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Boldrin & Levine: Against Intellectual Monopoly, Chapter 11Chapter 1: IntroductionIn late 1764, while repairing a small Newcomen steam engine, the idea of allowing steam to expand and condense in separate containers sprang into the mind of James Watt. He spent the next few months in unceasing labor building a model of the new engine. In 1768, after a series of improvements and substantial borrowing, he applied for a patent on the idea. August 1768 found Watt in , requiring him totravel to London about in August. He spent the patent and he spent another 6 next six months working hard to obtain ithis patent. The patent It was finally awarded in January 1769of thefollowing year. Nothing much happened, in terms by way of production, for a few years until, in 1775. Then, after another with a major effort supported by his new businessbusiness partner , the rich industrialist Matthew Boulton, Watt secured an Act of Parliament extending his 1769 patent until the year 1800. The great statesman Edmund Burke spoke eloquently in Parliament in the name of economic freedom and against the creation of unnecessary monopoly – but to no avail. 1 The connections of Watt’s partner Boulton were too solid to be defeated by simple principle.  Once Watt’s patents were securedand production started, a substantial portion of his energy was devoted to fending off rival inventors. In 1782, Watt secured an additional patent, made “necessary in consequence of ... having been so unfairly anticipated, by [Matthew] Wasborough in the crank motion.” 2More dramatically, in the 1790s, when the superior and independently designed Hornblower engine was put into production, Boulton and Watt went after him with the full force of the legal system. In contrast to Watt, who died a rich man, the inventor Jonathan Hornblower was not only forced to close shop, 3but found himself ruined and in jail. Prior to During the start period of Watt’s commercial production in 1776, there were 510 steam engines in patents the U.K., most using the inefficient Newcomen design. These engines generated added about 5,000 750 horsepower. By 1800, when Watt's patents expired, there were still only 2,250 of steam engines used in per year. In the U.K., of which only 449 were thirty yearsthe superior Boulton and Watt enginesfollowing Watt’s patents, the rest being old Newcomen engines. The total additional horsepower of these engines was added at a35,000 at best. In 1815, fifteen years after the expiration rate of the Watt patents, it is estimated that nearly 100more than 4,000 horsepower was installed in the U.Kper year.Moreover, while by 1830 the horsepower coming from steam engines reached 160,000. The fuel efficiency of steam engines is not thought to have changed at all little during the period of Watt’s patent; while between 1810 and 1835 it is estimated to have increased by a factor of five. 4After the expiration of the Watt’s patents in 1800, not only 1Boldrin & Levine: Against Intellectual Monopoly, Chapter 1was there an explosion in the production and efficiency of engines, but steam power finally came into its own as the driving force of the industrial revolution. In the next 30 years Over a thirty year period steam engines were modified and improved, and such as crucial innovations such as the steam train, the steamboat and the steam jenny all came into wide usage. The key innovation was the high-pressure steam engine –development – development of which had been blocked by Watt by strategically using Watt’s strategic use of his 1775 patent. Boldrin & Levine: Against Intellectual Monopoly, Chapter 12Many new improvements to the steam engine, such as those ofof William Bull, Richard Trevithick, and Arthur Woolf, became available by 1804: although developed earlier these innovations were kept idle until the Boulton and Watt patent expired. None of these innovators wished to incur the same fate as Jonathan

5Ironically, not only did Watt use the patent system as a legal cudgel with which to smash competition, but his own efforts at developing a superior steam engine were hindered by the very same patent system he used to keep competitors at bay. An important limitation of the original Newcomen engine was its inability to deliver a steady rotary motion. The most convenient solution, involving the combined use of the crank and a flywheel, relied on a method patented in 1780 by James Pickard, which prevented Watt from using it. Ironically, Watt also made various attempts at efficientlyefficiently transforming reciprocating into rotary motion, reaching, apparently, the same solution as Pickard. But the existence of a patent forced him to contrive an alternative less efficient mechanical device, the “sun and planet” gear. It was only in 1794, after the expiration of Pickard’s patent that Boulton and Watt adopted the economically and technically superior crank.6The impact of the expiration of his patents on Watt’s empire may come as a surprise as well. Despite . As might be expected, when the fact that patents expired “many establishments for making steam-engines of Mr. Watt's principle were then commenced” nevertheless “it would appear that the object commenced.” However, Watt’sprincipally competitors “principally aimed at was ...cheapness rather than excellence, for they fell short as to performance of the Soho [Boulton and Watt] engines.” As a result , we find that far from being driven out ofbusiness “Boulton and Watt for many years afterwards kept up their price and had increased orders.” 7In fact, it is only after their patents expired that Boulton and Watt really started to manufacture steam engines. Before then their activity consisted primarily of extracting hefty monopolistic royaltiesthrough licensing. Independent contractors produced most of the parts, and Boulton and Watt merely oversaw the assembly of the components by the purchasers. 2Boldrin & Levine: Against Intellectual Monopoly, Chapter 1In most histories, James Watt is a heroic inventor, responsible for the beginning of the industrial revolution. The facts above suggest a different an alternative interpretation. Watt is one of many clever inventors working to improve steam power in the second half of the eighteenth century. After getting one step ahead of the pack, he remained ahead not by superior innovation, but by superior exploitation of the legal system. The fact that his business partner was partnerBoldrin & Levine: Against Intellectual Monopoly, Chapter 13was a wealthy man with strong connections in Parliament, was not a minor help.  