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In late 1764, while repairing a small Newcomen steam engine, the  
Boldrin & Levine: Against Intellectual Monopoly, Chapter 1
idea   of   allowing   steam   to   expand   and   condense   in   separate  
1
containers sprang into the mind of James Watt. He spent the next  
Chapter 1: Introduction
few months in unceasing labor building a model of the new engine.  
In late 1764, while repairing a small Newcomen steam
In 1768, after a series of improvements and substantial borrowing,  
engine, the idea of allowing steam to expand and condense in
he applied for a patent on the idea.  August  1768  found Watt  in
separate containers sprang into the mind of James Watt. He spent
London about  the patent  and he spent  another  6 months working  
the next few months in unceasing labor building a model of the
hard to obtain it. The patent was finally awarded in January 1769.  
new engine. In 1768, after a series of improvements and substantial
Nothing much happened,  in  terms of production,  for  a  few years
borrowing, he applied for a patent on the idea, requiring him to
until,  in  1775,   after  another  major   effort   supported by his   new
travel to London in August. He spent the next six months working
business  partner   Matthew   Boulton,   Watt   secured   an   Act   of  
hard to obtain his patent. It was finally awarded in January of the
Parliament extending his 1769 patent until the year 1800. The great  
following year. Nothing much happened by way of production
statesman Edmund Burke   spoke   eloquently in Parliament   in the  
until 1775. Then, with a major effort supported by his business
name of economic freedom and against the creation of unnecessary  
partner, the rich industrialist Matthew Boulton, Watt secured an
monopoly – but   to no avail.  The   connections of Watt’s partner  
Act of Parliament extending his patent until the year 1800. The
Boulton were too solid to be defeated by simple principle.  
great statesman Edmund Burke spoke eloquently in Parliament in
 
the name of economic freedom and against the creation of
Once Watt’s patents were secured, a substantial portion of  
unnecessary monopoly – but to no avail.
his energy was devoted to fending off rival inventors. In 1782, Watt  
1
secured an additional patent, made “necessary in consequence of ...  
  The connections of
having been so unfairly anticipated, by [Matthew] Wasborough in  
Watt’s partner Boulton were too solid to be defeated by simple
the   crank motion.” More   dramatically,   in   the   1790s, when   the  
principle.
superior and  independently designed Hornblower engine was put  
Once Watt’s patents were secured and production started, a
into production, Boulton and Watt went after him with the full force  
substantial portion of his energy was devoted to fending off rival
of the legal system. In contrast to Watt, who died a rich man, the
inventors. In 1782, Watt secured an additional patent, made
inventor Jonathan Hornblower was not  only forced  to close shop,
“necessary in consequence of ... having been so unfairly
but found himself ruined and in jail.
anticipated, by [Matthew] Wasborough in the crank motion.”
2
Prior to the start of Watt’s commercial production in 1776,
More dramatically, in the 1790s, when the superior Hornblower
there were 510 steam engines in the U.K., most using the inefficient
engine was put into production, Boulton and Watt went after him
Newcomen  design.  These  engines  generated  about   5,000
with the full force of the legal system.
horsepower. By 1800, when Watt's patents expired, there were still
3
only 2,250 steam engines used in the U.K., of which only 449 were
During the period of Watt’s patents the U.K. added about
the  superior  Boulton  and  Watt  engines,   the  rest  being  old
750 horsepower of steam engines per year. In the thirty years
Newcomen  engines.  The  total  horsepower of  these  engines  was  
following Watt’s patents, additional horsepower was added at a
35,000 at best. In 1815, fifteen years after the expiration of the Watt
rate of more than 4,000 per year. Moreover, the fuel efficiency of
patents, it is estimated that nearly 100,000 horsepower was installed
steam engines changed little during the period of Watt’s patent;
in  the U.K., while  by 1830  the horsepower  coming  from  steam
while between 1810 and 1835 it is estimated to have increased by a
engines reached 160,000. The fuel efficiency of steam engines is not
factor of five.
thought to have changed at all during the period of Watt’s patent;  
4
while between 1810 and 1835 it is estimated to have increased by a  
After the expiration of Watt’s patents, not only was there
factor of five. After the expiration of the patents in 1800, not only  
an explosion in the production and efficiency of engines, but steam
1Boldrin & Levine: Against Intellectual Monopoly, Chapter 1
power came into its own as the driving force of the industrial
was   there   an explosion in the production of   engines, but   steam  
revolution. Over a thirty year period steam engines were modified
power finally came into its own as the driving force of the industrial  
and improved as crucial innovations such as the steam train, the
revolution. In the next 30 years steam engines were modified and  
steamboat and the steam jenny came into wide usage. The key
improved,  and  such  crucial   innovations   as   the   steam train,   the  
innovation was the high-pressure steam engine – development of
steamboat and the steam jenny all came into wide usage.   The key  
which had been blocked by Watt’s strategic use of his patent.Boldrin & Levine: Against Intellectual Monopoly, Chapter 1
innovation was   the high-pressure   steam engine –development  of  
2
which had been blocked by Watt  by strategically using his 1775
Many new improvements to the steam engine, such as those of
patent. Many new improvements to the steam engine, such as those  
William Bull, Richard Trevithick, and Arthur Woolf, became
of  William Bull, Richard Trevithick, and Arthur Woolf, became  
available by 1804: although developed earlier these innovations
available   by 1804:   although   developed   earlier   these   innovations  
were kept idle until the Boulton and Watt patent expired. None of
were kept idle until the Boulton and Watt patent expired. None of  
these innovators wished to incur the same fate as Jonathan
these   innovators   wished   to   incur   the   same   fate   as   Jonathan  
Hornblower.
Hornblower.
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Ironically, not only did Watt use the patent system as a legal  
Ironically, not only did Watt use the patent system as a
cudgel with which to smash competition, but his own efforts at  
legal cudgel with which to smash competition, but his own efforts
developing a superior steam engine were hindered by the very same  
at developing a superior steam engine were hindered by the very
patent   system he used to keep competitors at bay. An important  
same patent system he used to keep competitors at bay. An
limitation of   the original Newcomen engine was   its   inability to  
important limitation of the original Newcomen engine was its
deliver   a   steady   rotary motion.   The most   convenient   solution,  
inability to deliver a steady rotary motion. The most convenient
involving the combined use of the crank and a flywheel, relied on a  
solution, involving the combined use of the crank and a flywheel,
method patented in 1780 by James Pickard, which prevented Watt  
relied on a method patented by James Pickard, which prevented
from using   it.   Ironically,  Watt   also made   various   attempts   at  
Watt from using it. Watt also made various attempts at efficiently
efficiently transforming reciprocating into rotary motion, reaching,  
transforming reciprocating into rotary motion, reaching,
apparently,   the same solution as Pickard. But   the existence of a  
apparently, the same solution as Pickard. But the existence of a
patent forced him to contrive an alternative less efficient mechanical  
patent forced him to contrive an alternative less efficient
device,   the “sun and planet” gear.   It was only in 1794, after   the  
mechanical device, the “sun and planet” gear. It was only in 1794,
expiration of Pickard’s patent   that Boulton and Watt adopted the  
after the expiration of Pickard’s patent that Boulton and Watt
economically and technically superior crank.
adopted the economically and technically superior crank.
 
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The impact of the expiration of his patents on Watt’s empire  
The impact of the expiration of his patents on Watt’s
may   come   as   a   surprise   as  well.  Despite  the   fact  that  “many  
empire may come as a surprise. As might be expected, when the
establishments   for making steam-engines of Mr. Watt's principle  
patents expired “many establishments for making steam-engines of
were then commenced” nevertheless “it would appear that the object
Mr. Watt's principle were then commenced.” However, Watt’s
principally aimed at was cheapness rather than excellence, for they
competitors “principally aimed at...cheapness rather than
fell  short  as  to  performance  of  the  Soho  [Boulton  and  Watt]
excellence.” As a result, we find that far from being driven out of
engines.” As a result we find that “Boulton and Watt for many years  
business “Boulton and Watt for many years afterwards kept up
afterwards kept up their price and had increased orders.”  
their price and had increased orders.”
In fact, it is only after their patents expired that Boulton and  
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Watt really started to manufacture steam engines. Before then their  
In fact, it is only after their patents expired that Boulton and
activity   consisted   primarily   of   extracting   hefty   monopolistic  
Watt really started to manufacture steam engines. Before then their
royalties. Independent contractors produced most of the parts, and  
activity consisted primarily of extracting hefty monopolistic
Boulton and Watt merely oversaw the assembly of the components  
royalties through licensing. Independent contractors produced most
by the purchasers.
of the parts, and Boulton and Watt merely oversaw the assembly of
the components by the purchasers.
2Boldrin & Levine: Against Intellectual Monopoly, Chapter 1
In most histories, James Watt is a heroic inventor,
In   most   histories,   James   Watt   is   a   heroic   inventor,  
responsible for the beginning of the industrial revolution. The facts
responsible for the beginning of the industrial revolution. The facts  
suggest an alternative interpretation. Watt is one of many clever
above suggest a different interpretation. Watt is one of many clever  
inventors working to improve steam power in the second half of
inventors working to improve steam power in the second half of the  
the eighteenth century. After getting one step ahead of the pack, he
eighteenth century. After getting one step ahead of   the pack, he  
remained ahead not by superior innovation, but by superior
remained   ahead   not   by   superior   innovation,   but   by   superior  
exploitation of the legal system. The fact that his business partnerBoldrin & Levine: Against Intellectual Monopoly, Chapter 1
exploitation of the legal system. The fact that his business partner
3
was a wealthy man with strong connections in Parliament, was not a  
was a wealthy man with strong connections in Parliament, was not
minor help.  
a minor help.
 
