained. In this Essay, I identify a unique set of intellectual production activities that do not fit squarely into the existing theories of intellectual property and the firm: namely, the actual production of new and unique ideas. I say "actual production" to differentiate from the well-examined questions of integrating innovation with post-production transfer, development (including synthesis into a larger good), and marketing. The actual production, on the other hand, is the pre-development mental process (though nonmental inputs are often involved) that gives birth to an idea that did not previously exist.

The existing literature focuses on whether a firm that specializes in post-production development will integrate with the modular unit of actual idea production however that production might be organized(fn4) on where the idea is produced rather than how it is produced. The organization within the modular unit of the actual idea production is left open. Unanswered are questions of if and how inputs to idea creation will come together and whether collaborative production of ideas can be fostered or inhibited by markets or firm hierarchies.

The importance of this gap is underappreciated. In particular, the organization of the production of a component idea will often affect whether that production function can be integrated into the larger firm at all. Analogizing to a classic example for theorists of the firm,(fn5) a theory asserting that the production of a car body would be vertically integrated into the automotive production function would be problematic if it turned out that the production of car bodies was itself a disparate and unin-tegrated production function. Much of what has been written assumes that the specific organization of idea creation is a simple matter: production of an idea can be achieved by any economic actor and current employees can be directed to produce the new idea; or, when creation is specialized, the relevant economic actor can be easily identified and integrated into the larger firm.(fn6)

Moreover, the literature on intellectual property and the firm applies the property-rights theory to suggest that integration solves a potential hold-up(fn7) problem created by weak intellectual property rights. But integration in the property-rights sense requires the ownership of residual control rights, and that control can be difficult or impossible to achieve for idea production. As I discuss below, the quality that differentiates the production of a new idea from more traditional production (tangible products or standard services, for example) is that the production of the idea is often difficult to observe, verify, or direct, and may be uniquely within the abilities of a particular individual. Firms cannot own the residual rights to things that are within an individual's head and that can never be observed or verified. Thus, lack of control(fn8) of the mental process makes it difficult to integrate the uniquely qualified idea creator into a firm in the property-rights sense.

But we do see integration in some of these cases. Indeed, we see a wide variation of organization for idea creation. Some creative production is done solely on the market (the most creative novels); other creative production is done within collaborative firms under the direction of a hierarchy (movie production and the production of some other genres of novels). And yet none of these variations in the organization of the production of new ideas can be explained by the strength or weakness of property rights in the end product. Nor can they be explained solely by ownership of residual rights to control hold up. Whether a new comic book, novel, or toy is created by a hierarchical firm, a web of market transactions, or an individual, has little to do with the strength of copyright protection and more to do with the costs of verifying and controlling inputs on one hand and the value to be gained from collaboration on the other.

This Essay thus highlights an area of intellectual production that cannot be explained by the existing literature on intellectual property and the theory of the firm, and it suggests that some underappreciated alternate theories-like team production-might be at play.(fn9) I do not claim that the conclusions found in the existing literature are incorrect, but rather that they are limited in scope. Property-rights theories tell us about whether and how an existing intellectual input or the modular unit that produces it will be integrated within a larger development firm but less about how the input will be created in the first place-that is, how the modular unit will itself be organized.(fn10)

I present examples of idea production that conflict with the existing theories to demonstrate these limitations. I focus largely on the field of copyright, showing that the primacy of idea creation for copyrightable work places virtually the entire field(fn11) outside the realm of existing theories.

I begin with a brief discussion of prevailing theories of intellectual property and the firm and the difficulties of applying those theories to pure idea creation in Part II. I then use two high-profile copyright cases to illustrate the need for a new legal theory for the organization of idea creation in Parts III and IV. I conclude with some thoughts on directions for new theories in Part V.

II. Prevailing Theories of Intellectual Property and the Firm (and Their Limitations)

A. The Prevailing Theories

To be precise, the existing literature does not completely ignore the actual production of ideas. But the assumed question has been whether the post-production development firm directs its workers to create an idea or whether it purchases the idea on the market. A slight variation on this question is whether the development firm integrates the particular creative firm (or individual) who produces the idea rather than purchasing it from that same firm on the market.(fn12) The converse of those questions would be whether the idea-creating firm directs its employees to perform post-creation development or acquires a development firm.(fn13) These frameworks all share the common assumption that the idea is a thing that exists or can be caused to exist at will. They do not dig into how exactly the idea comes to exist in the first place or whether that production function requires a particular (sub)organization or is specialized to certain individuals.

This post-creation focus on integration is a natural result of the current landscape of the law. Only at the beginning of this stage can an idea receive legal protection. Copyright law protects the expression of ideas in a particular medium.(fn14) Patent law protects ideas that have been reduced to practice.(fn15) Those transformations must necessarily occur after creation. Pure ideas-before they are transformed into expressed media or invention-do not have substantial legal protection. Indeed, until recently, legal scholarship generally, and not just in the theory-of-the-firm field, had largely neglected the study of underlying ideas.(fn16)

With that backdrop, theorists often ask the question: do firms make or buy inventions? And they look at how the design of patent law affects the answer. The theories offered tend to focus-as much of patent scholarship does-on the strength and allocation of property rights.(fn17) Accordingly, the literature almost universally adopts and applies the prevailing property-rights theory of the firm.(fn18) That theory, pioneered by Oliver Hart, Sanford Grossman, and John Moore, suggests that firms will integrate an asset-by taking a property right in it-to combat the risk of hold up that results when perfectly complete contracts cannot be writ-ten.(fn19) Because a property right implies residual control over the asset, the owner of the asset has control (to the extent contracts are silent) over the future allocation of that asset's productive use. Parties will therefore structure ownership ex ante to minimize the...

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