The evidence suggests that Was Watt’s efforts patent a crucial incentive needed to use trigger hisinventive genius, as the legal traditional history suggests? Or did his useof the legal system to inhibit competition set back the industrial revolution by a decade or two. The granting of the 1769 and? More broadly, especially, of are the 1775 two essentialpatents likely delayed the mass adoption components of the steam engine: our current system of intellectual property – patentsinnovation was stifled until his patents expired; and very few steam copyrights – with all of their many faults, a necessary evil weengines were built during must put up with to enjoy the period fruits of Watt’s legal monopoly. invention and creativity? OrFrom are they just unnecessary evils, the number relics of innovations that occurred immediately after an earlier time whengovernments routinely granted monopolies to favored courtiers?That is the question we seek to answer.expiration In the specific case of Watt, the granting of the patent, it appears that Watt’s competitors simply 1769 andespecially of the 1775 patents likely delayed the mass adoption ofwaited the steam engine: innovation was stifled until then before releasing their own innovations. Also, we his patents expired;see that and few steam engines were built during the period of Watt’s inventive skills were badly allocated: we find him legalspending more time engaged in legal action to establish and preserve monopoly. From the number of innovations that occurredhis monopoly than he did in immediately after the actual improvement and production expiration of his enginethe patent, it appears thatWatt’s competitors simply waited until then before releasing theirown innovations. From a strictly economic point of view Watt did This should not surprise us: new steam engines,need such no matter how much better than Watt’s, had to use the idea of a long lasting separate condenser. Because the 1775 patent – it is estimated provided Boulton andWatt with a monopoly over that by 1783 – idea, plentiful other improvementsseventeen years before his patent expired – his enterprise broke of great social and economic value could not be implemented. Byeven; so every dollar that came after was pure gravy. While the view of same token, until 1794 Boulton and Watt’s enterprise we are proposing here engines were lessmay appear iconoclastic to many readers, it is neither new nor efficient they could have been because the Pickard’s patentparticularly original. Frederic Schererprevented anyone else from using, a strong and prestigious academic supporter of improving, the patent system, after going through the details idea of the Boulton and Watt story, concluded his 1986 examination of their story combining a crank with the following illuminating wordsa flywheel.Had there been no patent protection at allAlso,…Boulton and we see that Watt’s inventive skills were badlyallocated: we find him spending more time engaged in legal actionWatt certainly would have been forced to follow a business establish and preserve his monopoly than he did in the actualpolicy quite different from that which they actually followedimprovement and production of his engine. From a strictlyMost economic point of the firm’s profits were derived from royalties on the view Watt did not need such a long lastinguse of engines rather than from the sale of manufactured engine components, and without patent protection the firm – it is estimated that by 1783 – seventeen years before hisplainly could not have collected royaltiespatent expired – his enterprise had already broken even. The alternative Indeed,would have been even after their patent expired, Boulton and Watt were able to emphasize manufacturing and service activities as maintain a substantial premium over the principal source market by virtue of profitshavingbeen first, which in despite the fact that their competitors had had thirtywas the policy adopted when the expiration date of the years to learn how to make steam engines.patent for the separate condenser drew near in the late The wasteful effort to suppress competition and obtain3Boldrin & Levine: Against special privileges is referred to by economists as rent-seekingbehavior. History and common sense show it to be a poisoned fruitof legal monopoly. Watt’s attempt to extend the duration of hisBoldrin & Levine: Against Intellectual Monopoly, Chapter 11790s…. It 41769 patent is possible to conclude more definitely that an especially egregious example of rent seeking: the patent litigation activities of Boulton & Watt during extension was clearly unnecessary to provide incentive forthe original invention, which had already taken place. On top of1790s did not directly incite further technological progress…this, we see Watt using patents as a tool to suppress innovation byhis competitors, such as Hornblower, Wasborough and others. Boulton and Watt’s refusal to issue licenses allowing other Hornblower’s engine makers to employ the separate-is a perfect case in point: it was acondenser principle clearly retarded substantial improvement over Watt’s as it introduced the development and newintroduction concept of improvementsthe “compound engine” with more than one cyclinder. IndeedThis, and not the story of James Boulton and Watt contains most of design, was the basis forimportant elements of our argument against intellectual propertyfurther steam engine development after their patents expired. The new idea accrues almost by chance to However, because Hornblower built on the innovator while he is earlier work of Watt,carrying out a routine activity aimed at a completely different making use of his “separate condenser” Boulton and Watt wereable to block him in court and effectively put an endto steamengine development. The patent comes many years after that and it is due more to monopoly over the “separate condenser,”a mixture useful innovation, blocked the development of legal acumen and abundant resources available to “oil the another equallygears of fortune” than anything else. Finallyuseful innovation, after the patent protection is obtained“compound engine, it is mostly used as a tool to prevent ” thereby retardingeconomic progress and hurt competitorsgrowth. This retardation of innovation is a classical case The wasteful effort of what we shall refer to suppress competition and obtain as Intellectual Property-inefficiency, or IPspecial privileges we have seen in Watt is one of inefficiency for short.Finally, there is the greatest slow rate at which the steam enginedangers was adopted before the expiration of monopolyWatt’s patent. It is commonly referred to as rent-seeking By keepingprices high and preventing others from producing cheaper or bettersteam engines, Boulton and Watt hampered capital accumulationbehaviorand slowed economic growth. Watt’s attempt to extend the duration The story of his 1769 patent James Watt is a damaging case for the benefitsan especially egregious example of rent seeking: the a patent extension was clearly unnecessary system, but we shall see that it is not an unusual story.A new idea accrues almost by chance to provide incentive for the innovator while he isoriginal invention, which had already taken placecarrying out a routine activity aimed at a completely different end. On top of this, we see Watt using patents as The patent comes many years after that and it is due more to a tool to suppress innovation by his competitors, such as Hornblower, Wasborough mixture of legal acumen and others. Finally, abundant resources available to “oilthere is the slow rate at which gears of fortune” than anything else. Finally, after the steam engine was adopted before the expiration of Watt’s patent. By keeping prices high and preventing others from producing cheaper or better steam enginesprotection is obtained, it is primarily used as a tool to preventBoulton economic progress and Watt hampered capital accumulation and slowed hurt competitors.economic growth. While this view of Watt’s role in the industrial revolution Intellectual propertymay appear iconoclastic, as it is currently conceivedneither new nor particularly original.Frederic Scherer, still has all these damaging social effects – because its enforcement has been a prestigious academic supporter of the patentstrengthenedsystem, its term extended after going through the details of the Boulton and its reach expandedWattstory, current law is much worse. While concluded his 1986 examination of their story with the randomness in the procedure for obtaining a letter of following illuminating wordsHad there been no patent that characterized Watt’s period may have protection at all,…Boulton andWatt certainly would have been forced to follow a businessreduced, it has not disappeared. It has shifted policy quite different from