Against Intellectual Monopoly

0:00My great pleasure to be visiting with Michele Boldreen, who is the co-author of Against Intellectual Monopoly, a book that came out last year, wasn't it? It came out in August 2008, yes. 2008. And it was only this year that I had, I got around to reading it. And it really rocked my world. I've written, I think, something like 20 articles on the book itself. Yeah, we are even shocked by the responsibility you're placing on us. Well, I really do consider it to be one of the most important books of our time. I mean, it's not the most important book.

0:45One of the points you make about the problem of intellectual monopoly is that it can cripple economic growth. Growth. And this was a point I had never really considered. Can you talk just a few minutes about that? Well, yeah, let's try. Well, our view is the following. There are two aspects essentially that we think are relevant. One is basically growth comes from competition. It comes from, if you want, well-regulated and well-organized competition, but it comes from competition. Roth comes from the effort the humans put in trying to do things better than their fellows do, because in that way, they can make a buck or two.

1:34A very simple way of seeing competition, I think, is this. And so anything that's stifled competition, and it replaces it either with monopoly or Other Organizations of Economic Activity has a negative impact on the incentive to innovate. So in particular, think of markets that are monopolized because of patents. What you have there is certainly the guy that got the patent, the company that got the patent innovated at the beginning maybe in the expectation, the desire of getting the monopoly. But as we know the monopoly that the patent gives, but as we know there is a lot of contemporaneous innovation and a lot of simultaneous effort to achieve certain things.

2:25The fact that someone wins out of 10 and gets the big prize, puts immediately off the other nine. So it's productive capacity that is restricted. Not only puts off the other nine in that specific instance, but it may put them off for a while Because once you realize that somebody got the patent that you cannot fight against and you cannot get the license, then you give up. Sometimes you stay in if you think you can outdo the person, but you have to be very confident you can outdo that firm very much. If you don't, then you give up, you move to something else. And that is lost competition, lost innovation, that's one dimension. Second dimension, which is also very relevant and it's becoming more and more relevant in In advanced technologies, things that people call complex technologies, and the typical example these days are software-related stuff, bioengineering, medical things.

3:24The new products come out literally by reassembling and using dozens, hundreds of previous products. Where previous products are maybe the innovation of two years ago, three years ago, five years In a world where all those previous innovations are patented, you create a dramatic problem for the new innovators. Instead of having free access to the inputs in a competitive market, they are forced to purchase at monopoly price most of their inputs. Not only, some of the producers of those inputs may have a strategic interest to prevent the new product from coming in, because you may replace theirs.

4:09People have given to these phenomena various names, you know, the tragedy of the uncommons and so on, but it's quite clear what the mechanism is. So you can argue this theoretically with very many tools. You can look at the data. There's extensive empirical work in the software industry in particular showing that this is taking place and has taken place since copyright first and then patents became particularly is strong, but it's a major pullback on innovative activity. So those are the two main things we see. And you see it not only in our world today, but you look back through economic history and observe this again and again, where the patents and the copyrights are taking over national economies, the growth goes down. It's restricted relative to what it is in an open source world.

5:01Yes, that's the other thing. So then there is the practical experience, the historical experience, right? One goes and looks at what happened in various industries over time and in different centuries and in different countries and you see this phenomenon repeating over and over and over, right? New industries, and again, the software industry is perfect, but we can use other. You see the new industry when a new bunch of products come around, a new technology is found. You see dozens of entrants. You see great growth. A lot of small firms come in and everybody tries to use the thing and make little improvement. You have enormous growth. That's exactly what happened with PCs, with modern software and so on. And those periods are a period of enormous growth, enormous innovation, great increase in productivity, and almost never patents are relevant, partly because the legal teams, so to speak, haven't got there yet, have not extended, there is not a custom of patenting thing, partly because it's not even convenient

