Posted 10:39 AM by Robert

UPDATE: Victory For The Dead Hand Of Sonny Bono

Steve Verdon (also a new perma link) posts and links to an article that provides an overview of work by David Levine and Michele Boldrin on intellectual property rights - arguing that the they may often - or generally - reduce societal wealth.

The articles are interesting, but I have some serious concerns about even the foundations - not just of the Levine/Boldrin work, but of this and related fields that the article discusses (which, interestingly, touches on Paul Krugman and the "new trade theory" in which he is heavily involved). By way of example only, consider this paragraph regarding Paul Romer, a Stanford University economist whose work is the focus of much of Boldrin and Levine's critique, and who considers the Boldrin/Levine logic flawed and their assumptions implausible:

Central to Romer's theory is the idea of nonrivalry, a property he considers inherent to invention, designs and other forms of intellectual creation. “A purely nonrival good,” wrote Romer, “has the property that its use by one firm or person in no way limits its use by another.” A formula, for example, can be used simultaneously and equally by a hundred people, whereas a wrench cannot. The formula is a nonrival good, the wrench is rivalrous.

Boldrin and Levine take a closer look at this "nonrivalry". The article describes as a "fundamental tenet of current conventional wisdom" the assumption that that knowledge-based innovations are subject to increasing returns because ideas are nonrivalrous: One person's use of an idea (or song, movie, book, software, etc.) doesn't diminish anyone else's. ...

Boldrin and Levine challenge that "fundamental tenet" on the grounds that the economic application of ideas is inherently rivalrous because ideas “have economic value only to the extent that they are embodied into either something or someone.” And because ideas must be realized in the physical world, “valuable ideas ... are as rivalrous as commodities containing no ideas at all, if such exist. ... “To be used by others it needs to be copied, which requires resources of various kinds, including time. To be usable it needs to reside on some portion of the memory of your computer. ... When you are using that specific copy of the software, other people cannot simultaneously do the same. ... Once again, there is no free lunch.”

I agree with Boldrin and Levine that the need to physically manifest "ideas" subjects them to restrictions that are worth studying. But the "nonrivalry" assumption seems to have bigger, even more serious and central problems. As pointed out in prior posts, the value of many intellectual property rights such as the copyright of songs and novels - are definitely affected by their uses. Song owners are normally very careful about the context in which their songs are used for exactly this reason. And novelists are often very wary of allowing their works to be made into movies out of concern that the public's associations and understanding will be damaged or degraded by the movie - the current Harry Potter movies being a famous and wildly successful example of the novels' author reportedly retaining great control over the finished movie. I have several times pointed out that absence of legal rights probably results in both underuse and overuse of intellectual property.

Consider even the wrench/formula example cited by Romer above. It is simply not correct generally that a formula can be used simultaneously and equally by a hundred people without their interfering with each other in many critical ways. For example, suppose one discovered a market imperfection in the interaction between, say, stock markets and options markets, and reduced it to a formula. The more people use the formula to enrich themselves from arbitrage positions constructed with the formula, the more the market imperfection and the value of the formula will be reduced by the resulting arbitrage. Yes, all those people can simultaneously do the formula calculation - but so what? Suppose they all shared a computer and each of them had to wait in line, say, a second (or whatever smaller period of time it takes to cause the other temporal features of their arbitrage trade to swamp the significance of the delay) before their shared computer used the formula to run their separate arbitrage calculations? Does the result change meaningfully because they had to wait a bit? And how different is all this from the wrench being placed in an equipment or parts pool - such as airlines and motorpools use - so that it can be used by many mechanics to fix many cars or planes in a single day? Worse, the wrench probably has a long useful life - so it's not a bad estimate to assume that each use leaves the wrench unchanged. But every time an arbitrage position is exploited in public markets the use itself communicates information about that position to the market - so repeated use by many people may cause the formula (or its meaningful trading content) to become public information. At that point the formula's value will be driven to its minimum exactly because a lot of people are using it at the same time. Is the wrench more of a "nonrival good" than the formula?

The above paragraphs are not intended to show that either Romer or Boldrin/Levine is wrong. But I am left with a troubling sense about the approach.

Prior posts on this topic have pointed out that the economics and mathematics behind any decision to overturn the Bono Act would have to be ferociously complex - orders of magnitude beyond what's in the embarrassing "Economists Brief." The Boldrin/Levine papers are a step in the necessary (if not exactly desirable) direction towards complexity - but if their approach is sometimes appropriate, it seems unlikely to apply generally. And even their calculations seem likely to need refinement and further complexity to address the differences in markets and property. For example, most copyrighted materials in fact contain no significant original matter and hence the copyright confers no market power on the author. But the existence of the copyright gives the author a curious legal position, which one expects to differ significantly from, say, that of the position of Ms. Rowling - the author of the Harry Potter books.

The possibility that the intellectual property monopolies might actually restrict wealth creation is a very old idea. In fact, a lot of people in the 17th and 18th centuries were pretty convinced of that - and most good intellectual property courses with an economic focus point out this problematic underpinning. From a legal standpoint that's really a big legal analytic problem for the opponents of things like the Bono Act, since the constitution conferred the intellectual property power on the Congress notwithstanding the serious doubts of the framers' generation about whether they were doing economic good. Suppose after some such fancy economic analysis one could show that the copyright monopoly always restricts wealth creation. Would it follow that Congress could not constitutionally enact a copyright law? Not likely. Weaker economic results with the same flavor just raise the same problem indirectly or by implication.

On a separate point, I want to state my opinion that the intensity of conviction in of some of the people in the Blogosphere who disapprove of the Bono Act is a bit over the top, for what it's worth. That intensity of conviction may have distorted the judgment of some otherwise fine minds.