that which they actuallyBoldrin & Levine: Against Intellectual Monopoly, Chapter 15followed. Most of the stage at firm’s profits were derived fromwhich a patent is awarded to royalties on the stage at which it is litigated in use of engines rather than from the sale ofcourt. A manufactured engine components, and without patent is now routinely issued to anyone that files an application with the USPTOprotection the firm plainly could not have collectedroyalties. Anything and everything – including The alternative would have been to emphasizesuch allegedly “new” manufacturing and “useful” ideas service activities as the peanut butter and principaljelly sandwich – has been patented source of profits, which in recent years. The brutal legal fact was the policy adoptedfight, when the peddling expiration date of all kinds of influence from legal to legislative, 4Boldrin & Levine: Against Intellectual Monopoly, Chapter 1and the complete randomness of it all, are, nowadays, characteristics patent for the separateof a different stage condenser drew near in the life of a patentlate 1790s…. If the underlying invention It is good for anything, either dozens of people will claim possible to have invented it and sue the actual innovator, or conclude more definitely that the patent holder will sue litigation activitiesanyone anywhere who has come up with something similar, or who has of Boulton & Watt during the funny idea of competing with him. 1790s did not directly inciteIn addition to the corrupt rent-seeking, the legal suppression of innovation further technological progress…. Boulton and the reduced economic growth attendant upon Watt’s monopolies, we may also add a significant loss of personal freedom. These social harms are not refusal to issue licenses allowing other engine makers toemploy the necessary evils that we, as a separate-condenser principle clearly retardedsociety, must be willing to pay for innovative activity to occurthe development and introduction of improvements. 8***The industrial revolution was long ago. But the issue ofopposite, indeed, intellectual property is true: they are unnecessary evils, a residual of contemporary one. At the time we wrotemiddle ages from which free market societies emergedthis, a holdover U.S. District Judge James Spencer had been threatening forof three years to shut down the days when governments and royalty granted monopolies to widely used Blackberry messagingfavored courtiersnetwork – over a patent dispute. Another world, 9 And Blackberry itself is notwithout sin: in 2001 Blackberry sued Glenayre Electronics forinfringing on its patent for “pushing information from a fairer and more decent world, is hostpossible – that of competitive innovationsystem to a mobile data communication device.”10Economists, beginning with Adam Smith A similar war is taking place over copyright – the Napsternetwork was shut down by a federal judge in July of 2000 in a friend and teacher of James Watt – have carefully documented dispute over the problems sharing of copyrighted files.11monopoly. Because there are no countervailing market forces, Emotions run highgovernmenton both sides. We have the anti-enforced monopolies are particularly dangerous. copyright slogan “information justIntellectual property is one type of government-enforced monopolywants to be free” promoted by some civil libertarians. Never On the lessotherextreme, economists have generally argued in favor of patents large music and copyright protection. Despite the many problems with government grants of monopoly power, the argument is software companies argue that, a worldwithout the promise intellectual property would be a world without new ideas.Some of the bitterness of monopoly that patents and copyrights entail, the copyright debate is reflectedin Stephen Manes’ attack on Lawrence Lessigthere would be insufficient incentive According to innovate Stanford law professor and create. media darlingIn the case of WattLawrence Lessig, the argument goesa “movement must begin in the streets”to fight a corrupt Congress, he would never have overconcentrated media andinvested the time and effort an overpriced legal system...Contrary to come up with his invention without Lessig'sthe prospect of a patentrants...“Fair use” exceptions in existing copyright law.. But that case is weak. Even after their arepatent expired, Boulton so expansive that just about the only thing cut-and Watt were able to maintain -pastersBoldrin & Levine: Against Intellectual Monopoly, Chapter 16clearly can't do legally with a substantial copyrighted work is directlypremium over the market by virtue copy a sizable portion of having been firstit.12Certainly Lessig is no friend of current copyright law. Yet, despite the fact that their competitors had had thirty years to learn how Stephen Manes assertions to the contrary, he does believe inimitate them. Moreover, when Watt first developed balancing the rights of producers with the rights of users: his ideas bookFree Culture speaks repeatedly of this balance and how it has beenlost in modern law.13modelsLike Lessig, it was far from certain that he would be able to get a patent: many economists are skeptical of current lawat that time getting a patent was an uncertain proposition – part of seventeen prominent economists, including several Nobel Prizewinners, filed a brief with the reason he had to lobby nonstop for a long time to get itU.S. Indeed, Supreme Court in support ofit may well be that Lessig’s lawsuit challenging the extension of the idea length of obtaining a monopoly occurred to Watt only after he finished his invention – there is no evidence he copyright. Also like Lessig, economists recognize a role forintellectual property: where lawyers speak of balancing rights,gave any thought to patent law during the development processeconomists speak of incentives. To quote from a textbook by twoFinally, Watt had many competitors, such as Hornblower prominent economists Robert Barro and Xavier Sala-i-MartinWasborough; had he not invented It would be [good] to make the condenserexisting discoveries freelyavailable to all producers, it seems virtually but this practice fails to providecertain someone else would have come up with the idea in the 35 years between ...incentives for further inventions. A tradeoff arisesbetween restrictions on the time it occurred to Watt, use of existing ideas and the time his patents 5Boldrin & Levine: Against Intellectual Monopoly, Chapter 1finally expired. Why this is rather rewards to inventive activity.14Indeed, while many of us enjoy the rule than an isolated episode benefits of being able to freelyand why download music from the case for internet, we worry as well how the protection of intellectual property musician is to make a living if her music is weak immediately givenare two things we will argue through both theory and evidenceaway for free.This book elaborates on the idea that intellectual property While a furious debate rages over copyrights and patents,there is general agreement that some protection is needed to securegenerally inhibiting to innovation, growth, prosperity for inventors and freedomcreators the fruits of their labors. The rhetoricWe argue that not only would innovation thrive in the absence of “information just wants to be free” suggests that no one shouldintellectual monopolybe allowed to profit from her ideas. Despite this, but there does notseem to be a strong lobby arguing that we, as a societywhile it is ok for the rest ofus to benefit from the fruits of our labors, would enjoy greater inventors and creatorsgrowth and prosperity in its absence. We take should have to subsist on the view point charity of the others.average