6:08at the beginning, partly because of social norms, but it's not there. In fact, Bill Gates himself, when talking about the initial years of the modern software The software industry commented that we had patents back there in the 70s and 80s. The software industry would have not developed the way it does. It would have been much smaller, much lower growth. Just so that we're clear, you're not speaking of, for example, proprietary trade secrets that a firm is holding for itself, a formula? That's very different. The formula I have, I can decide to give it to you or not. I can I can sell it to you, I can license it to you under certain agreements, it's very different from, you know, it's like, what I know, if I know anything, but let's pretend that Miquel Bodri knows something, what I know, I can teach it to you or not, and we can agree on a fee for my service, that's nothing to do with intellectual, what's called intellectual property, we see what a patent does in particular, it prevents you from discovering the same thing. If you get there by yourself, or you get there by looking

7:16This is something which I feel very strongly. Imitation of best practices is possibly the greatest engine of economic growth, especially in less advanced countries. The patent prevents you from imitating me. Imagine sports with patents, as some crazy lawyers have been suggesting in this country. Imagine what football or basketball would become if we start patenting moves and schemes and tactics it would kill the fun you know the imitation the fact that I see that that guy does it right and he has a trick better than me and I put an effort into trying to do like him and maybe doing a little bit better that makes the competition thrive and the game interesting this was the point that shook me to my foundation this was the part I couldn't I had not grasped at all, before I read your book, was that, well, two things. One is that part of the very core of the growth of a free society and its development and its progress comes

8:19from imitation. And secondly, that the essence of copyright, the actual essence of monopoly is to make imitation, in effect, illegal. Right. Well, yes. Yes. That's, you know, economists like to talk about perfect market, and the lack of externalities and so on, right? They have all these big theories about public goods and we all dream up sometimes this abstract world in which there is no externality whatsoever and so perfect competition does the super-efficient thing. Obviously, that's an abstraction, right? And when you look at reality, you try to use that model, you do realize pretty soon that there is always some externality from human action, which is the fact that you and I can look at each other.

9:06Human beings are social and they live next to each other and they look at each other what they do, what they learn from each other and it's true, you know, do I charge you, do you charge me for showing me how to hold the fork or showing me how to cook the meat? No. And so in some sense you're underpaid. But you know, that's a line I don't want to start walking on. So it seems to me that imitation and the fact that we are social animals and we look at each other and compete with each other is a great engine of development when properly arranged and patents just prevent that, they put a huge lead on that, they say, nope, this cannot be done, for 20 years you cannot do it, and then sometimes, let me add one thing, We have this thing about James Watt in our book, in the first chapter, that we picked as poor James Watt, as the scoundrel of the story, as the symbol of a bad puppet. A bit

10:10we did it for a rhetorical purpose. Everybody has this mythological view of James Watt and we thought, well, he was a smart guy like many others, there's no reason to, so let's use the fact that everybody treated him as a superhero to capture attention. But there There was something more important apart from the rhetoric and the marketing that struck us in the story of Watt. What is it that Watt and his partner Bolton did? What contribution was it was, his team engine existed before him, in fact he got the idea by he was an engineer that would fix team engines and the most efficient team engine at the time was called New House I think, Newcom, Newcom, sorry, engine, okay. They were fine, they did the number three, but they had one thing that after what we realized is very useful.

10:58They did not have a separate condenser. There was a great idea that what had, he said, wait a second, this is very energy consuming because I have to let everything happens in just one container, I have to let the temperature go down, right, and all that energy gets wasted before I boil up the water again. But if after I have the piston lifted, I push the steam into a separate condenser, let the water condense there separately, that's a cold thing, and instead I inject fresh water in the original piston so that I can start the process of boiling it up quicker and faster and I save a lot of energy, right? Great idea, and deservedly did first and so on.

11:44But what happened? He patented that idea. If you think of it, it's impossible, even today, to make an engine that is a good engine that doesn't use that idea. The principle of having the condenser separate in a separate chamber is a great principle. So what happened during the 25 years of their patent? Other innovators came up with a lot of improvement, high pressure and a number of other things. So they contributed extra things to make the modern engine. But they all use also that idea. So that idea in some sense was a crucial ingredient of any future progress. Well, then for 25 years there was no progress, because you couldn't. Bolton and Walter had a patent on that specific idea. Nobody could do anything that used it. And that was the real block.