Was Watt’s patent a crucial incentive needed to trigger his
The evidence suggests  that  Watt’s efforts  to use  the legal
inventive genius, as the traditional history suggests? Or did his use
system to inhibit competition set back the industrial revolution by a  
of the legal system to inhibit competition set back the industrial
decade or two. The granting of the 1769 and, especially, of the 1775
revolution by a decade or two? More broadly, are the two essential
patents  likely  delayed  the  mass  adoption  of   the  steam  engine:
components of our current system of intellectual property – patents
innovation was stifled until his patents expired; and very few steam
and copyrights – with all of their many faults, a necessary evil we
engines  were  built  during  the period of Watt’s  legal  monopoly.
must put up with to enjoy the fruits of invention and creativity? Or
From the number of innovations that occurred immediately after the  
are they just unnecessary evils, the relics of an earlier time when
expiration of the patent, it appears that Watt’s competitors simply
governments routinely granted monopolies to favored courtiers?
waited until then before releasing their own innovations. Also, we
That is the question we seek to answer.
see that Watt’s inventive skills were badly allocated: we find him
In the specific case of Watt, the granting of the 1769 and
spending more time engaged in legal action to establish and preserve
especially of the 1775 patents likely delayed the mass adoption of
his monopoly than he did in the actual improvement and production
the steam engine: innovation was stifled until his patents expired;
of his engine. From a strictly economic point of view Watt did not  
and few steam engines were built during the period of Watt’s legal
need  such a long  lasting patent –  it  is estimated  that by 1783 –
monopoly. From the number of innovations that occurred
seventeen years  before his  patent  expired – his  enterprise  broke
immediately after the expiration of the patent, it appears that
even; so every dollar that came after was pure gravy.
Watt’s competitors simply waited until then before releasing their
While the view of Watt’s enterprise we are proposing here
own innovations. This should not surprise us: new steam engines,
may  appear  iconoclastic  to many  readers,  it  is  neither  new  nor
no matter how much better than Watt’s, had to use the idea of a
particularly  original.  Frederic  Scherer,   a  strong  and   prestigious
separate condenser. Because the 1775 patent provided Boulton and
academic supporter  of  the patent  system,  after  going  through  the
Watt with a monopoly over that idea, plentiful other improvements
details  of   the  Boulton  and  Watt  story,  concluded  his  1986
of great social and economic value could not be implemented. By
examination of their story with the following illuminating words
the same token, until 1794 Boulton and Watt’s engines were less
Had  there been no patent  protection at  all,…Boulton and
efficient they could have been because the Pickard’s patent
Watt certainly would have been forced to follow a business
prevented anyone else from using, and improving, the idea of
policy quite different from that which they actually followed.
combining a crank with a flywheel.
Most of the firm’s profits were derived from royalties on the
Also, we see that Watt’s inventive skills were badly
use of  engines rather  than  from  the sale of  manufactured
allocated: we find him spending more time engaged in legal action
engine components,  and without patent protection the firm
to establish and preserve his monopoly than he did in the actual
plainly could not  have collected royalties. The alternative
improvement and production of his engine. From a strictly
would have been  to emphasize manufacturing and service
economic point of view Watt did not need such a long lasting
activities as  the principal  source of profits, which  in  fact
patent – it is estimated that by 1783 – seventeen years before his
was  the  policy  adopted  when  the  expiration  date  of  the
patent expired – his enterprise had already broken even. Indeed,
patent  for  the  separate  condenser  drew near  in  the  late
even after their patent expired, Boulton and Watt were able to
3Boldrin & Levine: Against Intellectual Monopoly, Chapter 1
maintain a substantial premium over the market by virtue of having
1790s…. It is possible to conclude more definitely that the  
been first, despite the fact that their competitors had had thirty
patent   litigation activities  of  Boulton & Watt  during  the  
years to learn how to make steam engines.
1790s  did  not  directly  incite  further  technological 
The wasteful effort to suppress competition and obtain
progress…. Boulton  and Watt’s  refusal  to  issue  licenses 
special privileges is referred to by economists as rent-seeking
allowing  other  engine   makers  to  employ  the  separate-
behavior. History and common sense show it to be a poisoned fruit
condenser principle clearly retarded  the development  and
of legal monopoly. Watt’s attempt to extend the duration of hisBoldrin & Levine: Against Intellectual Monopoly, Chapter 1
introduction of improvements.
4
1769 patent is an especially egregious example of rent seeking: the
Indeed, the story of James Watt contains most of the  
patent extension was clearly unnecessary to provide incentive for
important  elements of  our  argument  against  intellectual  property.  
the original invention, which had already taken place. On top of
The new idea accrues almost by chance to the innovator while he is
this, we see Watt using patents as a tool to suppress innovation by
carrying out a routine activity aimed at a completely different end.  
his competitors, such as Hornblower, Wasborough and others.
The patent  comes many years after  that  and  it  is due more  to a  
Hornblower’s engine is a perfect case in point: it was a
mixture of legal acumen and abundant resources available to “oil the
substantial improvement over Watt’s as it introduced the new
gears  of  fortune”  than  anything  else.  Finally,   after  the   patent
concept of the “compound engine” with more than one cyclinder.
protection  is  obtained,   it  is  mostly  used  as  a  tool  to  prevent
This, and not the Boulton and Watt design, was the basis for
economic progress and hurt competitors.  
further steam engine development after their patents expired.
 
However, because Hornblower built on the earlier work of Watt,
The  wasteful  effort  to   suppress  competition  and  obtain
making use of his “separate condenser” Boulton and Watt were
special  privileges  we  have  seen  in  Watt  is  one  of  the   greatest
able to block him in court and effectively put an end to steam
dangers of monopoly.   It  is commonly  referred  to as  rent-seeking
engine development. The monopoly over the “separate condenser,”
behavior. Watt’s attempt to extend the duration of his 1769 patent is  
a useful innovation, blocked the development of another equally
an  especially  egregious  example  of   rent  seeking:  the  patent  
useful innovation, the “compound engine,” thereby retarding
extension  was  clearly  unnecessary  to   provide  incentive  for  the  
economic growth. This retardation of innovation is a classical case
original invention, which had already taken place. On top of this, we
of what we shall refer to as Intellectual Property-inefficiency, or IP
see  Watt  using  patents  as  a   tool  to  suppress  innovation  by  his
inefficiency for short.
competitors, such as Hornblower, Wasborough and others. Finally,
Finally, there is the slow rate at which the steam engine
there is the slow rate at which the steam engine was adopted before
was adopted before the expiration of Watt’s patent. By keeping
the  expiration  of  Watt’s  patent.  By  keeping  prices  high  and
prices high and preventing others from producing cheaper or better
preventing others from producing cheaper or better steam engines,  
steam engines, Boulton and Watt hampered capital accumulation
Boulton  and Watt  hampered  capital  accumulation  and  slowed
and slowed economic growth.
economic growth.
The story of James Watt is a damaging case for the benefits
 
of a patent system, but we shall see that it is not an unusual story.
Intellectual property, as it is currently conceived, still has all
A new idea accrues almost by chance to the innovator while he is
these damaging social  effects – because  its enforcement  has been
carrying out a routine activity aimed at a completely different end.
strengthened, its term extended and its reach expanded, current law
The patent comes many years after that and it is due more to a
is much worse. While the randomness in the procedure for obtaining
mixture of legal acumen and abundant resources available to “oil
a  letter of patent   that  characterized Watt’s period may have been  
the gears of fortune” than anything else. Finally, after the patent
reduced,  it  has  not  disappeared.  It  has  shifted  from the stage at
protection is obtained, it is primarily used as a tool to prevent
which a patent  is awarded  to  the stage at  which  it  is  litigated  in
economic progress and hurt competitors.
court.  A patent   is  now  routinely  issued  to  anyone  that  files  an
While this view of Watt’s role in the industrial revolution
application with the USPTO. Anything and everything – including
may appear iconoclastic, it is neither new nor particularly original.
such allegedly “new” and “useful”  ideas as the peanut  butter and
Frederic Scherer, a prestigious academic supporter of the patent
jelly sandwich – has been patented in recent years. The brutal legal
system, after going through the details of the Boulton and Watt
fight, the peddling of all kinds of influence from legal to legislative,
story, concluded his 1986 examination of their story with the
4Boldrin & Levine: Against Intellectual Monopoly, Chapter 1
following illuminating words
and the complete randomness of it all, are, nowadays, characteristics
Had there been no patent protection at all,…Boulton and
of a different stage in the life of a patent. If the underlying invention
Watt certainly would have been forced to follow a business
is good  for  anything,  either  dozens of  people will  claim  to have
policy quite different from that which they actuallyBoldrin & Levine: Against Intellectual Monopoly, Chapter 1
invented it and sue the actual innovator, or the patent holder will sue
5
anyone anywhere who has come up with something similar, or who
followed. Most of the firm’s profits were derived from
has the funny idea of competing with him.
royalties on the use of engines rather than from the sale of
 
manufactured engine components, and without patent
In addition to the corrupt rent-seeking, the legal suppression
protection the firm plainly could not have collected
of  innovation  and the  reduced  economic  growth  attendant  upon
royalties. The alternative would have been to emphasize
Watt’s monopolies, we may also add a significant loss of personal
manufacturing and service activities as the principal
freedom. These social harms are not the necessary evils that we, as a
source of profits, which in fact was the policy adopted
society, must be willing to pay for innovative activity to occur. The  
when the expiration date of the patent for the separate
opposite, indeed, is true: they are unnecessary evils, a residual of the  
condenser drew near in the late 1790s…. It is possible to
middle ages from which free market societies emerged, a holdover
conclude more definitely that the patent litigation activities
of the days when governments and royalty granted monopolies to
of Boulton & Watt during the 1790s did not directly incite
favored courtiers. Another world, a fairer and more decent world, is
further technological progress…. Boulton and Watt’s
possible – that of competitive innovation.
refusal to issue licenses allowing other engine makers to
 