citizen-consumer when debating if a policy is desirableFor all the emotion, not it seems both sides agree that of a would be monopolist. There is no doubt in our minds that a handful of powerful monopolists would be worse off in a world without intellectual property; what matters is that everybody else laws need to strike a balance betweenwould be substantially better off. providing sufficient incentive for creation and the freedom to make Our focus is on the economics use of existing ideas. Put it differently, both sides agree thatintellectual property: rights are a “necessary evil” that fosterspatents, copyrightinnovation, and downstream licensesdisagreement is over where the line should bedrawn. We are not seeking to argue what might and might not be legitimate under the current legal For the supporters of intellectual property, currentBoldrin & Levine: Against Intellectual Monopoly, Chapter 1system, but to understand how new laws and institutions might be 7crafted to encourage growth, innovation and creationmonopoly profits are barely enough; for its enemies currentlymonopoly profits are too high. During those not so distant times in which tariffs and other protectionist Our analysis leads to conclusions that are at variance withprohibitions made free trade illegal both sides. Our reasoning proceeds along the following lines.Everyone wants a monopoly. No one wants to compete against hisown customers, or against imitators. Currently patents and dangerous, economists arguing in favor copyrights grant producers of free trade did not insist that smugglers were certain ideas a monopoly. Certainlycarrying out lawful activitiesfew people do something in exchange for nothing. They were breaking the foolish laws Creators of newgoods are not different from producers of the time in pretty much the same way that people engaged in old ones: they want to bevarious forms of “piracy” these days are breaking current lawscompensated for their effort. But However, it is a long and dangerouslegally or not, by violating trade prohibitions smugglers were jump from the assertion that innovators deserve compensation forcarrying out socially useful trades: consumers wanted their efforts to the goods conclusion that patents and copyrights, that iswere willing to pay for them; producers had monopoly, are the best or the only way of providing that reward.Statements such as “A patent is the goods but way of rewarding somebodyfor coming up with a worthy commercial idea”15 were abound in theprevented from selling them by unjust business, legal restrictions; smugglersand economic press. As we shall see there are manyother ways in which innovators are rewarded, even substantially, at a cost, allowed these two groups and most of people to trade. In the same them are better for society than the monopoly powerway, while current day pirates patents and copyright currently bestow. Since innovators may be violating existing intellectual property lawsrewarded even without patents and copyright, they are also carrying out socially useful trades. we should ask: is ittrue that intellectual property achieves the intended purpose ofConsumers are asking creating incentives for cheap books, music, videos, innovation and other creation that offset theirconsiderable harm?products in convenient formats, This book examines both the evidence and workers are willing to work to the theory. Ourconclusion is that creators’ property rights can be well protected inproduce these goods at low cost. By violating the absence of intellectual property laws, contemporary “pirates” and that the latter does notincrease either innovation or creation. They are allowing these socially beneficial an unnecessarytrades to take placeevil. ***This is why we advocate changing these laws a book about economics, not about law. Or putto make lawful and permissible what differently, it is already socially goodnot about what the law is but rather what the lawshould be.If you are interested in whether or not you are likely towind up in jail for sharing your files over the internet, this is notthe book for you. If you are interested in whether it is a good ideafor the law to prevent you from sharing your files over the internet,then this book is for you.However, while this book is not about the law, somebackground on the law is necessary to understanding the economicissues. We are going to examine the economics of what has, inrecent years, come to be called “intellectual property,” especiallypatents and copyright. In fact, there are three broad types ofBoldrin & Levine: Against Intellectual Monopoly, Chapter 1This is why too, in order to understand what intellectual property is and why it is socially damaging, some knowledge of the existing legal framework is needed. There are three broad types of 8intellectual property recognized in most legal systems: patents,

 6Boldrin & Levine: Against Intellectual Monopoly, Chapter 1Trademarks are different in nature than patents and copyrights: they serve to identify the providers of goods, services or ideas. Copying – which would be a violation of copyright – isideasquite different from lying – which would be a violation oftrademark. We are unaware do not know of any economic rationale a good reason for allowing marketmarket participants to steal identities or masquerade as people they are not. Conversely, and there are strong economic advantages in allowing market participants to voluntarily identify themselves. While we may wonder if it is necessary to allow the Intel Corporation a monopoly over the use of the word “inside,” in general we have there islittle economic dispute with over the merits of trademarks. Patents and copyrights, the two forms of intellectual property on which we focus, are a subject of debate andcontroversy. They differ from each other in the extent of coverage they provide. Patents apply to specific implementations of ideas – although in recent years in the U.S. there has been decreasing emphasis on specificity. Patents are of relatively short durationdo not last forever: in the United States, 20 years for patents covering techniques of manufacture, and 14 years for ornamentation. Patents provide relatively broad protection: no one can legally use the same idea, even if theythey independently rediscover it , without permission from the patent

16Copyrights are much narrower in scope, protecting only the specific details of a particular narrative– although as with the caseof patents, the scope has been increasing in recent years. They are Copyrightis also much longer in duration than patent – the life of the author plus 50 years for the many signatory countries of the Berne Convention, and – in the U.S. since the Sonny Bono Copyright Term Extension Act – the life of the author plus 70 years. 17In the U.S. there are limitations on copyright not present in patent law: . As Stephen Manes correctly points out in his attack onLawrence Lessig, the right of fair use allows the purchaser of a copyrighted item limited rights to employ it, make partial copies of it and resell them, regardless of the desires of the copyright holder. In addition, certain derivative works are allowed without permission: parodies are allowed, for example, while sequels are