12:39In fact, that is something that is so much in the data, right, the economic historians have worked extensively on that, then you observe that the efficiency of steam engines in England did not grow at all between 1775 and 1800 when Bolton and Watt patent expired. There were only a lot of legal cases. Bolton and Watt would sue anybody that tried to make an engine different from there, better from there, and also had a separate condenser. Inventor. And they won. They were very good or they were very rich or they were very connected or whatever. They just kept winning. And then at a certain point people gave up. And suddenly then you look in a few years, in five years, after the patent expired, there is an explosion of new and much improved engine. It's literally, you know, other inventors have been sitting on potential innovations and waited until they could use it. And that's a perfect example Now, I suppose that, and I've heard this many times, I've gotten a lot of emails along these lines, people say, well, it's true that the patent will retard economic growth or the copyrights will limit distribution, but the initial invention might never have come about were it not for the prospect of gaining the monopoly. Do you see what I mean?

14:02I see what you mean and the only answer to that is obviously the honest answer is to say you might be right because there's no parallel universe in which we can redo human history and so on pure logic you cannot rule out that argument. All you can do is to use common sense and observation and recognize what? Every great innovation, pretty much every great innovation we have looked at was never the product of a single isolated guy that invented something completely unexpected. But there were always three, four, seven, twelve people working on roughly the same project and somebody got there a little bit first.

14:51And in fact most innovation were the cumulative type. They built up, they gave a small contribution one over the other and there is a degree of randomness in fact on who got the first patent for the thing. So common sense and historical observation suggest that that hypothesis is theoretically possible but highly unlikely, highly unlikely because most of the time lots of people were competing. And then there is another thing and this we can do especially with modern data and modern statistics. We can ask, okay, how much money, how much extra money would the typical innovator really need to receive to motivate them to do the innovative activity?

15:40Because that's the question you want to ask. Do they really need the big monopoly profits that some of them do? Do you think Bill Gates and his group would have not worked on MS-DOS and software if If they had somehow knew back then, then instead of making the multi-billion they made, they would have only made multi-millions. I doubt it. An example I like to use is most big movie and music experts that have become insanely rich thanks to copyright. And you look at the career of these people and you look at what they were doing before And you say, okay, assume Madonna, instead of making hundreds of millions she made in her life, because of lack of copyright, because of very short copyright on her music, ended up earning an average of, say, $3 million a year, as opposed to the 30 or 40 or whatever she earns, okay, or $2 million a year.

16:38Would she have opted for whatever her career was before they're in New Jersey serving at a bar? I somehow doubt it, you know? Yes, and another point that you go into extensively in the book is the enormous advantage that accrues to the first market player who comes to dominate the field in a new technology, in a new software, in a book, a publishing or something along those lines. The advantages for being the first past the post are huge and they last and they last, don't they? Right. That's the other thing that people don't notice. It's not very easy, exactly because imitation is very valuable. It's also true that it's not really the most automatic thing, the easiest thing to do.

17:30When somebody is really better and knows how to do something quite a bit better than the other, the advantage lasts for a long time. And that gives you great rents, that gives you great profit. My preferred example is, but there are many, we can go on the whole hour, but the best one is aspirin. You understand? Aspirin was not patented, aspirin, that's what we're supposed to be calling it, in Germany where it was first figured out, they had at the time, quite wisely, in the pharmaceutical and for a long time, in fact, the German chemical and pharmaceutical industry is one of our most preferred example because it came to dominate the world in chemistry without patent.

