Against Intellectual Monopoly: Chapter 1

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Luku 1: Johdanto

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Vuoden 1764 loppupuolella, korjatessaan pientä Newcomen-höyrykonetta, James Wattin mieleen tuli ajatus erillisissä astioissa laajenevasta höyrystä. Muutamat seuraavat kuukaudet hän uurasti lakkaamatta rakentaakseen mallin uudesta koneesta. Vuoden 1768 elokuussa, useiden parannusten ja huomattavan lainanottamisen jälkeen, hän matkusti Lontooseen hakemaan patenttia idealleen. Hän teki seuraavat kuusi kuukautta paljon työtä patentin eteen. Seuraavan vuoden tammikuussa se vihdoinkin myönnettiin. Tuotannon osalta ei tapahtunut juuri mitään ennen vuotta 1775. Silloin, yhteistyökumppaninsa, rikkaan teollisuusmiehen Matthew Boultonin tuella, Watt sai parlamentin myöntämään patentille jatkoaikaa vuoteen 1800 asti. Suuri valtiomies Edmund Burke puhui parlamentin edessä kaunopuheisesti taloudellisen vapauden nimissä tarpeettoman monopolin luomista vastaan – ilman vaikutusta.¹ Wattin kumppanin Boultonin yhteydet olivat liian vahvoja tullakseen voitetuksi pelkän periaatteen avulla.

Kun Wattin patentti oli varmistettu ja tuotanto aloitettu, huomattava osa hänen energiastaan kului kilpailevien keksijöiden torjumiseen. Vuonna 1782 Watt varmisti itselleen ylimääräisen patentin, joka tuli ”tarpeelliseksi sen seurauksena, kun [Matthew] Wasborough ennätti niin epäreilusti kehittää ensimmäisenä kampiliikkeen”.² Vieläkin dramaattisemmin 1790-luvulla, kun ylivoimainen ja itsenäisesti suunniteltu Hornblower-moottori saatettiin tuotantoon, Boulton ja Watt kävivät sen kimppuun koko oikeusjärjestelmän voimalla.³

Wattin patenttien aikakaudella Iso-Britanniassa höyrykoneiden yhteenlaskettu teho lisääntyi 750 hevosvoimalla vuosittain. 30 vuotena patenttien jälkeen lisää tehoa tuli yli 4000 hevosvoimaa vuosittain. Sen lisäksi höyrykoneiden polttoainehyötysuhde muuttui vain vähän Wattin patentin aikana, kun taas vuosien 1810 ja 1835 välillä sen on arvioitu parantuneen viisinkertaiseksi.⁴

Kun Wattin patentit raukesivat, ei koettu pelkästään räjähdysmäistä kasvua höyrykoneiden tuotannossa ja tehossa, mutta höyryenergiasta tuli viimeinkin teollista vallankumousta eteenpäin ajava voima. Seuraavan 30 vuoden aikana höyrykoneita muunneltiin ja paranneltiin, ja olennaiset keksinnöt kuten höyryjuna, höyrylaiva ja höyryllä toimiva kehruukone tulivat yleiseen käyttöön. Olennainen innovaatio oli korkeapaineinen höyrykone – kehitys jonka Watt esti strategisesti patenttiaan käyttämällä. Monet uudet parannukset höyrykoneeseen, kuten esimerkiksi William Bullin, Richard Trevithickin ja Arthur Woolfin, tulivat saataville vuonna 1804: vaikkakin ne oli kehitetty jo aikaisemmin, niitä ei voitu ottaa käyttöön ennen kun Boultonin ja Wattin patentti oli rauennut. Kukaan näistä keksijöistä ei halunnut samaa kohtaloa kuin Jonathan Hornblower.⁵

