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The great intellectual property trade-off

By Tim Harford
BBC World Service, 50 Things That Made the Modern Economy

26 June 2017 Business

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 GETTY IMAGES

In January 1842, Charles Dickens arrived on American shores for the first time.

He was greeted like a rock star in Boston, Massachusetts, but the great novelist was a man with
a cause: he wanted to put an end to cheap, sloppy pirated copies of his work in the US.

They circulated with impunity because the United States granted no copyright protection to non-
citizens.

In a bitter letter to a friend, Dickens compared the situation to being mugged and then paraded
through the streets in ridiculous clothes.

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 "Is it tolerable that besides being robbed and rifled," he wrote, "an author should be forced to
appear in any form - in any vulgar dress - in any atrocious company?"

Monopoly
It was a powerful and melodramatic metaphor. But the truth is the case for what Dickens was
demanding - legal protection for ideas that otherwise could be freely copied and adapted - has
never been quite so clear cut.

50 Things That Made the Modern Economy highlights the inventions, ideas and innovations
that helped create the economic world.

It is broadcast on the BBC World Service. You can find more information about the
programme's sources and listen online or subscribe to the programme podcast.

Patents and copyright grant a monopoly.

Dickens's British publishers will have charged as much as they could get away with for copies of
Bleak House. Cash-strapped literature lovers simply had to go without.

But these potential fat profits encourage new ideas.

It took Dickens a long time to write Bleak House. If other British publishers could have ripped it off
like the Americans, perhaps he wouldn't have bothered.

So, intellectual property reflects an economic trade-off, a balancing act. If it's too generous to the
creators, then good ideas will take too long to copy, adapt and spread. If it's too stingy, then
maybe we won't see the good ideas at all.
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 This trade-off has always been coloured by politics.

The British legal system strongly protected the rights of British authors and British inventors in
the 1800s because the UK was then - as now - a powerful force in world culture and innovation.

Brazen copying
But in Dickens's day, American literature and innovation were in their infancy. The US economy
was in full-blown copying mode: they wanted the cheapest possible access to the best ideas
that Europe could offer.

US newspapers filled their pages with brazen copying - alongside attacks on the interfering Mr
Dickens.

A few decades later, when American authors and inventors spoke with a more powerful voice,
America's lawmakers began to take an increasingly fond view of the idea of intellectual property.
Newspapers, once opposed to copyright, now rely upon it.

And we can expect to see a similar transition in developing countries today: the less they copy
other ideas and the more they create their own, the more they protect ideas. There's been a lot
of recent movement: China didn't have a copyright system at all until 1991.

The modern form of intellectual property originated, like so many things, in 15th Century Venice.
Venetian patents were explicitly designed to encourage innovation.

The inventor would automatically receive a patent if their invention was useful. The patent was
temporary, but could be sold, transferred or even inherited during its lifetime.

It would be forfeited if it wasn't used, and invalidated if the invention proved to be closely based
on a previous idea.
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 These are all very modern ideas. And they soon created very modern problems.

Rivalry
During the British industrial revolution, the great engineer James Watt worked out a superior way
to design a steam engine. He spent months developing a prototype, but then put even more
effort into securing a patent.

His influential business partner, Matthew Boulton, even got the patent extended by lobbying
Parliament.

Boulton and Watt used it to extract licensing fees and crush rivals - for example, Jonathan
Hornblower, who made an even better steam engine yet found himself ruined and imprisoned.

The details may have been grubby, but surely Watt's famous invention was worth it? Well,
maybe not.

The economists Michele Boldrin and David Levine argue that what truly unleashed steam-
powered industry was the expiry of the patent, in 1800, as rival inventors revealed the ideas they
had been sitting on for years.

And what happened to Boulton and Watt, once they could no longer sue those rivals? They
flourished anyway. They redirected their attention from litigation towards the challenge of
producing the best steam engines in the world. They kept their prices as high as ever, and their
order books swelled.

Far from incentivising improvements in the steam engine, the patent actually delayed them.

Expansion

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 Yet since the days of Boulton and Watt, intellectual property protection has grown more
expansive, not less so.

Copyright terms are growing ever longer. In the US, they were originally 14 years, renewable
once. They now last 70 years after the death of the author - typically more than a century.

Patents have become broader and are being granted on vague ideas - for example, Amazon's
"one-click" US patent protects the not-entirely-radical idea of buying a product on the internet by
clicking only one button.

The US intellectual property system now has a global reach, thanks to the inclusion of intellectual
property rules in what tend to be described as "trade agreements".

And more and more things fall under the scope of intellectual property - for example plants,
buildings and software have all been brought into its domain.

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These expansions are hard to justify, but easy to explain: intellectual property is very valuable to
its owners, which justifies the cost of employing expensive lawyers and lobbyists.

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 Meanwhile, the cost of the restrictions are spread widely among people who barely notice it.

The likes of Matthew Boulton and Charles Dickens have a strong incentive to lobby aggressively
for more draconian intellectual property laws - while the many buyers of steam engines and
Bleak House are unlikely to get politically organised to object.

The economists Boldrin and Levine have a radical response to this problem: scrap
intellectual property altogether.

There are, after all, other rewards for inventing things - getting a "first mover" advantage over
your competitors, establishing a strong brand, or enjoying a deeper understanding of what
makes a product work.

Financial upside?
In 2014, the electric car company Tesla opened up access to its patent archive in an effort to
expand the industry as a whole, calculating the company would benefit overall.

For most economists, scrapping intellectual property entirely is going too far. They point to
important cases - such as new medicines - where the costs of invention are enormous and the
costs of copying are trivial.

But those who defend intellectual property protections still tend to argue that - right now - those
protections offer more than enough incentive to create new ideas.

Dickens himself eventually discovered a financial upside to weak copyright protection.

Twenty five years after his initial visit to the US, Dickens returned, keen to make some money.

He reckoned that so many people had read cheap knock-offs of his stories that he could cash in
on his fame with a lecture tour. He was absolutely right: off the back of pirated copies of his
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 work, Charles Dickens made a fortune as a public speaker, many millions of dollars in today's
terms.

Perhaps the intellectual property was worth more when given away.

Tim Harford writes the Financial Times's Undercover Economist column. 50 Things That Made
the Modern Economy is broadcast on the BBC World Service. You can find more
information about the programme's sources and listen online or subscribe to the
programme podcast.

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