18:17German law allowed only patenting processes, not product. The argument was actually philosophically very interesting from a libertarian point of view. You may or may not agree with the argument, but it's interesting. It says chemical compounds that are feasible and possible are unique and are given in nature. Some people would appeal to nature, others would call God into the picture, but it doesn't matter. They are there and they exist as possible. They are not an invention of human mind. The fact that you can make the aspen is because chemically this is possible. So that thing cannot be patented because it cannot be an exclusive property of anybody. It's a chemical compound that can be made in nature and anybody should have the right to do it. On the other and the processes, the technological processes through which we get from the separate component to the compound. Those are very diverse. We can get to the same compound in very different ways and so it's legitimate that people patent it. So they allow process patenting and not

19:19product patenting. So they are asking per se could not be patented. Nevertheless, it at the enormous success it had. But, it is interesting, how many decades did it take, in fact, to find something as good as aspirin for its users? Very many. It was a dramatic example of, you know, initial advantage that lasts for a long time. Well, sure, sure, sure, sure. And, I mean, as you say, we could go on an hour. I do this all the time. I will continue to buy very expensive name brand software. I don't even Sometimes because it's better, it's more reliable. You think all these things and then when you finally take the risk and buy the thing that costs one-tenth as much, you discover that maybe it's better and it costs a fraction of the price and the support is there and it even has some advantages, but it takes you a long time to finally jump in and they continue to not be market leaders although

20:22So they make money in a niche market, but it's extraordinary. And you give the examples of even such things as what's that luggage company you talk about? Oh, right. Yeah, yeah. That was another beautiful example, right? Can you turn off? I need to say I had a visitor here. Can you stop the recording for a second? Yes, yes. We're not live, right? Yes, right. Sorry. That's okay. Go ahead. Yeah, the luggage. Yeah, yeah. The travel profit. That's fantastic. In the classical case, imitation is easy in some sense. There's another comment that this brings about, which is a general rule, and so these guys were the first, and the idea was a simple idea, why not putting some wheels on the thing, and they went first, but they were quickly imitated, and nevertheless, they thrive, they're still there, they're still one of the largest producer of carry-ons, and so on and so forth.

21:22What is, for example, the general thing you learn from that example, that often there is a strong correlation between how easy it is to imitate an innovation and how cheap it is. So the argument that says, oh my God, the entrepreneur that innovates first has to spend enormous resources, great effort, great risk in coming up with a new thing, and then he's and Donald E stuff has come up with a great idea and you just look at him or her and copy in a super cheap way. That's a good story for late night chit chatting when we're drunk, but it's not really reality because in reality what happens is that it's easy to imitate only if the innovation is easy to come across, if it is not very expensive, if it is not a lot of fixed cost in it.

22:12When it's a very complicated thing that requires millions of dollars and hours and hours and team, then imitating it requires exactly the same kind of effort. You don't imitate production processes for nuclear plants just by looking at them. They're very delicate. You don't imitate the Tiptron automatic shift mechanism of some cars just by looking at it. You need your big engine, you need a lot of trial, even if you do. Another example which is dramatically How many Japanese-made or German-made cars have we had available in the last 40 years to reverse engineer and imitate?

22:59How many Toyota factories or Mercedes factories could we imitate and look at what they do and do the same? And guess what? We never quite managed to be, we, I mean the big three, never quite managed to make it that good. So, when the stuff is delicate and expensive, it's actually very difficult to imitate. And even when it's all digital, I recall when Amazon first opened its doors, somebody said, oh, well, they'll never make any money because we live in a world in which anybody can open an Amazon store. Anybody can be Amazon. Well, somehow that didn't happen. Right. And not for lack of trying, right? How many imitators were there. Yeah, not for lack of time. Now, your conclusions in the book, and I hope that we can do some more interviews this time. If you enjoyed this, I'd like to do this a few more times.

23:51It was nice to chat with you. You know a lot more than me, probably. No, you're my teacher, and I hope that you can teach the whole world, because your thesis is radical, it's far-reaching, it goes way beyond just the issue of patents and copyrights. because I think what you've really done is made a massive contribution to liberal theory in general and a new way to understand the way society progresses and this this was the feature that I still can't quite get over. Let me, I want to be humble, I'm not your humble, if you know me you actually know that people think I'm more arrogant than I should but so for once let me try to I tell you what, this is very, very honest, and I don't know if David and I ever made this public, but this is actually complete truth.