Ironisesti, sama patenttijärjestelmä, jota Watt käytti kilpailijoidensa murskaamiseen, haittasi myös hänen omaa työtään paremman höyrykoneen kehittämisessä. Olennainen rajoite alkuperäisessä Newcomenin moottorissa oli kyvyttömyys tuottaa tasaista pyörivää liikettä. Kätevin ratkaisu ongelmaan, jossa yhdistyi kampi ja vauhtipyörä, riippuivat rakennustavasta, jonka James Pickard oli patentoinut, mikä esti Wattia käyttämästä sitä. Watt teki myös itse useita yrityksiä tehokkaamman voimansiirron kehittämiseksi, ilmeisesti päätyen kuitenkin samaan lopputulokseen kuin Pickard. Patentin olemassaolo pakotti Wattin kehittämään tehottomamman ”aurinko ja planeetta” -vaihteiston. Vasta vuonna 1794, Pickardin patentin rauettua, Boulton ja Watt ottivat käyttöön taloudellisesti ja teknisesti ylivoimaisen kammen.⁶

Wattin patenttien raukeamisen vaikutus hänen imperiumilleen voi myös tulla yllätyksenä. Kuten saattoi odottaa, patenttien rauetessa ”useita höyrykoneita valmistavia yrityksiä perustettiin, jotka käyttivät herra Wattin kehittämiä periaatteita”. Kuitenkin Wattin kilpailijat ”pääasiallisesti tähtäsivät ennemminkin halpuuteen kuin laatuun.” Lopputuloksena voimme havaita, että heitä ei suinkaan ajettu markkinoilta, vaan ”useita vuosia jälkeenpäin Boulton ja Watt pitivät hintojaan ylhäällä ja saivat silti enemmän tilauksia.”⁷

Itseasiassa vasta sen jälkeen, kun heidän patenttinsa raukesi, alkoivat Watt ja Boulton todenteolla valmistamaan höyrykoneita. Sitä ennen he lähinnä keskittyivät suurten monopolististen rojaltien keräämiseen lisenssien avulla. Aliurakoitsijat tuottivat suurimman osan osista, ja Boulton ja Watt lähinnä valvoivat, kun asiakkaat kokosivat komponentit.

Suuressa osassa historiikkeja James Wattia pidetään sankarillisena keksijänä, vastuullisena teollisen vallankumouksen alkamisesta. Faktat viittaavat toisenlaiseen tulkintaan. Watt oli yksi monista höyryvoimaa kehitelleistä älykkäistä keksijöistä 1700-luvun loppupuoliskolla. Sen jälkeen kun hän pääsi askeleen edemmäs muita, hän pysyi siellä – ei paremman innovaation, vaan tehokkaamman oikeusjärjestelmän hyväksikäytön ansiosta. Eikä siitä, että hänen yhteistyökumppaninsa oli rikas mies, jolla oli vahvoja yhteyksiä parlamenttiin, ollut ainoastaan pientä apua.

Oliko Wattin patentti ratkaiseva kannustin, joka tarvittiin tuomaan esille hänen sisäinen keksijänsä, kuten perinteisesti historiankirjat ehdottavat? Vai myöhästyttikö hänen oikeusjärjestelmän hyväksikäyttönsä kilpailun tukahduttamiseksi teollista vallankumousta vuosikymmenen tai kaksi? Vielä laajemmin, ovatko kaksi olennaista nykyisen immateriaalioikeutemme osaa – patentit ja tekijänoikeudet – lukuisine vikoineen, välttämätön paha jota meidän on ylläpidettävä nauttiaksemme keksimisen ja luomisen hedelmistä? Vai ovatko ne vain täysin turhia, jäännöksiä ajalta jolloin valtiot myönsivät rutiininomaisesti monopoleja suosituille ylhäisille? Tähän kysymykseen etsimme vastausta.