employ the separate-condenser principle clearly retarded
Economists,  beginning with Adam Smith  – a   friend  and
the development and introduction of improvements.
teacher of James Watt – have carefully documented the problems of  
8
monopoly.  Because  there  are  no  countervailing  market  forces,
***
government-enforced  monopolies  are  particularly  dangerous.
The industrial revolution was long ago. But the issue of
Intellectual property is one type of government-enforced monopoly.  
intellectual property is a contemporary one. At the time we wrote
Never the less, economists have generally argued in favor of patents
this, U.S. District Judge James Spencer had been threatening for
and   copyright  protection.  Despite  the  many  problems  with
three years to shut down the widely used Blackberry messaging
government  grants  of  monopoly  power,  the  argument  is  that,
network – over a patent dispute.
without the promise of monopoly that patents and copyrights entail,
9
there would be insufficient incentive to innovate and create.
And Blackberry itself is not
In the case of Watt, the argument goes, he would never have
without sin: in 2001 Blackberry sued Glenayre Electronics for
invested the time and effort to come up with his invention without
infringing on its patent for “pushing information from a host
the prospect  of  a patent. But  that  case  is weak. Even after  their
system to a mobile data communication device.”
patent expired, Boulton and Watt were able to maintain a substantial
10
premium over the market by virtue of having been first, despite the
A similar war is taking place over copyright – the Napster
fact  that  their  competitors  had had  thirty years  to  learn how  to  
network was shut down by a federal judge in July of 2000 in a
imitate  them.  Moreover,  when Watt  first  developed his ideas and  
dispute over the sharing of copyrighted files.
models, it was far from certain that he would be able to get a patent:
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at that time getting a patent was an uncertain proposition – part of
Emotions run high
the reason he had to lobby nonstop for a long time to get it. Indeed,
on both sides. We have the anti-copyright slogan “information just
it  may well be that  the idea of obtaining a monopoly occurred  to
wants to be free” promoted by some civil libertarians. On the other
Watt only after he finished his invention – there is no evidence he
extreme, large music and software companies argue that a world
gave any  thought  to patent  law during  the development  process.  
without intellectual property would be a world without new ideas.
Finally,  Watt  had  many  competitors,  such  as  Hornblower  and  
Some of the bitterness of the copyright debate is reflected
Wasborough; had he not invented the condenser, it seems virtually
in Stephen Manes’ attack on Lawrence Lessig
certain someone else would have come up with the idea in the 35
According to Stanford law professor and media darling
years between the time it occurred to Watt, and the time his patents
Lawrence Lessig, a “movement must begin in the streets”
5Boldrin & Levine: Against Intellectual Monopoly, Chapter 1
to fight a corrupt Congress, overconcentrated media and
finally expired. Why this is rather the rule than an isolated episode
an overpriced legal system...Contrary to Lessig's
and why the case for the protection of intellectual property is weak
rants...“Fair use” exceptions in existing copyright law...are
are two things we will argue through both theory and evidence.
so expansive that just about the only thing cut-and-pastersBoldrin & Levine: Against Intellectual Monopoly, Chapter 1
This book elaborates on the idea that intellectual property is  
6
generally inhibiting to innovation, growth, prosperity and freedom.  
clearly can't do legally with a copyrighted work is directly
We argue that not only would innovation thrive in the absence of
copy a sizable portion of it.
intellectual monopoly, but that we, as a society, would enjoy greater
12
growth and prosperity in its absence. We take the view point of the
Certainly Lessig is no friend of current copyright law. Yet, despite
average citizen-consumer when debating if a policy is desirable, not
Stephen Manes assertions to the contrary, he does believe in
that of a would be monopolist. There is no doubt in our minds that a
balancing the rights of producers with the rights of users: his book
handful  of  powerful  monopolists would be worse off  in a world
Free Culture speaks repeatedly of this balance and how it has been
without  intellectual property;  what  matters  is  that  everybody else
lost in modern law.
would be substantially better off.
13
 
Like Lessig, many economists are skeptical of current law
Our  focus  is  on  the  economics  of   intellectual   property:
– seventeen prominent economists, including several Nobel Prize
patents, copyright, and downstream licenses. We are not seeking to
winners, filed a brief with the U.S. Supreme Court in support of
argue what might and might not be legitimate under the current legal
Lessig’s lawsuit challenging the extension of the length of
system, but to understand how new laws and institutions might be
copyright. Also like Lessig, economists recognize a role for
crafted to encourage growth, innovation and creation. During those
intellectual property: where lawyers speak of balancing rights,
not  so  distant  times  in  which  tariffs  and  other  protectionist
economists speak of incentives. To quote from a textbook by two
prohibitions  made  free  trade  illegal  and   dangerous,  economists
prominent economists Robert Barro and Xavier Sala-i-Martin
arguing  in  favor  of   free  trade did not  insist  that  smugglers were
It would be [good] to make the existing discoveries freely
carrying out lawful activities. They were breaking the foolish laws
available to all producers, but this practice fails to provide
of   the  time  in pretty much  the same way  that  people engaged  in
the...incentives for further inventions. A tradeoff arises
various forms of “piracy” these days are breaking current laws. But
between restrictions on the use of existing ideas and the
legally  or  not,  by  violating  trade  prohibitions  smugglers  were
rewards to inventive activity.
carrying out socially useful trades: consumers wanted the goods and  
14
were willing  to pay  for  them;  producers had the goods but were
Indeed, while many of us enjoy the benefits of being able to freely
prevented from selling them by unjust legal restrictions; smugglers,  
download music from the internet, we worry as well how the
at a cost, allowed these two groups of people to trade. In the same
musician is to make a living if her music is immediately given
way, while current day pirates may be violating existing intellectual
away for free.
property  laws,   they  are  also  carrying out  socially useful  trades.
While a furious debate rages over copyrights and patents,
Consumers are asking  for cheap books,  music,  videos,  and other
there is general agreement that some protection is needed to secure
products in convenient formats, and workers are willing to work to
for inventors and creators the fruits of their labors. The rhetoric
produce these goods at low cost. By violating intellectual property  
that “information just wants to be free” suggests that no one should
laws, contemporary “pirates” are allowing these socially beneficial
be allowed to profit from her ideas. Despite this, there does not
trades to take place.   This is why we advocate changing these laws
seem to be a strong lobby arguing that while it is ok for the rest of
to make lawful and permissible what is already socially good.
us to benefit from the fruits of our labors, inventors and creators
This  is  why  too,  in order  to understand what  intellectual
should have to subsist on the charity of others.
property is and why it is socially damaging, some knowledge of the
For all the emotion, it seems both sides agree that
existing legal framework is needed. There are three broad types of
intellectual property laws need to strike a balance between
intellectual   property   recognized   in most   legal   systems:   patents,  
providing sufficient incentive for creation and the freedom to make
use of existing ideas. Put it differently, both sides agree that
intellectual property rights are a “necessary evil” that fosters
innovation, and disagreement is over where the line should be
drawn. For the supporters of intellectual property, currentBoldrin & Levine: Against Intellectual Monopoly, Chapter 1
7
monopoly profits are barely enough; for its enemies currently
monopoly profits are too high.
Our analysis leads to conclusions that are at variance with
both sides. Our reasoning proceeds along the following lines.
Everyone wants a monopoly. No one wants to compete against his
own customers, or against imitators. Currently patents and
copyrights grant producers of certain ideas a monopoly. Certainly
few people do something in exchange for nothing. Creators of new
goods are not different from producers of old ones: they want to be
compensated for their effort. However, it is a long and dangerous
jump from the assertion that innovators deserve compensation for
their efforts to the conclusion that patents and copyrights, that is
monopoly, are the best or the only way of providing that reward.
Statements such as “A patent is the way of rewarding somebody
for coming up with a worthy commercial idea”
15
  abound in the
business, legal and economic press. As we shall see there are many
other ways in which innovators are rewarded, even substantially,
and most of them are better for society than the monopoly power
patents and copyright currently bestow. Since innovators may be
rewarded even without patents and copyright, we should ask: is it
true that intellectual property achieves the intended purpose of
creating incentives for innovation and creation that offset their
considerable harm?
This book examines both the evidence and the theory. Our
conclusion is that creators’ property rights can be well protected in
the absence of intellectual property, and that the latter does not
increase either innovation or creation. They are an unnecessary
evil.
***
This is a book about economics, not about law. Or put
differently, it is not about what the law is but rather what the law
should be. If you are interested in whether or not you are likely to
wind up in jail for sharing your files over the internet, this is not
the book for you. If you are interested in whether it is a good idea
for 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, some
background on the law is necessary to understanding the economic
issues. We are going to examine the economics of what has, in
recent years, come to be called “intellectual property,” especially
patents and copyright. In fact, there are three broad types ofBoldrin & Levine: Against Intellectual Monopoly, Chapter 1
8
intellectual property recognized in most legal systems: patents,
copyrights and trademarks.
copyrights and trademarks.
 
Trademarks are different in nature than patents and
6Boldrin & Levine: Against Intellectual Monopoly, Chapter 1
copyrights: they serve to identify the providers of goods, services
Trademarks   are   different   in   nature   than   patents   and  
or ideas. Copying – which would be a violation of copyright – is
copyrights: they serve to identify the providers of goods, services or  
quite different from lying – which would be a violation of
ideas. We   are  unaware  of   any  economic  rationale  for   allowing  
trademark. We do not know of a good reason for allowing market
market participants to masquerade as people they are not, and there  
participants to steal identities or masquerade as people they are
are strong economic advantages in allowing market participants to  
not. Conversely, there are strong economic advantages in allowing
voluntarily   identify   themselves. While we may wonder   if   it   is  
market participants to voluntarily identify themselves. While we
necessary to allow the Intel Corporation a monopoly over the use of  
may wonder if it is necessary to allow the Intel Corporation a
the word “inside,” in general we have little dispute with trademarks.  
monopoly over the use of the word “inside,” in general there is
Patents   and   copyrights,   the   two   forms   of   intellectual  
little economic dispute over the merits of trademarks.
property on which we focus, differ in the extent of coverage they  
Patents and copyrights, the two forms of intellectual
provide.   Patents   apply   to   specific   implementations   of   ideas   –  
property on which we focus, are a subject of debate and
although   in   recent   years   in   the U.S.   there   has   been   decreasing  
controversy. They differ from each other in the extent of coverage
emphasis on specificity. Patents are of relatively short duration: in  
they provide. Patents apply to specific implementations of ideas –
the United   States,   20   years   for   patents   covering   techniques   of  
although in recent years in the U.S. there has been decreasing
manufacture,   and   14   years   for   ornamentation.   Patents   provide  
emphasis on specificity. Patents do not last forever: in the United
relatively broad protection: no one can legally use the idea, even if  
States, 20 years for patents covering techniques of manufacture,
they independently rediscover it without permission from the patent  
and 14 years for ornamentation. Patents provide relatively broad
protection: no one can legally use the same idea, even if they
independently rediscover it, without permission from the patent
holder.
holder.
 
16
Copyrights are much narrower in scope, protecting only the  
Copyrights are narrower in scope, protecting only the
specific details of a particular narrative. They are also much longer  
specific details of a particular narrative – although as with the case
in duration – the life of   the author plus 50 years   for   the many  
of patents, the scope has been increasing in recent years. Copyright
signatory countries of the Berne Convention, and – in the U.S. since  
is also much longer in duration than patent – the life of the author
the Sonny Bono Copyright Extension Act – the life of the author  
plus 50 years for the many signatory countries of the Berne
plus 70 years.   In the U.S.   there are limitations on copyright not  
Convention, and – in the U.S. since the Sonny Bono Copyright
present in patent law: the right of fair use allows the purchaser of a  
Term Extension Act – the life of the author plus 70 years.
copyrighted item limited rights to employ it, make partial copies of  
17
it and resell them, regardless of the desires of the copyright holder.  
In the U.S. there are limitations on copyright not present in
In   addition,   certain   derivative   works   are   allowed   without  
patent law. As Stephen Manes correctly points out in his attack on
permission: parodies are allowed,   for example, while sequels are  
Lawrence 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
not.
not.
 
