Economics and the Law - Abstracts

Fixed Cost Inefficiency and the Law

Gerrit De Geest

Many of the economic problems associated with intellectual property are caused by the fact that intellectual products require a fixed cost that needs to be financed by setting the price above the marginal costs. Yet in a modern economy, most production processes involve some degree of fixed costs as well. Therefore, fixed cost inefficiency is a more general problem, that not only affects intellectual property but also physical property. I discuss optimal legal rules for production process that involve fixed costs, and analyze the similarities and differences between intellectual and physical property in this respect.

Applications to other fields of law include damage measures for contract breach, and sale on consignment.

I conclude that the corner solution proposal of Boldrin and Levine (to completely abolish intellectual property) is inconsistent with how other fields of the law deal with similar problems.

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Watt, Again? Boldrin and Levine Continue to Exaggerate the Adverse Effect of Patents on the Progress of Steam Power

To accompany John Turner’s Comment

Several years ago we critically commented on Michele Boldrin and David K. Levine’s telling of James Watt’s story in their 2003 Lawrence R. Klein Lecture. Here we assess the revised version of Watt’s story that opens Against Intellectual Monopoly. We conclude that the new version is no better than the original. Although Boldrin and Levine correct some of their previous factual mistakes, they leave others, including a few egregious ones, uncorrected; and where they do make corrections, they do so half-heartedly, and without making corresponding adjustments to their original, bold conclusions. Finally, the new version introduces new and serious falsehoods.

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Strong Steam, Weak Patents, or, the Myth of Watt’s Innovation-Blocking Monopoly, Exploded

To be presented by George Selgin

James Watt’s 1769 patent is widely supposed to have stood in the way of the development of high-pressure steam technology until it finally expired in 1800. We dispute this popular claim. We show that, although it is true that high-pressure steam technology developed only after the expiration of Watt’s patent, the delay was due to factors other than that patent itself, including the widely-held opinion that high-pressure engines were excessively risky. Indeed, Watt’s monopoly rights may actually have hastened the development of the high-pressure steam engine, by causing would-be rivals to revive a supposedly obsolete technology so as to evade his patent.

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Innovation and Variation in Copyright Policy

To be presented by David McGowan

Innovation is commonly invoked as a purpose of copyright law, often as part of an argument that the law impedes innovation and should be altered.  This paper argues that most of the time innovation is used too abstractly to be useful to copyright analysis.  Clarifying the term and its relations to reproduction and alteration of works exposes some tensions in analysis the term obscures on its own. 

One might define an innovation as a change in the status quo that (i) allows one to do something one could not do before or (ii) allows one to do something already possible while using fewer resources than were required before.  This is an incomplete and possibly misleading definition, and I expand on it in a moment.  There is enough truth in these criteria, though, to make a couple of points. 

 First, there is no ethical valence to innovation so defined (whatever one’s ethical tastes).  It is perfectly sensible to refer to innovative torture techniques or methods of disguising Ponzi schemes.  Second, of special interest to utilitarians, it follows that there is no logical relationship between innovation and net increases in welfare.  Innovation is not intrinsically good; its appeal is based in experience.

That said, my definition of innovation does not work very well.  It seems appealing at first—the invention of the car fits my first criterion and the invention of a more fuel-efficient engine fits the second—but it is easy to find examples the criteria handle poorly.  The hydrogen car is intuitively an innovation but it does not obviously fit either aspect of the definition.  People drove before it was invented and it doesn’t necessarily use fewer resources than gasoline cars, it just uses different resources. 

One might argue that the hydrogen car fits the first criterion because before its invention it was not possible drive a hydrogen car, but that carries stipulation too far into tautology.  By parity of reasoning one would say it is an innovation to sell orange cars if all previous cars were blue, because it was not previously possible to drive an orange car.  That seems wrong.  Once there are cars and knowledge of the color orange, putting the color on the car is plausibly obvious (in the patent-law sense).  It adds variety but not capability or efficiency.[1] 

Yet this response also seems wrong.  Suppose the orange in question reflected the sun in a special and new way.  Then we might say the color as such was an innovation in colors even if not in cars.  The point would hold even if the inventor did her work because she wanted to drive an orange car.  

