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Aug. 27, 2014 Intellectual property and economic prosperity: Friend or foes?, by Mark Schultz and Adam Mossoff

This post originally appeared in AEI’s on August 27, 2014.

Intellectual property has long been viewed as contributing to U.S. prosperity – since even before the Founders enshrined it into the US Constitution. As James Madison said in the Federalist Papers, in the case of IP rights, “the public good fully coincides . . . with the claims of individuals.” He was so sure of this point that he asserted that “the utility of this power will scarcely be questioned.”

Of course, despite Madison’s optimistic statement, few things go unquestioned, no matter how widely believed or well-documented. As a case in point, consider the newly released report from the Mercatus Center, a free-market think tank, challenging recent research on the economic benefits of intellectual property protection.

There certainly is a lot of empirical research to challenge. In recent years, the U.S. government and others have released reports that attempt to describe and quantify the economic benefits of protecting intellectual property rights.

For example, in 2012, the U.S. Patent and Trademark Office (USPTO) issued a widely discussed report that identified and described the industries in the U.S. that used IP most intensively. The USPTO described the report’s purpose: “By developing new quantitative measures of IP-intensity by industry, the report aims to promote a better understanding of the industries where IP plays a particularly important role.”

One of the USPTO report’s most frequently discussed findings was that “IP-intensive” industries employ a lot of people: “Direct employment in the subset of most IP-intensive industries identified in this report amounted to 27.1 million jobs in 2010, while indirect activities associated with these industries provided an additional 12.9 million jobs throughout the economy in 2010, for a total of 40.0 million jobs, or 27.7 percent of all jobs in the economy.”

Other important takeaways from the USPTO Report included:

“IP-intensive industries accounted for about $5.06 trillion in value added, or 34.8 percent of U.S. gross domestic product (GDP), in 2010.”

“Average weekly wages for IP-intensive industries were $1,156 in 2010 or 42 percent higher than the $815 average weekly wages in other (non-IP-intensive) private industries.”

“Merchandise exports of IP-intensive industries totaled $775 billion in 2010, accounting for 60.7 percent of total U.S. merchandise exports.”

IP skeptics take issue with the findings of the USPTO Report and other similar research. For example, the Mercatus Report characterizes the findings mentioned above as asserting that “the existence of intellectual property in an industry creates the jobs in that industry.” It contends that this research “provide[s] no theoretical or empirical evidence to support” its findings regarding the importance of intellectual property (IP) to the U.S. economy.

The first problem with the Mercatus Report is that it does not fairly describe the research or claims it criticizes, as the juxtaposition of the quotes above from the USPTO report with the Mercatus Report’s characterization shows. The research that the Mercatus Report criticizes makes far more modest claims than the Report suggests.

The studies that the Mercatus Report critiques all attempt to contribute partial but reasonable answers to tough and complex questions about the relationships among IP, innovation, and economic prosperity. For example, the USPTO Report does not claim that IP creates jobs. Instead, it develops a method for identifying IP-intensive industries and then describes the contribution of these industries to employment and economic output. Nowhere does the USPTO Report claim that IP is responsible for all jobs or output in these industries. Rather, its claims are carefully circumscribed, and the report repeatedly notes the need for balance in IP rights.

A US Chamber of Commerce report critiqued in the Mercatus report is, perhaps unsurprisingly, a bit more effusive than the USPTO in its support for IP. It is, after all, entitled “IP Creates Jobs for America.” However, its claims are nevertheless more constrained than either its catchy-sounding title or the Mercatus Report suggest. If one digs into the substance of the study, the Chamber explicitly concludes that “IP supports more than 19.1 million direct American jobs in IP-intensive companies across all industries.” Note the use of the word “support,” not “create.” The Chamber describes the study’s findings in modest terms: “Our research captures the broad impact of IP-intensive companies on the overall U.S. economy and the success of these companies on the state level.”

In sum, both the USPTO Report and the Chamber study focus on describing the economic impact of IP-intensive industries. This is an interesting and worthy topic of study. While it is almost certainly impossible to estimate precisely how many jobs IP creates, it is perfectly valid to try to understand IP’s importance by looking at the economic contribution of IP-intensive industries. Additionally, it is hard to dispute that IP creates some jobs – most likely a lot of jobs – in America, given the size and importance of its innovation and creative industries.