In the case of both patents and copyright, from the point of
In the case of both patents   and copyright,   there   are   two  
view of economics, there are two ingredients in the law: the right
important economic features. The first is what we call the right of 
to buy and sell copies of ideas, and the right to control how other
sale.  This is the right of a legitimate owner of intellectual property
people make use of their copies. The first right is not controversial.Boldrin & Levine: Against Intellectual Monopoly, Chapter 1
to sell it. In copyright law, when applied to the creator this right is  
9
sometimes   called the   “right   of   first   sale,”  but  the  right  of  sale
In copyright law, when applied to the creator this right is
extends   also   to   the   legitimate   rights   of   others,  for  example,
sometimes called the “right of first sale.” However, it extends also
licensees, to sell the idea. The second feature of the law is the right  
to the legitimate rights of others to sell their copies. It is the second
to control the use of the intellectual property after sale. This second
right, enabling the owner to control the use of intellectual property
right   produces   a monopoly – enforced by the   obligation of   the  
after sale, that is controversial. This right produces a monopoly –
government   to prosecute  individuals or organizations that use the  
enforced by the obligation of the government to act against
idea in ways prohibited by the copyright or patent holder.  
individuals or organizations that use the idea in ways prohibited by
We emphasize that we favor the right of sale.  It is crucial
the copyright or patent holder.
that  producers of intellectual  property be able to profit  from their
In addition to the well-known forms of intellectual property
7Boldrin & Levine: Against Intellectual Monopoly, Chapter 1
– patents and copyright – there are also lesser-known ways of
invention. While sales could  take place even  in  the absence of a
protecting ideas. These include contractual agreements, such as the
legal right, markets function best in the presence of clearly defined
shrink-wrap and click-through agreements that you never read
property rights. Not only should the property rights of innovators be
when you buy software. They also include the most traditional
protected but also the rights of those who have legitimately obtained
form of protection – trade secrecy – as well as its contractual and
a copy of the idea, directly or indirectly, from the original innovator.  
legal manifestations such as non-disclosure agreements. Like
The  former  encourages  innovation,  the  latter  encourages  the
patents and copyright all of these devices serve to help the
diffusion, adoption and improvement of innovations.
originator of an idea maintain a monopoly over it.
 
We do not know of any legitimate argument that producers
It is with the right of the owner of intellectual property to
of ideas should not be able to profit from their creations. While
control how the purchaser makes use of the idea or creation that we
ideas could be sold in the absence of a legal right, markets function
disagree. Because this right gives the owner a monopoly over usage
best in the presence of clearly defined property rights. Not only
of the idea and prevents buyers from using the intellectual property
should the property rights of innovators be protected but also the
they lawfully purchased, we refer to it as  intellectual monopoly  to
rights of those who have legitimately obtained a copy of the idea,
distinguish it from the right of sale. Hence, intellectual property is
directly or indirectly, from the original innovator. The former
composed  of   two  parts:  the   right   of  sale,  and  the  intellectual
encourages innovation, the latter encourages the diffusion,
monopoly. The first gives the producer or any rightful owner of a  
adoption and improvement of innovations.
copy of the idea the power to sell it to another party.  The second
Why, however, should creators have the right to control
gives the patent or copyright holder the right to control and limit the
how purchasers make use of an idea or creation? This gives
usage of the idea by any other person. The latter is not just a simple
creators a monopoly over the idea. We refer to this right as
well-defined right of property. It establishes a monopoly that we do
“intellectual monopoly,” to emphasize that it is this monopoly over
not usually allow producers of other goods. We will argue that this
all copies of an idea that is controversial, not the right to buy and
monopoly creates many social costs, yet has little social benefit. It
sell copies. The government does not ordinarily enforce
largely redistributes income and wealth from the many that do not
monopolies for producers of other goods. This is because it is
have it, to the “lucky” ones who have managed to obtain it.
widely recognized that monopoly creates many social costs.
To  foreshadow our argument,  the original  innovator  has a
Intellectual monopoly is no different in this respect. The question
natural  first-mover advantage by virtue of initially being the only
we address is whether it also creates social benefits commensurate
one to know of the idea or how to implement it. Furthermore, ideas
with these social costs.
are always scarce. The innovator can invariably use his first mover
***
advantage and the scarcity of his idea to earn a profit. In the case of  
The U.S. Constitution allows Congress “To promote the
Watt, the first-mover advantage was extremely strong. Even after 31
progress of science and useful arts, by securing for limited times to
years  had been available  for  competitors  to reverse engineer  his
authors and inventors the exclusive right to their respectiveBoldrin & Levine: Against Intellectual Monopoly, Chapter 1
invention,   Boulton  and Watt  were  still  able  to  command  a
10
substantial premium over the market. They were able to do so for
writings and discoveries.”
many  years,   by  virtue  of   the   special  expertise  that  comes  with
18
having  been  first.   Economic  research  shows  that   the  same
Our perspective on patents and
mechanism is at work, for example in the contemporary market for
copyright is a similar one: promoting the progress of science and
pharmaceutical  products. Many years  after  a  medical  patent  has
the useful arts is a crucial ingredient of economic welfare, from
expired, when cheaper generic drugs are available that are perfect
solving such profound economic problems as poverty, to such
substitute for the original product, the first innovator still retains a
mundane personal nuisances as boredom. From a social point of
substantial degree of market power and still charges a higher price.
view, and in the view of the founding fathers, the purpose of
In  thinking  about  abolishing  intellectual  monopoly,  it  is  
patents and copyrights is not to enrich the few at the expense of the
important  to  recognize  that  even  if  existing copyright  and patent
many. Nobody doubts that J. K. Rowling and Bill Gates have been
laws  were  abolished,  much  of  their  impact  could  be  recreated
greatly enriched by their intellectual property – nor is it surprising
through private contracts.  That  is,  in selling  their  idea,  innovators
that they would argue in favor of it. But common sense and the
8Boldrin & Levine: Against Intellectual Monopoly, Chapter 1
U.S. Constitution say that these rights must be justified by bringing
could require purchasers to sign a contract agreeing to make use of it
benefits to all of us.
only  in  ways  approved  of   by  the  seller.   Shrink-wrap  software
The U.S. Constitution is explicit that what is to be given to
agreements  are  a  simple  and  common  example  of  this  type  of
authors and inventors is an exclusive right – a monopoly. Implicit
downstream  licensing. Notice  that   private  agreements  could  not
is the idea that giving this monopoly serves to promote the
completely  recreate  existing patent protection,  since  independent
progress of science and useful arts. The U.S. Constitution was
invention could not be controlled, which would already be a major
written in 1787. At that time, the idea of copyright and patent was
step  forward.   On  the   other  hand,  copyright  protection  would
relatively new, the products to which they applied few, and their
effectively be  increased,  since current  copyright  law obligates  the  
terms short. In light of the experience of the subsequent 219 years
seller  to allow  fair  use,  and  this could be  ruled out  in a private
we might ask: is it true that legal grants of monopoly serve to
agreement. Indeed, the current legal situation is murky, since some
promote the progress of science and the useful arts?
sellers  do  attempt  to   eliminate  fair  use  through  downstream
Certainly common sense suggests that it should. How is a
licensing  agreements.  In  any  case,  to  eliminate  intellectual
musician to make a living if the moment she performs her music,
monopoly,  it is necessary to go beyond merely abolishing patents
everyone else can copy and give it away for free? Why would the
and copyright to also limit downstream licensing agreements.
large corporations pay the small inventor when they can simply
Economists  as  a  rule  favor  both  freedom of  contract  and  
take his idea? It is hard to imagine life without the internet, and
well-defined property rights. It may come a surprise that the two of
today we are all jet setters. Is not the explosion of creativity and
us  –  two  conservative  economists  –  appear  to   be  arguing  the  
invention unleashed since the writing of the U.S. Constitution a
opposite.   However,  economists  also  favor  competition  over
testimony to the powerful benefit of intellectual property? Would
monopoly, and economists have come to learn and understand that
not the world without patent and copyright be a sad cold world,
competition does not fall from the sky; it is a system of organizing
empty of new music and of marvelous new inventions?
human economic interactions that requires nurturing and protection.
So the first question we will pose is what the world might
The  fact  is  that  –  like most  free-market  economists – we do not
be like without intellectual monopoly. Patents and copyrights have
favor  enforcing  collusive  contracts  that  are  used  to  create
not secured monopolies on all ideas at all times. It is natural then to
monopolies – and this is what shrink wrap agreements are. Nor do
examine times and industries in which legal protection for ideas
we argue against property rights, which we view as essential to the  
have not been available to see whether innovation and creativity
smooth functioning of a competitive economy. Our argument is with
were thriving or were stifled. It is the case, for example, that
intellectual monopoly. We favor the right of sale, the right to sell
neither the internet nor the jet engine were invented in hopes of
copies of  ideas.  We argue both  that  the original  innovator should
securing exclusive rights. In fact, we ordinarily think of
have that  right,  and that those who have purchased a copy of  the  
“innovative monopoly” as an oxymoron. We shall see that when
idea should have the same right to sell what is now their copy of the
monopoly over ideas is absent, competition is fierce – and that as a
idea.   It  is  the monopolistic  regulation of   the  right  to use  legally
result innovation and creativity thrive. Whatever a world withoutBoldrin & Levine: Against Intellectual Monopoly, Chapter 1
available  technologies  to make  further copies of  ideas  after  their
11
lawful sale with which we disagree. When you buy a potato you can
patents and copyrights would be like, it would not be a world
eat it, throw it away, plant it or make it into a sculpture. When you
devoid of great new music and beneficial new drugs.
buy a potato you can use the idea of a potato embodied in it to make
You will gather by now that we are skeptical of monopoly
better  potatoes  or  to  invent  french  fries.  Current  laws  allow
– as are economists in general. Our second topic will be an
producers of  CDs, books,  computer software or  medical  drugs to
examination of the many social costs created by copyrights and
take  this  freedom  away  from  you.   It  is  this  confounding  of
patents. Adam Smith – a friend and teacher of James Watt – was
intellectual  property with  intellectual  monopoly against  which we
one of the first economists to explain how monopolies make less
argue.  
available at a higher price. In some cases, such as the production of
 
