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In late 1764, while repairing a small Newcomen steam engine, the  
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Boldrin & Levine: Against Intellectual Monopoly, Chapter 1
−
idea   of   allowing   steam   to   expand   and   condense   in   separate  
+
1
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containers sprang into the mind of James Watt. He spent the next  
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Chapter 1: Introduction
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few months in unceasing labor building a model of the new engine.  
+
In late 1764, while repairing a small Newcomen steam
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In 1768, after a series of improvements and substantial borrowing,  
+
engine, the idea of allowing steam to expand and condense in
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he applied for a patent on the idea.  August  1768  found Watt  in
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separate containers sprang into the mind of James Watt. He spent
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London about  the patent  and he spent  another  6 months working  
+
the next few months in unceasing labor building a model of the
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hard to obtain it. The patent was finally awarded in January 1769.  
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new engine. In 1768, after a series of improvements and substantial
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Nothing much happened,  in  terms of production,  for  a  few years
+
borrowing, he applied for a patent on the idea, requiring him to
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until,  in  1775,   after  another  major   effort   supported by his   new
+
travel to London in August. He spent the next six months working
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business  partner   Matthew   Boulton,   Watt   secured   an   Act   of  
+
hard to obtain his patent. It was finally awarded in January of the
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Parliament extending his 1769 patent until the year 1800. The great  
+
following year. Nothing much happened by way of production
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statesman Edmund Burke   spoke   eloquently in Parliament   in the  
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until 1775. Then, with a major effort supported by his business
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name of economic freedom and against the creation of unnecessary  
+
partner, the rich industrialist Matthew Boulton, Watt secured an
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monopoly – but   to no avail.  The   connections of Watt’s partner  
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Act of Parliament extending his patent until the year 1800. The
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Boulton were too solid to be defeated by simple principle.  
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great statesman Edmund Burke spoke eloquently in Parliament in
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the name of economic freedom and against the creation of
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Once Watt’s patents were secured, a substantial portion of  
+
unnecessary monopoly – but to no avail.
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his energy was devoted to fending off rival inventors. In 1782, Watt  
+
1
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secured an additional patent, made “necessary in consequence of ...  
+
  The connections of
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having been so unfairly anticipated, by [Matthew] Wasborough in  
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Watt’s partner Boulton were too solid to be defeated by simple
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the   crank motion.” More   dramatically,   in   the   1790s, when   the  
+
principle.
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superior and  independently designed Hornblower engine was put  
+
Once Watt’s patents were secured and production started, a
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into production, Boulton and Watt went after him with the full force  
+
substantial portion of his energy was devoted to fending off rival
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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
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but found himself ruined and in jail.
+
anticipated, by [Matthew] Wasborough in the crank motion.”
−
+
2
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Prior to the start of Watt’s commercial production in 1776,
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More dramatically, in the 1790s, when the superior Hornblower
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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
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only 2,250 steam engines used in the U.K., of which only 449 were
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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
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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
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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
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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
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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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+
5
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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  
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after the expiration of Pickard’s patent that Boulton and Watt
−
economically and technically superior crank.
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adopted the economically and technically superior crank.
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+
6
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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
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establishments   for making steam-engines of Mr. Watt's principle  
+
patents expired “many establishments for making steam-engines of
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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
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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
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engines.” As a result we find that “Boulton and Watt for many years  
+
business “Boulton and Watt for many years afterwards kept up
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afterwards kept up their price and had increased orders.”  
+
their price and had increased orders.”
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In fact, it is only after their patents expired that Boulton and  
+
7
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Watt really started to manufacture steam engines. Before then their  
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In fact, it is only after their patents expired that Boulton and
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activity   consisted   primarily   of   extracting   hefty   monopolistic  
+
Watt really started to manufacture steam engines. Before then their
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royalties. Independent contractors produced most of the parts, and  
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activity consisted primarily of extracting hefty monopolistic
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Boulton and Watt merely oversaw the assembly of the components  
+
royalties through licensing. Independent contractors produced most
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by the purchasers.
+
of the parts, and Boulton and Watt merely oversaw the assembly of
−
+
the components by the purchasers.
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2Boldrin & Levine: Against Intellectual Monopoly, Chapter 1
+
In most histories, James Watt is a heroic inventor,
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In   most   histories,   James   Watt   is   a   heroic   inventor,  
+
responsible for the beginning of the industrial revolution. The facts
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responsible for the beginning of the industrial revolution. The facts  
+
suggest an alternative interpretation. Watt is one of many clever
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above suggest a different interpretation. Watt is one of many clever  
+
inventors working to improve steam power in the second half of
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inventors working to improve steam power in the second half of the  
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the eighteenth century. After getting one step ahead of the pack, he
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eighteenth century. After getting one step ahead of   the pack, he  
+
remained ahead not by superior innovation, but by superior
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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
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exploitation of the legal system. The fact that his business partner
+
3
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was a wealthy man with strong connections in Parliament, was not a  
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was a wealthy man with strong connections in Parliament, was not
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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
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patents  likely  delayed  the  mass  adoption  of   the  steam  engine:
+
components of our current system of intellectual property – patents
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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
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From the number of innovations that occurred immediately after the  
+
are they just unnecessary evils, the relics of an earlier time when
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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
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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,
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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
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particularly  original.  Frederic  Scherer,   a  strong  and   prestigious
+
separate condenser. Because the 1775 patent provided Boulton and
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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
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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.
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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
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plainly could not  have collected royalties. The alternative
+
improvement and production of his engine. From a strictly
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would have been  to emphasize manufacturing and service
+
economic point of view Watt did not need such a long lasting
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activities as  the principal  source of profits, which  in  fact
+
patent – it is estimated that by 1783 – seventeen years before his
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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
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patent   litigation activities  of  Boulton & Watt  during  the  
+
years to learn how to make steam engines.
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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
−
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1769 patent is an especially egregious example of rent seeking: the
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Indeed, the story of James Watt contains most of the  
+
patent extension was clearly unnecessary to provide incentive for
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important  elements of  our  argument  against  intellectual  property.  
+
the original invention, which had already taken place. On top of
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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.
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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
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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:
+
11
−
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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