Looking at the bigger picture, the broad sweep of economic history indicates that when it comes to economic prosperity and innovation, the U.S. and a few other nations have been doing something right for the past two centuries. The U.S. and Great Britain led the world into unprecedented prosperity and development through the Industrial Revolution, and the U.S. remains responsible for a vast amount of the innovation and creativity driving global prosperity – from the world’s most successful creative industries to smartphones to life-saving drugs.

This success is due in large part to good institutions, chief among them economic freedom, political liberty, and the rule of law. As economic historians have pointed out, another of those institutions has always been a robust IP system that has secured property rights in innovative technology and creative works under the rule of law.

In addition to the big-picture history, there are plenty of other reasons to believe that IP contributes to prosperity like all other property rights. Economists attribute much of the U.S.’s success to innovation, technical change, and new knowledge. Nobel Prize winner Robert Solow estimated that almost 90% of productivity growth in the first half of the 20th Century was due to technical change. Paul Romer similarly has made the point that productivity growth, at its core, represents use of accumulated knowledge. Finally, William Baumol estimated that by the 1960s, 90% of GDP was “contributed by innovation carried out since 1870.”

So, innovation is pretty important to economic prosperity. In fact, economists sometimes say it’s the only exception to the rule that there’s no such thing as a free lunch. Innovation spurs economic growth – in profits, jobs, and wages – by enabling us to get more from our existing stock of people and capital. Consider that the story of late 20th-Century prosperity is largely based on figuring out how to make the most out of resources previously deemed worthless – for example, the sand we have transformed into silicon chips.

Of course, innovation and intellectual property are not necessarily the same things. Identifying the source of innovation is something of a Holy Grail in modern policy studies. These sources appear to be many and complex, but IP seems to play a key role. Empirical research (here, here, here, here, and here, for example) says that countries that protect IP enjoy the benefit of greater investment in R&D, more research jobs, more foreign direct investment, greater trade flows in high tech goods and services, and other positive economic outcomes. Of course, these studies show only a positive association between strength of IP rights and good results, not necessarily causation. However, the researchers in these cases have controlled for other factors and used enough care to put the burden on skeptics to provide plausible, empirically-verified alternative explanations.

Moreover, as inventors, creators, and the industries that commercialize their work often attest, they require security in their investments. IP of course provides no guarantee of success – IP owners have no more of that than any other producer, and usually less. In economic terms, IP provides no promise of an “economic monopoly.” It does, however, secure the products of innovative and creative activity from being appropriated unjustly and inefficiently by others, providing the same security that other producers in the marketplace enjoy from the rule of law.

IP skeptics argue, however, that the U.S. would enjoy even greater prosperity with weaker or no IP protections, but, thus far, they have failed to put forward any substantial body of empirical evidence to support their case.

IP critics typically fail to offer convincing, practical, and scalable alternative approaches to fostering innovation. The Mercatus Report, for example, dedicates a few sentences to the idea that prizes, Kickstarter, government funding, or patrons can take the place of IP. But none of these alternatives is problem-free. It is bewildering, for example, to find a libertarian think tank arguing that government projects are superior to private property rights as a means of directing resources to innovative activities. While prize systems may seem innocuous, they also have a historical legacy that should make free market advocates blanche, such as political logrolling and rent-seeking machinations that denied actual innovation due recognition and support.

In sum, non-IP institutions can do some things, but they have many of the same problems that the IP skeptics claim are inherent in IP rights. Indeed, if one wants to understand why government control can lead to distortions and stagnation, and why private property is usually the more effective alternative, then one need look no further than to the sound work that Mercatus and other free-market think tanks do on other important topics in political economy. This non-IP economic and policy work often emphasizes the key role of property rights in protecting individuals from the politically powerful, as well as the wisdom of leaving economic decisions to property owners and their customers, who have both the best information and the highest moral claim to decide what should get made and sold in the free market. These arguments apply equally to all property, including the copyrighted songs sold through iTunes, the patents, copyrights, and trademarks that made the Kindle possible, and the patented technology in the smartphones now used by hundreds of millions of people.