24:44We got to this point of view, and we got to write our papers and our books, essentially out of surprise. I was a student in Rochester, New York, where I got my PhD, of a distinguished scholar in and also Paul Romer was one of my teachers. I learned a lot from Paul Romer. Now Paul Romer is famous for being one of the initiators, some people would say the initiator, but there are a bunch of others, but certainly one of the people that contributed more to what's called New Growth Theory, which is essentially the opposite of what we claim. New Growth Theory says growth is driven by innovation, innovation driven by increasing return and and Monopoly Power. So in order to understand the process of growth, we have to focus on increasing returns and so on. And the thing never quite convinced me for the reason, in fact, that then we made clear. And I argued often with Paul. One of my examples was he always had this example that he used. He said, you know, technology is new ideas like recipes.

25:47And so once you have the recipes, everybody can use it. It's like a free good. Economists have this expression, it's a public good, everybody can access it. And because it becomes a public good and everybody can access it, then the innovator would have no incentive to produce it, if that were the case, right? Because once you have the recipes, you know everything. And I remember challenging him, me being Italian, he actually had a passion, him and his wife, for cooking, and a lot of them used to talk to me about, you know, cooking book and so on. Paul, if you and I cook a risotto, do you think it's going to come out of the same quality? No, obviously you have an advantage, but the recipe of risotto has been around for decades. You own dozens of books, so anyhow, I was never convinced.

26:37When I got to work, at some point I moved from Chicago to UCLA to follow my beloved wife and I got acquainted and met David, we became friends. This was in 1987. For years we talked about new growth theory and about the stuff that then we wrote and we were always agreeing on everything. But it was all verbal. I like to talk a lot, so does David. We like discussions. So we would discuss and have a brighter paper. So these guys are all wrong. Somebody should explain them. But to us, it seemed that it was plain old economic theory that made that very clear. Marshall, you know, the old Schumpeter, The Theory of Money and Credit The Theory of Money and Credit And we agree at this point on every little detail we have come up with dozens of examples.

27:54So it is a deal. Either we stop, because I'm getting bored, and we start arguing about something else where we disagree, or we write a paper. Because even if it seems obvious to us that we're not contributing anything, that this is all there in the classics, clearly this is not the case out there. Let's try to explain to people the classics. And frankly, we started writing from this. So I was extremely surprised when we wrote the first couple of papers. The people would look at us like we were from Mars. Because I kept saying, guys, this is Marshal. You know, this was written in the 19th century. We're just putting in modern words and formulas. But so, yeah, I mean, I'm glad that you see this as a great contribution. But I honestly, I purely think that all we're doing is to bring some classical thinking into. I know this is what you think.

28:40And in some ways, it's brilliant in the way that many great insights in the history of ideas are brilliant, because they're, at their core, simple. It's just a new application that nobody had really seen before. Yeah, maybe it's an application. Yeah, I agree. This dimension of the way a free society works has eluded, I think, many thinkers. I think Bastiat had it, more or less. But the application is particularly relevant to everything that everybody's thinking about right now. So it provides an opportunity for people to come to not just a new understanding of intellectual property, New understanding of the way civilization progresses or regresses. This is, I think, a great surprise to me from your book.

29:34Yes, yes. In fact, I honestly think I wish I was younger and more energetic and I had more some sense of usability, because one thing that we think is very important is the implication of what we've been writing and thinking and arguing for developing countries. If you want to understand the process of development, you want to understand how Mexico and Colombia and China and NUNA and India can become rich and so on, you have to look at the thing we're talking about, catching up amounts to imitating. That's it. You understand? India is not going to become developed and rich and those 1.2, 1.3 billion people are They're not going to increase their income per capita by becoming all softer engineer overnight or discovering new drugs, they're going to become rich by starting to produce the same things we produce with the same technologies and maybe doing a little bit better.

30:37No imitation, no development. Just look at every period in history, you catch up by doing that. United States became great economy by initially imitating and adopting and people these days I would say pirating. European technologies. And eventually they caught up and surpassed, but for a long time it was pirating left and right. Michele Boldrain, I will thank you for your wonderful discussion today and can we meet up again? Jeff, I'm very happy to talk to you. Thank you very much. Thanks. Bye-bye.