music, this may not be a great social evil; in other cases such as the
Everyone  wants  a  monopoly,  and   all  producers  would
availability of AIDS drugs, it may be a very great evil indeed.
impose  downstream  licensing  agreements  if  they  could. No one  
However, as we shall see, low availability and high price is only
wants to compete against his own customers, or against imitators for
one of the many costs of monopoly. The example of James Watt is
9Boldrin & Levine: Against Intellectual Monopoly, Chapter 1
a case in point: by making use of the legal system, he inhibited
that matter. Under current law only producers of (certain) ideas do
competition and prevented his competitors from introducing useful
not have to do so. It is a long and dangerous jump from the assertion
new advances. We shall also see that because there are no
that  innovators  deserve  compensation  for  their  efforts  to  the
countervailing market forces, government-enforced monopolies
conclusion  that  current patent  and copyright protection is the best
such as intellectual monopoly are particularly problematic.
way of providing such reward. Statements such as “A patent is the
While monopoly may be evil, and while innovation may
way  of  rewarding  somebody  for  coming  up  with  a   worthy
thrive in the absence of traditional legal protections such as patents
commercial idea” abound in the business, legal and economic press.  
and copyrights, it may be that patents and copyrights serve to
But there are many other ways in which innovators are rewarded,
increase innovation. The presumption in the U.S. Constitution is
most of them socially better than copyright and patents.
that they do, and that the benefits of more entertainment and more
The  U.S.  Constitution  allows  Congress  “To  promote  the  
innovation outweigh the costs of these monopolies. Certainly the
progress of science and useful arts, by securing for limited times to  
monopolies created by patents and copyright may be troublesome
authors and inventors the exclusive right to their respective writings
– but if that is the cost of having blockbuster movies, automobiles
and discoveries.”  Our  perspective  on patents  and copyright  is  a
and flu vaccine, most of us are prepared to put up with it. That is
similar one: promoting the progress of science and the useful arts is
the position traditionally taken by economists, most of whom
a  crucial  ingredient  of   economic  welfare,   from  solving  such
support patents and copyright, at least in principle. Some of them
profound economic problems as poverty, to such mundane personal
take the view that intellectual monopoly is an unavoidable evil if
nuisances as boredom. The question we shall focus on is whether
we are to have any innovation at all; other simply argue that at
intellectual monopoly is useful in promoting innovation and growth
least some modest amount of intellectual monopoly is desirable to
for  the benefit  of   the average citizen,  or  if,  as we shall  argue,  it
provide adequate incentive for innovation and creation. Our third
stifles  innovation and growth and  it  redistributes wealth  from  the  
topic will be an examination of the theoretical arguments
“average  guy”  to a  few  protected  individuals  who  are  either  in
supporting intellectual monopoly, as well as counter-arguments
control of, or closely associated with, the big monopolies lobbying
about why intellectual monopoly may hurt rather than foster
for intellectual property.
creative activity.
Traditionally, economists have been skeptical of government
It is crucial to recognize that intellectual monopoly is a
intervention  in markets,   for example,  through  regulation or  trade-
double-edged sword. The rewards to innovative effort are certainly
restrictions. Economists are also skeptical of intellectual monopoly,
greater if success is awarded a government monopoly. But the
and  the  economics  literature  in  general  suggests  that   existing
existence of monopolies also increases the cost of creation. In one
protections should be  reduced.   In  the case of   regulation and  free
extreme case, a movie that cost $218 to make had to pay $400,000
trade, economists also generally recognize that some regulation and
for the music rights.
trade-restrictions are desirable. They  recognize,  too,  that  allowing
19
some  intervention  triggers  rent-seeking  behavior  by  would-be
  As we will argue at length, theoreticalBoldrin & Levine: Against Intellectual Monopoly, Chapter 1
monopolists, and  that  as a  result  it  is most  practical  to  focus on
12
eliminating  government  intervention.  Alas,   this  is  not  yet  the
arguments alone cannot tell us if intellectual monopoly increases
conventional  view with  respect  to  intellectual monopoly. Until
or decreases creative activity.
recently, conventional wisdom held that markets could not function
In the final analysis, the only justification for intellectual
at all in its absence. As a result, many economists still believe that
property is that it increases –  de facto and substantially –
intellectual monopoly is an unavoidable evil if we are to have any
innovation and creation. What have the last 219 years taught us?
innovation at all.  
Our final topic is an examination of the evidence about intellectual
 
monopoly and innovation. Is it a fact that intellectual monopoly
Modern  economic  research,  however,  has  shown  that  
leads to more creativity and innovation? Our examination of the
markets for  ideas can function even  in  the absence of  intellectual
data shows no evidence that it does. Nor are we the first
monopoly,  and we shall see that markets for ideas and innovation
economists to reach this conclusion. After reviewing an earlier set
function and function well absent intellectual monopoly. As a result,  
of facts in 1958, the distinguished economist Fritz Machlup wrote
we take the same position on intellectual monopoly that economists
“it would be irresponsible, on the basis of our present
10Boldrin & Levine: Against Intellectual Monopoly, Chapter 1
knowledge of its economic consequences, to recommend
take  on  trade  restrictions:  although  some  modest  amount  of
instituting [a patent system].”20
protection  might  be  desirable  in  very  special  cases,  it  is more
Since there is no evidence that intellectual monopoly
practical and useful to focus on the elimination of restrictions as a
achieves the desired purpose of increasing innovation and creation,
general  rule. Similarly,  while some modest  amount  of  intellectual
it has no benefits. So there is no need for society to balance the
monopoly  might  be  desirable  in  very  special  cases,  it  is more
benefits against the costs. This leads us to our final conclusion:
practical  and  useful  to  focus  on  the   elimination  of  intellectual
intellectual property is an unnecessary evil.Boldrin & Levine: Against Intellectual Monopoly, Chapter 1
monopoly as a general rule.
13
 
Comments
Our  analogy  between  intellectual   property   and  trade
We are grateful to George Selgin and John Turner, of the
restrictions is not a purely rhetorical tool, nor a random comparison.  
University of Georgia Terry College of Business, for pointing out a
For centuries, human innovative activity took the form of creating
number of factual mistakes and imprecisions in our rendition of the
new consumption goods,  new machines and new staples of   food.
James Watt story, as it had appeared in earlier versions of this
But  the  transmission of   ideas  from one producer  to another  and  
chapter and in our 2003 Lawrence R. Klein Lecture, published in
across countries was not nearly as fast, standardized, and routinized
Boldrin and Levine [2004]. In a recent article, Selgin and Turner
as it is today. Creative human activity was focused on the creation
[2006], also take issue with our interpretation of the facts and add a
and reproduction of  physical  goods  and not  on  the creation and  
few additional ones that, in their view, contradict our vision of
reproduction of ideas. Free trade of commodities was therefore key
James Watt as a primary example of an intellectual monopolist. It
in fostering progress: the more competitors came in with shoes like
seems clear, even from the references quoted by Selgin and Turner,
yours, the more you had to improve on your shoes to keep selling
that many students of the Industrial Revolution share our view –
them.  
more properly: we shared theirs.
 
Selgin and Turner’s argument and facts do not, however,
This dialectic we used to call economic progress, and, after a
address the issues we raise about Boulton and Watt. Take their
few centuries of   intellectual  debate and numerous  wars,  Western
discussion of the hypothetical “Watt sans patent.” Obviously
societies came to understand that restricting international trade was
Boulton and Watt fought hard for their patents, and obviously they
damaging because protectionism prevents economic progress. Since
claimed innovation would have been impossible without them. Our
at least the late Middle Ages, the battle has been between the forces
point is another: could they have made enough money to
of  progress,  individual  freedom,  competition  and free  trade,   and  
compensate their opportunity cost without the patent? All the
those of stagnation, regulation of individual actions, monopoly, and
evidence, including that reported by Selgin and Turner, suggests
trade protection. Now that the intellectual and political battle over
this is the case. In fact they make our case quite convincingly:
free trade of physical goods seems won, and an increasing number
quoting F.M. Scherer they assert that seventeen years before the
of less advanced countries are joining the progressive ranks of free-
second patent expired they, Boulton and Watt, were already
trading nations, pressure for making intellectual property protection
breaking even. In economics, “breaking even” means that your
stronger is mounting in those very same countries that advocate free
opportunity costs have been paid, and your capital has received the
trade. This is not coincidence.  
risk-adjusted, expected return, and Scherer is a distinguished
 
economist. Whatever profits Boulton and Watt made after that,
Most  physical  goods  already  are  and,   in  the  decades  to
were all extra rents due to monopoly power and, economically, not
come, will increasingly be, produced in the less developed countries.
needed to pay their opportunity costs. So, we all agree that, at least
Most  innovations and creations are  taking place  in  the advanced
for the final 17 years, the patent was not serving a useful economic
world, and the IT and bio-engineering revolutions suggest this will
purpose, hence it was damaging because it created monopoly
continue for a while at  least. It  is not  surprising  then,   that a new
distortions.
version of 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 1
therein 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, a country must regulate trade and strive for trade
surpluses. Today, the same fallacy teaches that without intellectual
monopoly innovations  would be  impossible.  Our  goal  here  is  to
demolish that glass house.
 
12Boldrin & Levine: Against Intellectual Monopoly, Chapter 1
Notes
Notes
Much of the story of James Watt can be found in Carnegie  
                                               
[1905], Lord   [1923],   and Marsden   [2004].  The  quotation  about
1
Wasborough is from Carnegie. Information on the role of Boulton in  
Lord [1923] p. 5-3.htm.
Watt’s   enterprise   is   drawn   from   Mantoux   [1905].   A   lively  
2
description of the real Watt, as well of his legal wars against   the
Carnegie [1905] p. 157.
Hornblowers – and many other – and of how he subsequently used  
3
his status to alter the public memory of the facts, can be found in  
Much of the story of James Watt can be found in Carnegie
Marsden [2004]. Lord [1923] gives figures on the number of steam  
[1905], Lord [1923], and Marsden [2004]. Information on the roleBoldrin & Levine: Against Intellectual Monopoly, Chapter 1
engines produced by Boulton and Watt between 1775 and 1800,  
14
while   the The Cambridge   Economic History   of   Europe [1965]  
                                                                                                           
provides data on the spread of total horsepower between 1800 and  
of Boulton in Watt’s enterprise is drawn from Mantoux [1905]. A
1815   and   the   spread   of   steam power more   broadly. However,  
lively description of the real Watt, as well of his legal wars against
Kanefsky [1979] has largely discredited the Lord numbers, and the
Hornblower – and many other – and of how he subsequently used
figures we quote on number of machines and horsepower are from  
his status to alter the public memory of the facts, can be found in
Kanefsky and Robey [1980]. The 100,000 horsepower estimate for
Marsden [2004]. That Pickard’s patent was unjust is also the view
1815 is the average of   the figures they give for 1800 and 1830.  
of Selgin and Turner (2006), who, like Watt, do not seem to
These two studies together with that of Smith [1977-78] provide a  
provide any evidence of why it was so.
careful   historical   account   of   the detrimental   impact   of   the  
As both the Lord and Carnegie works are out of copyright,
Newcomen’s and of the Watt’s patents on the rate of adoption of the
both are available online at the very good Rochester site on the
steam technology. Data of the fuel efficiency, the “duty,” of steam
history of steam power www.history.rochester.edu/steam. Later
engines is from Nuvolari [2004]. The story about Pickard’s patent
drafts of this chapter benefited enormously from the arrival of
blocking adoption by Watt is told in von Tunzelmann [1978]. The
Google Book Search, which allowed us to check so many original
quotation about the fortunes of Boulton and Watt after the expiration
historical sources about James Watt and the steam engine we
of the Watt patents is taken from Thompson [1847] p. 110 and is
would have never thought possible.
quoted in Lord [1923]. Scherer’s quotation about Boulton and Watt  
4
is from the pages 24-25 of Scherer [1984], while Scherer [1965] is
Lord [1923] gives figures on the number of steam engines
the source of the break-even point estimate reported a little earlier.
produced by Boulton and Watt between 1775 and 1800, while the
As both the Lord and Carnegie works are out of copyright,
The Cambridge Economic History of Europe [1965] provides data
both are available online at  the very good Rochester  site on the  
on the spread of total horsepower between 1800 and 1815 and the
history  of   steam  power  www.history.rochester.edu/steam.  Later
spread of steam power more broadly. However, Kanefsky [1979]
drafts  of   this  chapter  benefited  enormously  from  the   arrival  of
has largely discredited the Lord numbers, which is why we use
Google Book Search, which allowed us to check so many original
figures on machines and horsepower from Kanefsky and Robey
historical  sources about  James Watt  and the steam engine as we
[1980].
would have never thought possible before.
Our horsepower calculations are based on 510 steam
 