Wattin tapauksessa vuoden 1769 ja erityisesti vuoden 1775 patentit todennäköisesti myöhästyttivät höyrykoneen laajaa käyttöönottoa: kehitys tukahtui kunnes Wattin patentti raukesi, ja hyvin harvoja höyrykoneita rakennettiin hänen monopolinsa aikana. Välittömästi patentin raukeamisen jälkeen tapahtuneiden keksintöjen määrästä voimme päätellä, että Wattin kilpailijat vain odottivat ennen omien keksintöjensä julkistamista. Tämän ei pitäisi tulla yllätyksenä: uusien höyrykoneiden, olivat ne kuinka paljon Wattin koneita parempia, piti käyttää erillistä lauhdutinta. Koska vuoden 1775 patentti tarjosi Boultonille ja Wattille monopolin kyseiselle idealle, monet muut sosiaalisesti ja taloudellisesti arvokkaat muutokset jäivät ottamatta käyttöön. Samalla tavalla, vuoteen 1794 asti Boultonin ja Wattin koneet olivat tehottomampia kuin ne olisivat voineet olla, koska Pickardin patentti esti käyttämästä ja parantamasta ideaa kammen ja vauhtipyörän yhdistelmästä.

Näemme myös kuinka huonosti Wattin keksijäntaidot olivat huonosti allokoitu: huomaamme hänen käyttäneen enemmän aikaa lakijärjestelmän parissa muodostaakseen ja säilyttääkseen monopolinsa kuin hän käytti aikaa varsinaiseen koneensa paranteluun ja tuotantoon. Taloudellisesta näkökulmasta katsoen Watt ei olisi tarvinnut niin pitkään kestänyttä patenttia – on arvioitu että vuoteen 1783 mennessä – 17 vuotta ennen hänen patenttinsa raukeamista – hänen yrityksensä oli päässyt omilleen. Edelleen patentin raukeamisen jälkeen Boulton ja Watt kykenivät ylläpitämään huomattavaa markkinaosuutta, vain koska olivat ensimmäisiä, huolimatta siitä faktasta että heidän kilpailijoillaan oli 30 vuotta aikaa oppia tekemään höyrykoneita.

Vahingollista yritystä tukahduttaa kilpailua ja hankkia erityisiä etuoikeuksia kutsutaan taloustieteilijöiden piirissä ylivoiton tavoitteluksi (rent-seeking). Historia ja arkijärki ovat osoittaneet sen olevan laillisen monopolin myrkyllinen hedelmä. Wattin yritys jatkaa hänen vuoden 1769 patenttiaan on erityisen törkeä esimerkki ylivoiton tavoittelusta: patentin jatkaminen oli selkeästi tarpeeton antamaan kannustin alkuperäiselle keksinnölle, joka oli jo tapahtunut. Sen lisäksi näemme, kuinka Watt käyttää patentteja työkaluna kilpailijoidensa, kuten Hornblowerin, Wasburoughin ja muiden innovaatioiden tukahduttamiseksi.

Hornblowerin kone on täydellinen esimerkki asiasta: se oli huomattava parannus Wattiin verrattuna, koska se esitteli uuden käsitteen ”compound enginestä” jossa oli enemmän kuin yksi sylinteri. Tämä, eikä Boultonin ja Wattin malli, oli pohjana höyrykoneiden kehitykselle sen jälkeen, kun heidän patenttinsa oli rauennut. Kuitenkin, koska Hornblower rakensi Wattin aiemman työn pohjalta käyttäen hyväksi ”erillistä höyrystintä”, Boulton ja Watt pystyivät pysäyttämään hänet oikeusteitse ja laittamaan tehokkaasti lopun höyrykonekehitykselle. Monopoli ”erilliselle höyrystimelle”, eli hyödylliselle innovaatiolle, esti samalla tavalla hyödyllisen innovaation, eli ”compound enginen” kehitystä, hidastaen täten taloudellista kasvua. Tällainen innovaation hidastaminen on klassinen esimerkki siitä, mitä kutsumme aineettoman omaisuuden tehottomuudeksi, tai IP-tehottomuudeksi lyhyemmin.

Lopuksi, höyrykone otettiin käyttöön hitaassa tahdissa ennen Wattin patentin raukeamista. Pitämällä hinnat korkealla ja estämällä muita tuottamasta halvempia ja parempia höyrykoneita, Boulton ja Watt vaikeuttivat pääoman kasautumista ja hidastivat talouskasvua.