 In the case of both patents and copyright, from the point ofview of economics, there are two important economic features. The first is what we call ingredients in the law: the right of sale. This is to buy and sell copies of ideas, and the right to control how otherpeople make use of a legitimate owner of intellectual property to sell ittheir copies. In The first right is not controversial.Boldrin & Levine: Against Intellectual Monopoly, Chapter 19In copyright law, when applied to the creator this right is sometimes called the “right of first sale.” However,” but the right of sale it extends also to the legitimate rights of others, for example, licensees, to sell the ideatheir copies. The second feature of the law It is the secondright , enabling the owner to control the use of the intellectual property after sale, that is controversial. This second right produces a monopoly – enforced by the obligation of the government to prosecute act againstindividuals or organizations that use the idea in ways prohibited by the copyright or patent holder. We emphasize that we favor In addition to the right well-known forms of sale. It is crucial that producers intellectual property– patents and copyright – there are also lesser-known ways of intellectual property be able to profit from their 7Boldrin & Levine: Against Intellectual Monopoly, Chapter 1protecting ideas. These include contractual agreements, such as theshrink-wrap and click-through agreements that you never readinventionwhen you buy software. While sales could take place even in They also include the absence most traditionalform of a protection – trade secrecy – as well as its contractual andlegal right, markets function best in the presence manifestations such as non-disclosure agreements. Likepatents and copyright all of clearly defined property rights. Not only should these devices serve to help the property rights of innovators be protected but also the rights originator of those who have legitimately obtained an idea maintain a copy of the idea, directly or indirectly, from the original innovatormonopoly over it. The former encourages innovation, the latter encourages the We do not know of any legitimate argument that producersdiffusion, adoption and improvement of innovationsideas should not be able to profit from their creations.While It is with ideas could be sold in the absence of a legal right of , markets functionbest in the owner presence of intellectual clearly defined property to rights. Not onlycontrol how should the purchaser makes use property rights of innovators be protected but also the idea or creation that we disagree. Because this right gives the owner rights of those who have legitimately obtained a monopoly over usage copy of the idea and prevents buyers from using the intellectual property they lawfully purchased, we refer to it as intellectual monopoly to distinguish it directly or indirectly, from the right of saleoriginal innovator. HenceThe formerencourages innovation, the latter encourages the diffusion, intellectual property is composed adoption and improvement of two parts: innovations.Why, however, should creators have the right of sale, and the intellectual to controlmonopoly. The first how purchasers make use of an idea or creation? This gives the producer or any rightful owner of creators a copy of monopoly over the idea the power . We refer to sell it this right as“intellectual monopoly,” to another party. The second emphasize that it is this monopoly overgives the patent or copyright holder all copies of an idea that is controversial, not the right to control buy and limit the usage of the idea by any other personsell copies. The latter is government does not just a simple ordinarily enforcewell-defined right monopolies for producers of propertyother goods. It establishes a monopoly that we do This is because it isnot usually allow producers of other goods. We will argue widely recognized that this monopoly creates many social costs, yet has little social benefit. It largely redistributes income and wealth from the many that do not Intellectual monopoly is no different in this respect. The questionhave it, to the “lucky” ones who have managed to obtain we address is whether italso creates social benefits commensuratewith these social costs.To foreshadow our argument, ***The U.S. Constitution allows Congress “To promote the original innovator has a natural first-mover advantage by virtue progress of initially being the only science and useful arts, by securing for limited times toone to know of authors and inventors the idea or how exclusive right to implement it. Furthermoretheir respectiveBoldrin & Levine: Against Intellectual Monopoly, ideas Chapter 110are always scarcewritings and discoveries. The innovator can invariably use his first mover ”18advantage Our perspective on patents and copyright is a similar one: promoting the scarcity progress of his idea to earn science andthe useful arts is a profit. In the case crucial ingredient of Watteconomic welfare, the first-mover advantage was extremely strong. Even after 31 fromyears had been available for competitors solving such profound economic problems as poverty, to reverse engineer his suchmundane personal nuisances as boredom. From a social point ofinventionview, Boulton and Watt were still able to command a substantial premium over in the view of the market. They were able to do so for many yearsfounding fathers, by virtue the purpose ofpatents and copyrights is not to enrich the few at the expense of the special expertise that comes with having been firstmany. Economic research shows Nobody doubts that the same J. K. Rowling and Bill Gates have beenmechanism greatly enriched by their intellectual property – nor is at work, for example it surprisingthat they would argue in favor of it. But common sense and the contemporary market for pharmaceutical productsU.S. Many years after a medical patent has Constitution say that these rights must be justified by bringingexpired, when cheaper generic drugs are available that are perfect substitute for the original product, the first innovator still retains a substantial degree benefits to all of market power and still charges a higher priceus.In thinking about abolishing intellectual monopoly, it The U.S. Constitution is explicit that what is to be given toimportant to recognize that even if existing copyright authors and patent inventors is an exclusive right – a monopoly. Implicitlaws were abolished, much of their impact could be recreated through private contracts. That is, in selling their the idea, innovators 8Boldrin & Levine: Against Intellectual Monopoly, Chapter 1could require purchasers that giving this monopoly serves to sign a contract agreeing to make use of it promote theonly in ways approved progress of by the sellerscience and useful arts. The U.S. Shrink-wrap software Constitution wasagreements are a simple and common example of this type of downstream licensingwritten in 1787. Notice At that private agreements could not completely recreate existing time, the idea of copyright and patent protection, since independent wasinvention could not be controlledrelatively new, the products to which would already be a major step forwardthey applied few, and theirterms short. On In light of the other hand, copyright protection would effectively be increased, since current copyright law obligates experience of the subsequent 219 yearsseller to allow fair use, and this could be ruled out in a private agreement. Indeed, the current we might ask: is it true that legal situation is murky, since some sellers do attempt grants of monopoly serve to eliminate fair use through downstream licensing agreements. In any case, to eliminate intellectual promote the progress of science and the useful arts?monopoly, Certainly common sense suggests that it should. How is necessary to go beyond merely abolishing patents aand copyright musician to also limit downstream licensing agreements. make a living if the moment she performs her music,Economists as a rule favor both freedom of contract everyone else can copy and give it away for free? Why would thewell-defined property rights. large