engines generating about 5,000 horsepower in the U.K. in 1760.
Information on U.S.  Patent  Law can be  found at  the U.S.
During the subsequent forty years we estimate that about 1,740
Patent Office at www.uspto.gov/main/patents.htm. The Sony Bono
engines generating about 30,000 horsepower were added. This
Copyright  Extension  Act  can  be  found  online  at
gives our estimate that the total increased at a rate of roughly 750
library.thinkquest.org/J001570/sonnybonolaw.html, while the Berne
horsepower each year. For 1815 we estimate about 100,000
Convention  on  Copyright  can  be  found  at
horsepower – that is, the average of the figures Kanefsky and
www.law.cornell.edu/treaties/berne/. A useful discussion of fair use,  
Robey [1980] give for 1800 and 1830. This together with the
including parodies, is Gall [2000].
35,000 horsepower we estimate for 1800 gives our estimate that
For  the statistical  evidence about  leading drugs keeping a
the total increased at a rate of roughly 4,000 horsepower each year
large share of the market long after generic imitators are allowed to
after 1800.
enter see, for example, Caves et al [1991]
Data on the fuel efficiency, the “duty,” of steam engines is
The quote about patents being the reward is taken from The
from Nuvolari [2004b].
Economist, June 23rd
2001, page 42, with italics added.  
5
13Boldrin & Levine: Against Intellectual Monopoly, Chapter 1
Kanefsky and Robey [1980] together with Smith [1977-78]
The U.S. Constitution, not  being copyrighted,  is online at
provide a careful historical account of the detrimental impact of the
various places, such as http://www.law.cornell.edu/constitution.
Newcomen’s, first, and of Watt’s patents, later, on the rate of
We are most grateful to George Selgin and John Turner, of
adoption of steam technology. Apart from the books just quoted,
the University of Georgia Terry College of Business, for pointing
information about the Hornblower’s engine and its relation toBoldrin & Levine: Against Intellectual Monopoly, Chapter 1
out a number of factual mistakes and imprecisions in our rendition
15
of the James Watt story, as it had appeared in earlier versions of this
                                                                                                           
chapter and in our 2003 Lawrence R.  Klein Lecture,  published  in
Watt’s are widely available through easily accessible web sites,
[2004].
such as Encyclopedia Britannica, Wikipedia, and so on. Some
details of Hornblower’s invention may be of interest. It was
patented in 1781 and consisted of a steam engine with two
cylinders, significantly more efficient than the Boulton and Watt
design. Boulton and Watt challenged his invention, claiming
infringement of their patent because Hornblower engine used a
separate condenser, and won. With the 1799 judicial decision
against him, Hornblower had to pay Boulton and Watt a substantial
amount of money for past royalties, while losing all opportunities
to further develop the compound engine. His compound steam
engine principle was not revived until 1804 by Arthur Woolf. It
became one of the main ingredients in the efficiency explosion that
followed the expiration of Boulton and Watt’s patent.
Watt’s low-pressure engines were a dead end for further
development; history shows that high-pressure, non-condensing
engines were the way forward. Boulton and Watt’s patent,
covering all kinds of steam engines prevented anyone from
working seriously on the high-pressure version until 1800. This
included William Murdoch, an employee of Boulton and Watt,
who had developed a version of the high-pressure engine in the
early 1780s. He named it the “steam carriage” and was legally
barred from developing it by Boulton and Watt’s successful
addition of the high-pressure engine to their patent, although
Boulton and Watt never spent a cent to develop it. For the details
of this story the reader should check the on line site Cotton Times
at http://www.cottontimes.co.uk/ or Carnegie [1905, pp. 140-141].
The “William Murdoch” entry in Wikipedia provides a good
summary. More generally various researchers directly connect
Murdoch to Trevithick, who is now considered the official
“inventor” (in 1802) of the high-pressure engine. Quite plainly, the
evidence suggests that Boulton and Watt’s patent retarded the
high-pressure steam engine, and hence economic development, of
about 16 years.
6
  The story about Pickard’s patent blocking adoption by Watt is
told in von Tunzelmann [1978].
7
Thompson [1847] p. 110 and quoted also in Lord [1923].
8 Scherer [1984] pp. 24-25. Boldrin & Levine: Against Intellectual Monopoly, Chapter 1
16
                                                                                                           
9
U.S. District Court for Eastern District of Virginia Plaintiff NTP,
Inc. v. Defendant Research In Motion Ltd. Civil Action Number
3:01CV767-JRS.
10
  U.S. Patent 6219694.
11
United States Court of Appeals for the 9th
Circuit Court, In Re:
Napster.
12
  Stephen Manes [2004] .
13
  Lessig [2004].
14
14
Robert Barro and Xavier Sala-i-Martin [1999] p. 290.
15
The Economist, June 23rd
2001, page 42, with italics added.
16
Information on U.S. Patent Law can be found at the U.S. Patent
Office at www.uspto.gov/main/patents.htm. In addition to utility
and design patents, there is also a third class of patent, the plant
patent. Like a utility patent, a plant patent lasts 20 years.
17
The Sony Bono Copyright Extension Act can be found online at
library.thinkquest.org/J001570/sonnybonolaw.html, while the
Berne Convention on Copyright can be found at
www.law.cornell.edu/treaties/berne/. A useful discussion of fair
use, including parodies, is Gall [2000].
18
U.S. Constitution Article 1, Section 8. The U.S. Constitution, not
being copyrighted, is online at various places, such as
http://www.law.cornell.edu/constitution.
19
The $218 movie was Tarnation and the information from BBC
News, is at http://news.bbc.co.uk/2/hi/entertainment/3720455.stm.
20
Machlup [1958], p. 80. He nevertheless concluded that we
should keep the patent system. We discuss his position further in
our conclusion.

Versio 24. huhtikuuta 2009 kello 11.36

Chapter 1: Introduction

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Boldrin & Levine: Against Intellectual Monopoly, Chapter 1 1 Chapter 1: Introduction In 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, requiring him to travel to London in August. He spent the next six months working hard to obtain his patent. It was finally awarded in January of the following year. Nothing much happened by way of production until 1775. Then, with a major effort supported by his business partner, the rich industrialist Matthew Boulton, Watt secured an Act of Parliament extending his 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 secured and 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.” 2 More dramatically, in the 1790s, when the superior Hornblower engine was put into production, Boulton and Watt went after him with the full force of the legal system. 3 During the period of Watt’s patents the U.K. added about 750 horsepower of steam engines per year. In the thirty years following Watt’s patents, additional horsepower was added at a rate of more than 4,000 per year. Moreover, the fuel efficiency of steam engines changed little during the period of Watt’s patent; while between 1810 and 1835 it is estimated to have increased by a factor of five. 4 After the expiration of Watt’s patents, not only was there an explosion in the production and efficiency of engines, but steam power came into its own as the driving force of the industrial revolution. Over a thirty year period steam engines were modified and improved as crucial innovations such as the steam train, the steamboat and the steam jenny came into wide usage. The key innovation was the high-pressure steam engine – development of which had been blocked by Watt’s strategic use of his patent.Boldrin & Levine: Against Intellectual Monopoly, Chapter 1 2 Many new improvements to the steam engine, such as those of 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 Hornblower. 5 Ironically, 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 by James Pickard, which prevented Watt from using it. Watt also made various attempts at efficiently 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. 6 The impact of the expiration of his patents on Watt’s empire may come as a surprise. As might be expected, when the patents expired “many establishments for making steam-engines of Mr. Watt's principle were then commenced.” However, Watt’s competitors “principally aimed at...cheapness rather than excellence.” As a result, we find that far from being driven out of business “Boulton and Watt for many years afterwards kept up their price and had increased orders.” 7 In 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 royalties through licensing. Independent contractors produced most of the parts, and Boulton and Watt merely oversaw the assembly of the components by the purchasers. In most histories, James Watt is a heroic inventor, responsible for the beginning of the industrial revolution. The facts suggest 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 partnerBoldrin & Levine: Against Intellectual Monopoly, Chapter 1 3 was a wealthy man with strong connections in Parliament, was not a minor help. Was Watt’s patent a crucial incentive needed to trigger his inventive genius, as the traditional history suggests? Or did his use of the legal system to inhibit competition set back the industrial revolution by a decade or two? More broadly, are the two essential components of our current system of intellectual property – patents and copyrights – with all of their many faults, a necessary evil we must put up with to enjoy the fruits of invention and creativity? Or are they just unnecessary evils, the relics of an earlier time when governments routinely granted monopolies to favored courtiers? That is the question we seek to answer. 