This example suggests the common-sense point that innovation in one field may simply add variety in another, complementary field, even if the complement is necessary to spur the innovation.   In terms of my two criteria, the point is that the “something” in question cannot be taken for granted.  Innovation is relative to purpose and field of endeavor. 

Copyright law provides a good example of this point.  Innovation is often raised in arguments that are less about copyrighted works than about reproduction technologies, such as p2p software.  Holding production of works constant, the weaker copyright protection is the stronger and more innovative complements are likely to be.

It is of course possible that robustness of innovation in one complement may trade off with robustness of innovation in another.  Suppose widespread copying undercuts creative incentives, as the RIAA and MPAA claim.  If so then it makes no sense to argue about whether copyright policy is good or bad for innovation as such; it would be good for innovation in one field and bad for innovation in another.  Utilitarians would try to ascertain the policy implying the highest yield net of inevitable losses.

Alternatively, innovation may trade off with something else, such as variation.  Suppose instead of a newly reflective orange we have simply a slight variation in a previously popular shade.  In that case it would not seem useful to refer to the shade as an innovation in either colors or cars.  Similarly, it is plausible to say the differences among Madonna, Britney Spears, and Christina Aguilera reflect variation rather than innovation.[2] 

Putting things this way raises an obvious question: what distinguishes variation from innovation?  I doubt there is any intrinsic distinction; common usage and common sense would suggest that an innovation represents a greater degree of difference from the status quo than does a variation.  Thus a third criterion: (iii) Innovation represents a significant departure from the status quo; significance may take the form either of new capabilities as in criterion (i) or new efficiencies as in criterion (ii) but may take other forms as well. 

To the extent all this is right, it complicates significantly the notion that copyright policy should aim to enhance innovation.  At the moment my intuitions are: (i) innovation sometimes and perhaps often trades off with some types of variation; (ii) with regard to much of copyright’s subject matter (music, movies, and books, but not software) copyright doctrine seems to aim more at variation than at innovation; (iii) policies that foster comparatively small variations may trade off with policies that foster more significant variations, so that (iv) policies favoring comparatively small variations in works may be consistent with innovation-maximizing policy in complements but inconsistent with larger variations in works; (v) it is therefore not enough to speak only of copyright policy in terms of innovation, particularly in complements: doctrinal and welfare analysis require consideration of these trade-offs, too; (vi) there is no accepted analytical basis for preferring innovation to variation, or vice-versa; and (vii) anecdotal evidence may favor innovation-maximizing policy over variation-maximizing policy.

[1] Similarly, one might argue that the hydrogen car satisfies the second criteria by abstracting from gasoline power to energy.  But what if the hydrogen car actually consumes more energy per mile (under present production conditions) than the gasoline car?  It would seem to follow that it was not an innovation under my second criterion, which again seems wrong.  That this result might be changed by a change in the conditions of production highlights another deficiency in my criteria.

[2] Of course, what is good for innovation might be good for variation as well.  In that happy case there are no interesting policy questions.  As discussed below, I think there is reason to believe it is at least sometimes not the case.

Evaluating the Economic Performance of Property Systems

To be presented by James Bessen

Abstract: How should the economic performance of property systems be evaluated? Benefit-cost analysis is widely used to evaluate non-market based regulation when prices are not available. Market prices provide better information for property systems, but market prices are not necessarily socially optimal because of imperfect property rights. Using a framework developed in a sister paper (“Imperfect Property Rights”), this paper discusses two practical approaches to evaluating the performance of property systems, one based on an analysis of institutional performance, the other based on measuring incentives. As an illustration, I show how these approaches can be used to evaluate the US patent system.