corporations pay the small inventor when they can simplytake his idea? It may come a surprise that the two of us – two conservative economists – appear is hard to be arguing imagine life without the internet, andoppositetoday we are all jet setters. However, economists also favor competition over monopoly, and economists have come to learn and understand that competition does Is not fall from the sky; it is a system explosion of organizing human economic interactions that requires nurturing creativity and protection. The fact is that – like most free-market economists – we do not invention unleashed since the writing of the U.S. Constitution afavor enforcing collusive contracts that are used to create testimony to the powerful benefit of intellectual property? Wouldmonopolies – not the world without patent and this is what shrink wrap agreements are. Nor do copyright be a sad cold world,empty of new music and of marvelous new inventions?So the first question we argue against property rights, which we view as essential to will pose is what the world mightsmooth functioning of a competitive economybe like without intellectual monopoly. Our argument is with Patents and copyrights haveintellectual monopolynot secured monopolies on all ideas at all times. We favor the right of sale, the right It is natural then to sell copies of examine times and industries in which legal protection for ideas. We argue both that the original innovator should have that right, not been available to see whether innovation and creativitywere thriving or were stifled. It is the case, for example, that those who have purchased a copy of neither the idea should have internet nor the same right to sell what is now their copy jet engine were invented in hopes of the ideasecuring exclusive rights. It is the monopolistic regulation In fact, we ordinarily think of the right to use legally available technologies to make further copies of ideas after their lawful sale with which we disagree“innovative monopoly” as an oxymoron. When you buy a potato you can We shall see that wheneat itmonopoly over ideas is absent, throw it away, plant it or make it into competition is fierce – and that as a sculptureresult innovation and creativity thrive. When you buy Whatever a potato you can use the idea of a potato embodied in it to make world withoutBoldrin & Levine: Against Intellectual Monopoly, Chapter 1better potatoes or to invent french fries. Current laws allow 11producers of CDspatents and copyrights would be like, books, computer software or medical it would not be a worlddevoid of great new music and beneficial new drugs to take this freedom away from you. It is this confounding of intellectual property with intellectual You will gather by now that we are skeptical of monopoly against which we argue– as are economists in general. Our second topic will be an Everyone wants a monopoly, examination of the many social costs created by copyrights and all producers would impose downstream licensing agreements if they couldpatents. No Adam Smith – a friend and teacher of James Watt – wasone of the first economists to explain how monopolies make lesswants to compete against his own customers, or against imitators for 9Boldrin & Levine: Against Intellectual Monopolyavailable at a higher price. In some cases, Chapter 1that matter. Under current law only producers such as the production of (certain) ideas do music, this may not have to do so. It is be a long and dangerous jump from great social evil; in other cases such as the assertion that innovators deserve compensation for their efforts to the availability of AIDS drugs, it may be a very great evil indeed.conclusion that current patent However, as we shall see, low availability and copyright protection high price is onlyone of the best way many costs of providing such rewardmonopoly. Statements such as “A patent The example of James Watt is the way of rewarding somebody for coming up with a worthy commercial idea” abound case in point: by making use of the businesslegal system, legal he inhibitedcompetition and economic pressprevented his competitors from introducing usefulnew advances. But We shall also see that because there are many other ways in which innovators are rewarded, nomost of them socially better than copyright and patentscountervailing market forces, government-enforced monopoliessuch as intellectual monopoly are particularly problematic.The U.S. Constitution allows Congress “To promote While monopoly may be evil, and while innovation maythrive in the absence of traditional legal protections such as patentsprogress of science and useful artscopyrights, by securing for limited times it may be that patents and copyrights serve to authors and inventors increase innovation. The presumption in the exclusive right to their respective writings U.S. Constitution isthat they do, and discoveries.” Our perspective on patents that the benefits of more entertainment and copyright is a moresimilar one: promoting innovation outweigh the progress costs of science and these monopolies. Certainly the useful arts is a crucial ingredient monopolies created by patents and copyright may be troublesome– but if that is the cost of economic welfarehaving blockbuster movies, from solving such automobilesprofound economic problems as povertyand flu vaccine, to such mundane personal nuisances as boredommost of us are prepared to put up with it. The question we shall focus on That is whether intellectual monopoly is useful in promoting innovation and growth for the benefit position traditionally taken by economists, most of the average citizen, or if, as we shall argue, it whomstifles innovation support patents and growth and it redistributes wealth from copyright, at least in principle. Some of themtake the view that intellectual monopoly is an unavoidable evil if“average guy” we are to a few protected individuals who are either in have any innovation at all; other simply argue that atcontrol least some modest amount of, or closely associated with, the big monopolies lobbying intellectual monopoly is desirable toprovide adequate incentive for intellectual property.innovation and creation. Our thirdTraditionally, economists have been skeptical topic will be an examination of government the theoretical argumentsintervention in marketssupporting intellectual monopoly, for example, through regulation or tradeas well as counter-argumentsrestrictions. Economists are also skeptical of about why intellectual monopoly, may hurt rather than fostercreative activity.and the economics literature in general suggests It is crucial to recognize that existing intellectual monopoly is aprotections should be reduceddouble-edged sword. In The rewards to innovative effort are certainlygreater if success is awarded a government monopoly. But theexistence of monopolies also increases the case cost of regulation and free creation. In onetradeextreme case, economists also generally recognize a movie that some regulation and cost $218 to make had to pay $400,000trade-restrictions are desirablefor the music rights. They recognize, too, that allowing some intervention triggers rent-seeking behavior by would-be 19monopolists, and that as a result it is most practical to focus on eliminating government intervention. AlasAs we will argue at length, this is not yet the theoreticalBoldrin & Levine: Against Intellectual Monopoly, Chapter 112conventional view with respect to arguments alone cannot tell us if intellectual monopolyincreasesor decreases creative activity. Until recentlyIn the final analysis, conventional wisdom held the only justification for intellectualproperty is that markets could not function it increases – de facto and substantially –at all in its absenceinnovation and creation. As a result, many economists still believe that What have the last 219 years taught us?intellectual monopoly Our final topic is an unavoidable evil if we are to have any examination of the evidence about intellectualmonopoly and innovation at all.  