In the specific case of Watt, the granting of the 1769 and

especially of the 1775 patents likely delayed the mass adoption of the steam engine: innovation was stifled until his patents expired; and few steam engines were built during the period of Watt’s legal monopoly. From the number of innovations that occurred immediately after the expiration of the patent, it appears that Watt’s competitors simply waited until then before releasing their own innovations. This should not surprise us: new steam engines, no matter how much better than Watt’s, had to use the idea of a separate condenser. Because the 1775 patent provided Boulton and Watt with a monopoly over that idea, plentiful other improvements of great social and economic value could not be implemented. By the same token, until 1794 Boulton and Watt’s engines were less efficient they could have been because the Pickard’s patent prevented anyone else from using, and improving, the idea of combining a crank with a flywheel. Also, we see that Watt’s inventive skills were badly allocated: we find him spending more time engaged in legal action to establish and preserve his monopoly than he did in the actual improvement and production of his engine. From a strictly economic point of view Watt did not need such a long lasting patent – it is estimated that by 1783 – seventeen years before his patent expired – his enterprise had already broken even. Indeed, even after their patent expired, Boulton and Watt were able to maintain a substantial premium over the market by virtue of having been first, despite the fact that their competitors had had thirty years to learn how to make steam engines. The wasteful effort to suppress competition and obtain special privileges is referred to by economists as rent-seeking behavior. History and common sense show it to be a poisoned fruit of legal monopoly. Watt’s attempt to extend the duration of hisBoldrin & Levine: Against Intellectual Monopoly, Chapter 1 4 1769 patent is an especially egregious example of rent seeking: the patent extension was clearly unnecessary to provide incentive for the original invention, which had already taken place. On top of this, we see Watt using patents as a tool to suppress innovation by his competitors, such as Hornblower, Wasborough and others. Hornblower’s engine is a perfect case in point: it was a substantial improvement over Watt’s as it introduced the new concept of the “compound engine” with more than one cyclinder. This, and not the Boulton and Watt design, was the basis for further steam engine development after their patents expired. However, because Hornblower built on the earlier work of Watt, making use of his “separate condenser” Boulton and Watt were able to block him in court and effectively put an end to steam engine development. The monopoly over the “separate condenser,” a useful innovation, blocked the development of another equally useful innovation, the “compound engine,” thereby retarding economic growth. This retardation of innovation is a classical case of what we shall refer to as Intellectual Property-inefficiency, or IP inefficiency for short. Finally, there is the slow rate at which 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 engines, Boulton and Watt hampered capital accumulation and slowed economic growth. The story of James Watt is a damaging case for the benefits of a patent system, but we shall see that it is not an unusual story. A new idea accrues almost by chance to the innovator while he is carrying out a routine activity aimed at a completely different end. The patent comes many years after that and it is due more to a mixture of legal acumen and abundant resources available to “oil the gears of fortune” than anything else. Finally, after the patent protection is obtained, it is primarily used as a tool to prevent economic progress and hurt competitors. While this view of Watt’s role in the industrial revolution may appear iconoclastic, it is neither new nor particularly original. Frederic Scherer, a prestigious academic supporter of the patent system, after going through the details of the Boulton and Watt story, concluded his 1986 examination of their story with the following illuminating words Had there been no patent protection at all,…Boulton and Watt certainly would have been forced to follow a business policy quite different from that which they actuallyBoldrin & Levine: Against Intellectual Monopoly, Chapter 1 5 followed. Most of the firm’s profits were derived from royalties on the use of engines rather than from the sale of manufactured engine components, and without patent protection the firm plainly could not have collected royalties. The alternative would have been to emphasize manufacturing and service activities as the principal source of profits, which in fact was the policy adopted when the expiration date of the patent for the separate condenser drew near in the late 1790s…. It is possible to conclude more definitely that the patent litigation activities of Boulton & Watt during the 1790s did not directly incite further technological progress…. Boulton and Watt’s refusal to issue licenses allowing other engine makers to employ the separate-condenser principle clearly retarded the development and introduction of improvements. 8

The industrial revolution was long ago. But the issue of intellectual property is a contemporary one. At the time we wrote this, U.S. District Judge James Spencer had been threatening for three years to shut down the widely used Blackberry messaging network – over a patent dispute. 9 

And Blackberry itself is not

without sin: in 2001 Blackberry sued Glenayre Electronics for infringing on its patent for “pushing information from a host system to a mobile data communication device.” 10 A similar war is taking place over copyright – the Napster network was shut down by a federal judge in July of 2000 in a dispute over the sharing of copyrighted files. 11 

Emotions run high

on both sides. We have the anti-copyright slogan “information just wants to be free” promoted by some civil libertarians. On the other extreme, large music and software companies argue that a world without intellectual property would be a world without new ideas. Some of the bitterness of the copyright debate is reflected in Stephen Manes’ attack on Lawrence Lessig According to Stanford law professor and media darling Lawrence Lessig, a “movement must begin in the streets” to fight a corrupt Congress, overconcentrated media and an overpriced legal system...Contrary to Lessig's rants...“Fair use” exceptions in existing copyright law...are so expansive that just about the only thing cut-and-pastersBoldrin & Levine: Against Intellectual Monopoly, Chapter 1 6 clearly can't do legally with a copyrighted work is directly copy a sizable portion of it. 12 Certainly Lessig is no friend of current copyright law. Yet, despite Stephen Manes assertions to the contrary, he does believe in balancing the rights of producers with the rights of users: his book Free Culture speaks repeatedly of this balance and how it has been lost in modern law. 13 Like Lessig, many economists are skeptical of current law – seventeen prominent economists, including several Nobel Prize winners, filed a brief with the U.S. Supreme Court in support of Lessig’s lawsuit challenging the extension of the length of copyright. Also like Lessig, economists recognize a role for intellectual property: where lawyers speak of balancing rights, economists speak of incentives. To quote from a textbook by two prominent economists Robert Barro and Xavier Sala-i-Martin It would be [good] to make the existing discoveries freely available to all producers, but this practice fails to provide the...incentives for further inventions. A tradeoff arises between restrictions on the use of existing ideas and the rewards to inventive activity. 14 Indeed, while many of us enjoy the benefits of being able to freely download music from the internet, we worry as well how the musician is to make a living if her music is immediately given away for free. While a furious debate rages over copyrights and patents, there is general agreement that some protection is needed to secure for inventors and creators the fruits of their labors. The rhetoric that “information just wants to be free” suggests that no one should be allowed to profit from her ideas. Despite this, there does not seem to be a strong lobby arguing that while it is ok for the rest of us to benefit from the fruits of our labors, inventors and creators should have to subsist on the charity of others. For all the emotion, it seems both sides agree that intellectual property laws need to strike a balance between providing sufficient incentive for creation and the freedom to make use of existing ideas. Put it differently, both sides agree that intellectual property rights are a “necessary evil” that fosters innovation, and disagreement is over where the line should be drawn. For the supporters of intellectual property, currentBoldrin & Levine: Against Intellectual Monopoly, Chapter 1 7 monopoly profits are barely enough; for its enemies currently monopoly profits are too high. Our analysis leads to conclusions that are at variance with both sides. Our reasoning proceeds along the following lines. Everyone wants a monopoly. No one wants to compete against his own customers, or against imitators. Currently patents and copyrights grant producers of certain ideas a monopoly. Certainly few people do something in exchange for nothing. Creators of new goods are not different from producers of old ones: they want to be compensated for their effort. However, it is a long and dangerous jump from the assertion that innovators deserve compensation for their efforts to the conclusion that patents and copyrights, that is monopoly, are the best or the only way of providing that reward. Statements such as “A patent is the way of rewarding somebody for coming up with a worthy commercial idea” 15 

abound in the

business, legal and economic press. As we shall see there are many other ways in which innovators are rewarded, even substantially, and most of them are better for society than the monopoly power patents and copyright currently bestow. Since innovators may be rewarded even without patents and copyright, we should ask: is it true that intellectual property achieves the intended purpose of creating incentives for innovation and creation that offset their considerable harm? This book examines both the evidence and the theory. Our conclusion is that creators’ property rights can be well protected in the absence of intellectual property, and that the latter does not increase either innovation or creation. They are an unnecessary evil.

This is a book about economics, not about law. Or put differently, it is not about what the law is but rather what the law should be. If you are interested in whether or not you are likely to wind up in jail for sharing your files over the internet, this is not the book for you. If you are interested in whether it is a good idea for 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, some background on the law is necessary to understanding the economic issues. We are going to examine the economics of what has, in recent years, come to be called “intellectual property,” especially patents and copyright. In fact, there are three broad types ofBoldrin & Levine: Against Intellectual Monopoly, Chapter 1 8 intellectual property recognized in most legal systems: patents, copyrights and trademarks. Trademarks 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 – is quite different from lying – which would be a violation of trademark. We do not know of a good reason for allowing market participants to steal identities or masquerade as people they are not. Conversely, 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 there is little economic dispute over the merits of trademarks. Patents and copyrights, the two forms of intellectual property on which we focus, are a subject of debate and controversy. 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 do 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 they independently rediscover it, without permission from the patent holder. 16 Copyrights are narrower in scope, protecting only the specific details of a particular narrative – although as with the case of patents, the scope has been increasing in recent years. Copyright is 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. 17 In the U.S. there are limitations on copyright not present in patent law. As Stephen Manes correctly points out in his attack on Lawrence 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 not. In the case of both patents and copyright, from the point of view of economics, there are two ingredients in the law: the right to buy and sell copies of ideas, and the right to control how other people make use of their copies. The first right is not controversial.Boldrin & Levine: Against Intellectual Monopoly, Chapter 1 9 In copyright law, when applied to the creator this right is sometimes called the “right of first sale.” However, it extends also to the legitimate rights of others to sell their copies. It is the second right, enabling the owner to control the use of intellectual property after sale, that is controversial. This right produces a monopoly – enforced by the obligation of the government to act against individuals or organizations that use the idea in ways prohibited by the copyright or patent holder. In addition to the well-known forms of intellectual property – patents and copyright – there are also lesser-known ways of protecting ideas. These include contractual agreements, such as the shrink-wrap and click-through agreements that you never read when you buy software. They also include the most traditional form of protection – trade secrecy – as well as its contractual and legal manifestations such as non-disclosure agreements. Like patents and copyright all of these devices serve to help the originator of an idea maintain a monopoly over it. We do not know of any legitimate argument that producers of ideas should not be able to profit from their creations. While ideas could be sold in the absence of a legal right, markets function best in the presence of clearly defined property rights. Not only should the property rights of innovators be protected but also the rights of those who have legitimately obtained a copy of the idea, directly or indirectly, from the original innovator. The former encourages innovation, the latter encourages the diffusion, adoption and improvement of innovations. Why, however, should creators have the right to control how purchasers make use of an idea or creation? This gives creators a monopoly over the idea. We refer to this right as “intellectual monopoly,” to emphasize that it is this monopoly over all copies of an idea that is controversial, not the right to buy and sell copies. The government does not ordinarily enforce monopolies for producers of other goods. This is because it is widely recognized that monopoly creates many social costs. Intellectual monopoly is no different in this respect. The question we address is whether it also creates social benefits commensurate with these social costs.