James Wattin tarina on vahingollinen tapaus patenttijärjestelmän hyödyllisyydelle, mutta me tulemme näkemään, ettei se ole epätavallinen. Uusi idea kehittyy melkeinpä sattumalta keksijälle kun hän on rutiininomaisesti toimimassa jonkin aivan toisenlaisen lopputuloksen saamiseksi. Patentti tulee vasta vuosia sen jälkeen ja se johtuu enemmänkin lainopillisen terävyyden sekä käytettävissä olevien resurssien käyttäminen ”hyvän onnen rattaiden voitelemiseen” kuin minkään muun. Viimein, kun patenttisuoja on hankittu, käytetään sitä usein työkaluna taloudellisen kasvun estämiseen ja kilpailijoiden satuttamiseen.

Vaikka näkemys, jota tässä esitämme, voi vaikuttaa ikonisoivalta, se ei ole varsinaisesti uusi, eikä erityisemmin alkuperäinen. Frederic Scherer, patenttijärjestelmän arvovaltainen akateeminen tukija, tutkittuaan Boultonin ja Wattin tarinaa, totesi vuonna 1986 seuraavanlaisesti: Jos patenttisuojausta ei olisi ollut olemassa, ... Boulton ja Watt olisivat varmasti joutuneet seuraamaan varsin toisenlaista bisnestaktiikkaa siihen verrattuna mitä he käyttivät. Suurin osa yrityksen voitoista oli saatu moottorien käytön rojalteista eikä valmistettujen moottorien komponenteista, ja ilman patenttisuojaa yritys ei olisi tietenkään kyennyt keräämään rojalteja. Vaihtoehtona olisi ollut keskittyä tuotantoon ja huoltopalveluihin päätulonlähteenä, joka itseasiassa oli käytäntö, jota alettiin omaksua 1790-luvulla kun erillisen höyrystimen patentin raukeaminen alkoi lähestyä... On mahdollista todeta vieläkin varmemmin, että patenttiriitely 1790-luvulla ei suoraan kannustanut teknologista kehitystä... Boultonin ja Wattin kieltäytyminen lisenssien myöntämisestä muille moottorinvalmistajille erillisen höyrystimen valmistamiseksi selkeästi haittasi sekä kehitystä että parannusten omaksumista.⁸

Teollisesta vallankumouksesta on jo aikaa, mutta immateriaalikysymykset ovat edelleen esillä. Tätä kirjaa kirjoitettaessa yhdysvaltalaistuomari James Spencer on uhkaillut kolme vuotta sulkea laajasti käytetyn Blackberry- viestintäverkon – patenttikiistan takia.^9 Eikä Blackberry ole itsekään mikään puhdas pulmunen: vuonna 2001 Blackberry haastoi oikeuteen Glenayre Electronicsin, koska kyseinen yritys loukkasi Blackberryn patenttia, joka koski push-tekniikkaa.^10

Samanlainen sota käytiin tekijänoikeuksien kanssa. Napster-palvelu suljettiin liittovaltion tuomarin toimesta heinäkuussa 2000, koska palvelussa jaettiin tekijänoikeussuojattuja tiedostoja.^11 Tunteet käyvät kuumina molemmilla puolilla. Jotkut tekijänoikeusvastaiset libertaristit käyttävät slogania “informaatio vain haluaa olla vapaa”. Toisessa ääripäässä, suuret levy- ja ohjelmistoyhtiöt väittävät “maailman ilman immateriaalioikeuksia olevan maailma ilman uusia ideoita”.

Osa tekijänoikeusväittelyn katkeruudesta on heijastunut Stephen Manesin hyökkäyksessä Lawrence Lessigiä kohtaan.

Stanfordin lakiprofessorin ja median suosikin Lawrence Lessigin mukaan, “liikkeen täytyy alkaa kaduilta” jotta korruptoitunutta kongressia, ylikeskittynyttä mediaa ja ylihintaista oikeusjärjestelmää vastaan voidaan taistella. Contrary to Lessig's rants...“Fair use” exceptions in existing copyright law...are so expansive that just about the only thing cut-and-pasters 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, current 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 of 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. 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 respective 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 without 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, theoretical 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.

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 role 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 to 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.

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.