Modern economic research, however, has shown Is it a fact that intellectual monopolymarkets for ideas can function even in leads to more creativity and innovation? Our examination of the absence of intellectual monopoly, and data shows no evidence that it does. Nor are we shall see that markets for ideas and innovation the firstfunction and function well absent intellectual monopolyeconomists to reach this conclusion. As a resultAfter reviewing an earlier setof facts in 1958, the distinguished economist Fritz Machlup wrotewe take “it would be irresponsible, on the same position on intellectual monopoly that economists basis of our present10Boldrin & Levine: Against Intellectual Monopolyknowledge of its economic consequences, Chapter 1to recommendtake on trade restrictions: although some modest amount of instituting [a patent system].”20protection might be desirable in very special cases, it Since there is more no evidence that intellectual monopolypractical and useful to focus on achieves the elimination desired purpose of restrictions as a increasing innovation and creation,general ruleit has no benefits. Similarly, while some modest amount of intellectual monopoly might be desirable in very special cases, it So there is more no need for society to balance thepractical and useful to focus on benefits against the elimination of intellectual monopoly as a general rulecosts.This leads us to our final conclusion: Our analogy between intellectual property and trade restrictions is not a purely rhetorical tool, nor a random comparisonan unnecessary evil. Boldrin & Levine: Against Intellectual Monopoly, Chapter 113CommentsFor centuriesWe are grateful to George Selgin and John Turner, human innovative activity took of the form of creating new consumption goods, new machines and new staples University of food. But the transmission Georgia Terry College of ideas from one producer to another Business, for pointing out anumber of factual mistakes and imprecisions in our rendition of theacross countries was not nearly as fast, standardizedJames Watt story, and routinized as it is today. Creative human activity was focused on the creation had appeared in earlier versions of thischapter and reproduction of physical goods in our 2003 Lawrence R. Klein Lecture, published inBoldrin and not on the creation Levine [2004]. In a recent article, Selgin and Turnerreproduction of ideas. Free trade [2006], also take issue with our interpretation of commodities was therefore key the facts and add afew additional ones that, in fostering progress: the more competitors came in with shoes like yourstheir view, the more you had to improve on your shoes to keep selling contradict our vision ofthemJames Watt as a primary example of an intellectual monopolist. It This dialectic we used to call economic progressseems clear, even from the references quoted by Selgin andTurner, after a few centuries that many students of intellectual debate and numerous wars, Western the Industrial Revolution share our view –societies came to understand that restricting international trade was damaging because protectionism prevents economic progressmore properly: we shared theirs. Since at least the late Middle AgesSelgin and Turner’s argument and facts do not, however, address the battle has been between issues we raise about Boulton and Watt. Take theirdiscussion of the forces hypothetical “Watt sans patent.” Obviouslyof progress, individual freedom, competition Boulton and free tradeWatt fought hard for their patents, and obviously theythose of stagnation, regulation of individual actions, monopoly, and trade protectionclaimed innovation would have been impossible without them. Now that the intellectual and political battle over Ourfree trade of physical goods seems won, and an increasing number point is another: could they have made enough money toof less advanced countries are joining compensate their opportunity cost without the patent? All the progressive ranks of free-trading nationsevidence, pressure for making intellectual property protection including that reported by Selgin and Turner, suggestsstronger this is mounting in those very same countries that advocate free the case. In fact they make our case quite convincingly:tradequoting F. This is not coincidenceM. Scherer they assert that seventeen years before the Most physical goods already are second patent expired they, Boulton andWatt, in the decades to were alreadycomebreaking even. In economics, will increasingly be“breaking even” means that youropportunity costs have been paid, produced in and your capital has received the less developed countries. Most innovations risk-adjusted, expected return, and creations are taking place in the advanced Scherer is a distinguishedworldeconomist. Whatever profits Boulton and Watt made after that, were all extra rents due to monopoly power and the IT and bio-engineering revolutions suggest this will , economically, notcontinue for a while at leastneeded to pay their opportunity costs. It is not surprising thenSo, we all agree that a new , at leastversion of for the final 17 years, the eternal parasite of economic progress – mercantilism – is emerging in the rich countries of North America, Europe and Asia.  Economic progress springs from having things produced as efficiently as possible, so that they can sell at the lowest price. This wisdom applies to both the things we buy and to those we sell, and 11Boldrin & Levine: Against Intellectual Monopoly, Chapter 1therein lies the trap of mercantilism. Most of us have learned that the surest way to make a profit is to “buy cheap and sell dear.” When there is adequate competition and everyone tries to buy cheap and sell dear, then the only way I can buy cheap and sell dear is for me to be more efficient than you. This generates incentives for innovation and progress. The trap and tragedy of mercantilism is when this individually correct philosophy is transformed into a national policy: that we are all better off when our country as a whole buys cheap and sells dear. It was this myopic and distorted view of the way in which markets function that Smith, Ricardo, and the other classic economists were fighting against 250 years ago. At that time wheat producers in England wanted to restrict free trade in wheat so English producers could sell it dear.  The contemporary variation of this economic pest is one in which our collective interest is best served if we buy goods cheap and sell ideas dear. In the mind of those preaching this new version of the mercantilist credo, the World Trade Organization should enforce as much free trade as possible, so we can buy “their” products at a low price. It should also protect our “intellectual property” as much as possible, so we can sell “our” movies, software, and medicines at a high price. What this folly misses is that, now like three centuries ago, while it is good to buy “their” food cheap, if “they” buy movies and medicines at high prices, so do “we.” This has dramatic consequences on the incentives to progress: when someone can sell at high prices because of legal protection from imitators, they will not expend much effort looking for better and cheaper ways of doing things. For centuries, the battle for economic progress has identified with the battle for free trade. In the decades to come, the battle for economic progress will identify, more and more, with the battle against intellectual monopoly. As in the battle for free trade, the first step must consist in destroying the intellectual foundations of the obscurantist position. Back then the mercantilist fallacy taught that, to become wealthy, patent was not serving a country must regulate trade and strive for trade useful economicsurpluses. Todaypurpose, the same fallacy teaches that without intellectual hence it was damaging because it created monopoly innovations would be impossible. Our goal here is to demolish that glass housedistortions. 12Boldrin & Levine: Against Intellectual Monopoly, Chapter 1