The U.S. Constitution allows Congress “To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respectiveBoldrin & Levine: Against Intellectual Monopoly, Chapter 1 10 writings and discoveries.” 18 

Our perspective on patents and

copyright is a similar one: promoting the progress of science and the useful arts is a crucial ingredient of economic welfare, from solving such profound economic problems as poverty, to such mundane personal nuisances as boredom. From a social point of view, and in the view of the founding fathers, the purpose of patents and copyrights is not to enrich the few at the expense of the many. Nobody doubts that J. K. Rowling and Bill Gates have been greatly enriched by their intellectual property – nor is it surprising that they would argue in favor of it. But common sense and the U.S. Constitution say that these rights must be justified by bringing benefits to all of us. The U.S. Constitution is explicit that what is to be given to authors and inventors is an exclusive right – a monopoly. Implicit is the idea that giving this monopoly serves to promote the progress of science and useful arts. The U.S. Constitution was written in 1787. At that time, the idea of copyright and patent was relatively new, the products to which they applied few, and their terms short. In light of the experience of the subsequent 219 years we might ask: is it true that legal grants of monopoly serve to promote the progress of science and the useful arts? Certainly common sense suggests that it should. How is a musician to make a living if the moment she performs her music, everyone else can copy and give it away for free? Why would the large corporations pay the small inventor when they can simply take his idea? It is hard to imagine life without the internet, and today we are all jet setters. Is not the explosion of creativity and invention unleashed since the writing of the U.S. Constitution a testimony to the powerful benefit of intellectual property? Would not the world without patent and copyright be a sad cold world, empty of new music and of marvelous new inventions? So the first question we will pose is what the world might be like without intellectual monopoly. Patents and copyrights have not secured monopolies on all ideas at all times. It is natural then to examine times and industries in which legal protection for ideas have not been available to see whether innovation and creativity were thriving or were stifled. It is the case, for example, that neither the internet nor the jet engine were invented in hopes of securing exclusive rights. In fact, we ordinarily think of “innovative monopoly” as an oxymoron. We shall see that when monopoly over ideas is absent, competition is fierce – and that as a result innovation and creativity thrive. Whatever a world withoutBoldrin & Levine: Against Intellectual Monopoly, Chapter 1 11 patents and copyrights would be like, it would not be a world devoid of great new music and beneficial new drugs. You will gather by now that we are skeptical of monopoly – as are economists in general. Our second topic will be an examination of the many social costs created by copyrights and patents. Adam Smith – a friend and teacher of James Watt – was one of the first economists to explain how monopolies make less available at a higher price. In some cases, such as the production of music, this may not be a great social evil; in other cases such as the availability of AIDS drugs, it may be a very great evil indeed. However, as we shall see, low availability and high price is only one of the many costs of monopoly. The example of James Watt is a case in point: by making use of the legal system, he inhibited competition and prevented his competitors from introducing useful new advances. We shall also see that because there are no countervailing market forces, government-enforced monopolies such as intellectual monopoly are particularly problematic. While monopoly may be evil, and while innovation may thrive in the absence of traditional legal protections such as patents and copyrights, it may be that patents and copyrights serve to increase innovation. The presumption in the U.S. Constitution is that they do, and that the benefits of more entertainment and more innovation outweigh the costs of these monopolies. Certainly the monopolies created by patents and copyright may be troublesome – but if that is the cost of having blockbuster movies, automobiles and flu vaccine, most of us are prepared to put up with it. That is the position traditionally taken by economists, most of whom support patents and copyright, at least in principle. Some of them take the view that intellectual monopoly is an unavoidable evil if we are to have any innovation at all; other simply argue that at least some modest amount of intellectual monopoly is desirable to provide adequate incentive for innovation and creation. Our third topic will be an examination of the theoretical arguments supporting intellectual monopoly, as well as counter-arguments about why intellectual monopoly may hurt rather than foster creative activity. It is crucial to recognize that intellectual monopoly is a double-edged sword. The rewards to innovative effort are certainly greater if success is awarded a government monopoly. But the existence of monopolies also increases the cost of creation. In one extreme case, a movie that cost $218 to make had to pay $400,000 for the music rights. 19 

As we will argue at length, theoreticalBoldrin & Levine: Against Intellectual Monopoly, Chapter 1

12 arguments alone cannot tell us if intellectual monopoly increases or decreases creative activity. In the final analysis, the only justification for intellectual property is that it increases – de facto and substantially – innovation and creation. What have the last 219 years taught us? Our final topic is an examination of the evidence about intellectual monopoly and innovation. Is it a fact that intellectual monopoly leads to more creativity and innovation? Our examination of the data shows no evidence that it does. Nor are we the first economists to reach this conclusion. After reviewing an earlier set of facts in 1958, the distinguished economist Fritz Machlup wrote “it would be irresponsible, on the basis of our present knowledge of its economic consequences, to recommend instituting [a patent system].”20 Since there is no evidence that intellectual monopoly achieves the desired purpose of increasing innovation and creation, it has no benefits. So there is no need for society to balance the benefits against the costs. This leads us to our final conclusion: intellectual property is an unnecessary evil.Boldrin & Levine: Against Intellectual Monopoly, Chapter 1 13 Comments We are grateful to George Selgin and John Turner, of the University of Georgia Terry College of Business, for pointing out a number of factual mistakes and imprecisions in our rendition of the James Watt story, as it had appeared in earlier versions of this chapter and in our 2003 Lawrence R. Klein Lecture, published in Boldrin and Levine [2004]. In a recent article, Selgin and Turner [2006], also take issue with our interpretation of the facts and add a few additional ones that, in their view, contradict our vision of James Watt as a primary example of an intellectual monopolist. It seems clear, even from the references quoted by Selgin and Turner, that many students of the Industrial Revolution share our view – more properly: we shared theirs. Selgin and Turner’s argument and facts do not, however, address the issues we raise about Boulton and Watt. Take their discussion of the hypothetical “Watt sans patent.” Obviously Boulton and Watt fought hard for their patents, and obviously they claimed innovation would have been impossible without them. Our point is another: could they have made enough money to compensate their opportunity cost without the patent? All the evidence, including that reported by Selgin and Turner, suggests this is the case. In fact they make our case quite convincingly: quoting F.M. Scherer they assert that seventeen years before the second patent expired they, Boulton and Watt, were already breaking even. In economics, “breaking even” means that your opportunity costs have been paid, and your capital has received the risk-adjusted, expected return, and Scherer is a distinguished economist. Whatever profits Boulton and Watt made after that, were all extra rents due to monopoly power and, economically, not needed to pay their opportunity costs. So, we all agree that, at least for the final 17 years, the patent was not serving a useful economic purpose, hence it was damaging because it created monopoly distortions. Notes

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]. Information on the roleBoldrin & Levine: Against Intellectual Monopoly, Chapter 1 14

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 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 view of Selgin and Turner (2006), who, like Watt, do not seem to provide 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 the history of steam power www.history.rochester.edu/steam. Later drafts of this chapter benefited enormously from the arrival of Google Book Search, which allowed us to check so many original historical sources about James Watt and the steam engine we would have never thought possible. 4 

Lord [1923] gives figures on the number of steam engines

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, which is why we use figures on machines and horsepower from Kanefsky and Robey [1980]. Our horsepower calculations are based on 510 steam engines generating about 5,000 horsepower in the U.K. in 1760. During the subsequent forty years we estimate that about 1,740 engines generating about 30,000 horsepower were added. This gives our estimate that the total increased at a rate of roughly 750 horsepower each year. For 1815 we estimate about 100,000 horsepower – that is, the average of the figures Kanefsky and Robey [1980] give for 1800 and 1830. This together with the 35,000 horsepower we estimate for 1800 gives our estimate that the total increased at a rate of roughly 4,000 horsepower each year after 1800. Data on the fuel efficiency, the “duty,” of steam engines is from 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 Watt’s patents, later, on the rate of adoption of steam technology. Apart from the books just quoted, information about the Hornblower’s engine and its relation toBoldrin & Levine: Against Intellectual Monopoly, Chapter 1 15

Watt’s are widely available through easily accessible web sites, such as Encyclopedia Britannica, Wikipedia, and so on. Some details of Hornblower’s invention may be of interest. It was patented in 1781 and consisted of a steam engine with two cylinders, significantly more efficient than the Boulton and Watt design. Boulton and Watt challenged his invention, claiming infringement of their patent because Hornblower engine used a separate condenser, and won. With the 1799 judicial decision against him, Hornblower had to pay Boulton and Watt a substantial amount of money for past royalties, while losing all opportunities to further develop the compound engine. His compound steam engine principle was not revived until 1804 by Arthur Woolf. It became one of the main ingredients in the efficiency explosion that followed the expiration of Boulton and Watt’s patent. Watt’s low-pressure engines were a dead end for further development; history shows that high-pressure, non-condensing engines were the way forward. Boulton and Watt’s patent, covering all kinds of steam engines prevented anyone from working seriously on the high-pressure version until 1800. This included William Murdoch, an employee of Boulton and Watt, who had developed a version of the high-pressure engine in the early 1780s. He named it the “steam carriage” and was legally barred from developing it by Boulton and Watt’s successful addition of the high-pressure engine to their patent, although Boulton and Watt never spent a cent to develop it. For the details of this story the reader should check the on line site Cotton Times at http://www.cottontimes.co.uk/ or Carnegie [1905, pp. 140-141]. The “William Murdoch” entry in Wikipedia provides a good summary. More generally various researchers directly connect Murdoch to Trevithick, who is now considered the official “inventor” (in 1802) of the high-pressure engine. Quite plainly, the evidence suggests that Boulton and Watt’s patent retarded the high-pressure steam engine, and hence economic development, of about 16 years. 6 

 The story about Pickard’s patent blocking adoption by Watt is

told in von Tunzelmann [1978]. 7 

Thompson [1847] p. 110 and quoted also in Lord [1923].

8 Scherer [1984] pp. 24-25. Boldrin & Levine: Against Intellectual Monopoly, Chapter 1 16

9 

U.S. District Court for Eastern District of Virginia Plaintiff NTP,

Inc. v. Defendant Research In Motion Ltd. Civil Action Number 3:01CV767-JRS. 10 

U.S. Patent 6219694.

11 

United States Court of Appeals for the 9th
Circuit Court, In Re:

Napster. 12 

Stephen Manes [2004] .

13 

Lessig [2004].

14 

Robert Barro and Xavier Sala-i-Martin [1999] p. 290.

15 

The Economist, June 23rd
2001, page 42, with italics added.

16 

Information on U.S. Patent Law can be found at the U.S. Patent

Office at www.uspto.gov/main/patents.htm. In addition to utility and design patents, there is also a third class of patent, the plant patent. Like a utility patent, a plant patent lasts 20 years. 17 

The Sony Bono Copyright Extension Act can be found online at

library.thinkquest.org/J001570/sonnybonolaw.html, while the Berne Convention on Copyright can be found at www.law.cornell.edu/treaties/berne/. A useful discussion of fair use, including parodies, is Gall [2000]. 18 

U.S. Constitution Article 1, Section 8. The U.S. Constitution, not

being copyrighted, is online at various places, such as http://www.law.cornell.edu/constitution. 19 

The $218 movie was Tarnation and the information from BBC

News, is at http://news.bbc.co.uk/2/hi/entertainment/3720455.stm. 20 

Machlup [1958], p. 80. He nevertheless concluded that we

should keep the patent system. We discuss his position further in our conclusion.

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