1 Lord [1923] p. 5-3.htm.2 Carnegie [1905] p. 157.3 Much of the story of James Watt can be found in Carnegie [1905], Lord [1923], and Marsden [2004]. The quotation about Wasborough is from Carnegie. Information on the role roleBoldrin & Levine: Against Intellectual Monopoly, Chapter 114 of Boulton in Watt’s enterprise is drawn from Mantoux [1905]. A lively description of the real Watt, as well of his legal wars against the Hornblowers Hornblower – and many other – and of how he subsequently used his status to alter the public memory of the facts, can be found in Marsden [2004]. That Pickard’s patent was unjust is also the viewof Selgin and Turner (2006), who, like Watt, do not seem toprovide any evidence of why it was so.As both the Lord and Carnegie works are out of copyright,both are available online at the very good Rochester site on thehistory of steam power www.history.rochester.edu/steam. Laterdrafts of this chapter benefited enormously from the arrival ofGoogle Book Search, which allowed us to check so many originalhistorical sources about James Watt and the steam engine wewould have never thought possible.4 Lord [1923] gives figures on the number of steam enginesengines produced by Boulton and Watt between 1775 and 1800, while the The Cambridge Economic History of Europe [1965] provides data on the spread of total horsepower between 1800 and 1815 and the spread of steam power more broadly. However, Kanefsky [1979] has largely discredited the Lord numbers, and the which is why we usefigures we quote on number of machines and horsepower are from Kanefsky and Robey [1980]. The 100Our horsepower calculations are based on 510 steamengines generating about 5,000 horsepower in the U.K. in 1760.During the subsequent forty years we estimate that about 1,740engines generating about 30,000 horsepower were added. Thisgives our estimate for that the total increased at a rate of roughly 750horsepower each year. For 1815 we estimate about 100,000horsepower – that is , the average of the figures they Kanefsky andRobey [1980] give for 1800 and 1830. These two studies This together with the35,000 horsepower we estimate for 1800 gives our estimate that the total increased at a rate of roughly 4,000 horsepower each yearafter 1800.Data on the fuel efficiency, the “duty,” of steam engines isfrom Nuvolari [2004b]. 5 Kanefsky and Robey [1980] together with Smith [1977-78] provide a careful historical account of the detrimental impact of the Newcomen’s , first, and of the Watt’s patents , later, on the rate of adoption of the steam technology. Data of Apart from the fuel efficiencybooks just quoted, information about the “dutyHornblower’s engine and its relation toBoldrin & Levine: Against Intellectual Monopoly, Chapter 115 Watt’s are widely available through easily accessible web sites,such as Encyclopedia Britannica, Wikipedia,” and so on. Somedetails of Hornblower’s invention may be of steam engines is from Nuvolari [2004]interest. The story about Pickard’s patent It wasblocking adoption by Watt is told patented in von Tunzelmann [1978]. The 1781 and consisted of a steam engine with twoquotation about cylinders, significantly more efficient than the fortunes of Boulton and Watt after the expiration of the Watt patents is taken from Thompson [1847] pdesign. 110 Boulton and is Watt challenged his invention, claiminginfringement of their patent because Hornblower engine used aquoted in Lord [1923]separate condenser, and won. Scherer’s quotation about With the 1799 judicial decisionagainst him, Hornblower had to pay Boulton and Watt a substantialis from the pages 24-25 amount of Scherer [1984]money for past royalties, while Scherer [1965] is losing all opportunitiesto further develop the source compound engine. His compound steamengine principle was not revived until 1804 by Arthur Woolf. Itbecame one of the breakmain ingredients in the efficiency explosion thatfollowed the expiration of Boulton and Watt’s patent.Watt’s low-even point estimate reported pressure engines were a little earlier.dead end for furtherdevelopment; history shows that high-pressure, non-condensingAs both engines were the Lord way forward. Boulton and Carnegie works are out Watt’s patent,covering all kinds of copyright, steam engines prevented anyone fromboth are available online at the very good Rochester site working seriously on the high-pressure version until 1800. Thishistory included William Murdoch, an employee of steam power www.history.rochester.edu/steam. Later Boulton and Watt,drafts who had developed a version of this chapter benefited enormously from the arrival of high-pressure engine in theGoogle Book Search, which allowed us to check so many original early 1780s. He named it the “steam carriage” and was legallyhistorical sources about James Watt barred from developing it by Boulton and Watt’s successfuladdition of the steam high-pressure engine as we to their patent, althoughwould have Boulton and Watt never thought possible beforespent a cent to develop it.For the details Information of this story the reader should check the on U.S. Patent Law can be found at the U.S. line site Cotton TimesPatent Office at http://www.usptocottontimes.govco.uk/main/patentsor Carnegie [1905, pp.htm140-141]. The Sony Bono “William Murdoch” entry in Wikipedia provides a goodCopyright Extension Act can be found online at summary. More generally various researchers directly connectlibrary.thinkquest.org/J001570/sonnybonolaw.htmlMurdoch to Trevithick, while who is now considered the Berne officialConvention on Copyright can be found at www“inventor” (in 1802) of the high-pressure engine.law.cornell.edu/treaties/berne/. A useful discussion of fair useQuite plainly, theincluding parodies, is Gall [2000].For the statistical evidence about leading drugs keeping a large share of suggests that Boulton and Watt’s patent retarded the market long after generic imitators are allowed to enter seehigh-pressure steam engine, for exampleand hence economic development, Caves et al [1991]ofabout 16 years.6 The quote story about patents being the reward Pickard’s patent blocking adoption by Watt is taken from The Economist, June 23rdtold in von Tunzelmann [1978].72001, page 42, with italics added Thompson [1847] p. 110 and quoted also in Lord [1923]. 13Boldrin 8 Scherer [1984] pp. 24-25. Boldrin & Levine: Against Intellectual Monopoly, Chapter 1The 16 9 U.S. ConstitutionDistrict Court for Eastern District of Virginia Plaintiff NTP, not being copyrighted, is online at various places, such as http://wwwInc.lawv.cornellDefendant Research In Motion Ltd.edu/constitutionCivil Action Number3:01CV767-JRS.We are most grateful to George Selgin and John Turner, of 10the University of Georgia Terry College of Business, for pointing U.S. Patent 6219694.out a number of factual mistakes and imprecisions in our rendition 11 United States Court of Appeals for the James Watt story9th Circuit Court, as it had appeared in earlier versions of this In Re:Napster.12chapter and in our 2003 Lawrence RStephen Manes [2004] . 13 Klein Lecture, published in Lessig [2004].