Innovation, intellectual property and capitalism

Economic history shows a remarkable similarity between economic and technological long term cycles. By looking at a timeline of inventions one can easily detect many points of contact. Indeed, given the two-way causality between technical progress and economic growth it is inevitable that most of the controversies are about the direction in the virtuous circle between science and economic growth. At a microeconomic level, microeconomic textbooks usually explain how innovation benefits both trading parties.

However, the role of capitalism is not just to ease the sharing of the benefits from technical progress. A further advantage, and possibly more important, is the stimulation of innovation. In fact, it is no coincidence that capitalism and technical advancement go hand-in-hand driven by two of the basic principles of capitalism.

First, the pursuit of profit maximization is a major driver of innovation. For instance, all the fantastic new drugs that pharmaceutical companies produce every year are not the result of their concern for the patients but of their lush for profits. Moreover, if they lag in innovation, their competitors will take over their market share. Thus, the profit motive plays simultaneously the role of carrot and stick in the motivation of innovation.

Second, the protection of intellectual property for only a limited period of time provides innovators with enough protection to recover their investment in research, while preventing the undue state protection for incumbent producers. Obviously, the duration of such protection is subject to discussion and in the end its desirable extension is as much a result of political discussion as of empirical analysis.

While the role of profit maximization is often accepted, the legitimacy of intellectual property is at the origin of much heated debate, namely on whether it represents the granting of a temporary monopoly or the protection of a property right.

Many of the issues may be gauged by considering the following question raised by Paul H. Rubin and Tilman Klumpp (2011): “On the one hand, ideas, novels, or musical compositions are products of the mind, and if a man owns his mind as much he owns his body then it seems that, indeed, he would acquire property over what he conceives in his mind. On the other hand, ideas are vague and often conceived in similar form by many people. Since two persons cannot, independently of each other, have ownership over the same good, how can property be acquired over an idea that one conceives the day after it was conceived by somebody else?”.

Thus, the products of the mind are not easily treated within the traditional marginalist cost-benefit analysis. Moreover, the debate between supporters and opponents of intellectual property is often, but not always, aligned politically.

Take for instance the following libertarian views.

Among anarcho-capitalists we have some arguing for infinite copyright terms similar to those applying to non-intellectual property while others oppose them on the grounds that they divert resources from fundamental to patented research.

While amongst left-wing libertarians some oppose intellectual property because it represents an infringement of freedom of speech and the press.

In turn, some conservative libertarians advocate that a distinction should be made on the basis of who supported the costs of R&D and on the purpose of the invention. For example, Deepak Lal (2006) argues against granting copyrights to fundamental research on the grounds that it is mostly done at public financed institutions while supporting them in the case of pharmaceutical companies developing new drugs but not in the music industry selling a new song.

However, others agree with patent and copyright laws but oppose laws protecting trademarks or anti-counterfeiting laws.

Finally, others champion against patents and copyrights on moral grounds, namely arguing that is immoral to refuse to give new medicines for people in need.

The moral dilemma is especially difficult when dealing with life threatening diseases, as illustrated recently during the 2004-2005 Ebola epidemic or with the new Sovaldi drug for Hepatitis C.

The latter, involved a dispute over the price charged by Gilead, the company selling this drug capable of curing this previously incurable disease (priced at US$ 84,000 an amount not covered under most insurance schemes). The company argued that the price was needed to obtain a “fair profit” in the investment of $US 11 billion she had made to acquire the small company that had developed the drug.

This example illustrates another complexity with the regulation of intellectual property – the transferability of copyrights and patents.

Another problem is the enforceability of intellectual property rights on a global scale since some countries do not recognize or enforce such rights. This has led the USA and the European Union to negotiate bilateral agreements (the so-called TRIPS) to secure the protection of patents and trademarks, but these have been perceived as promoting protectionism rather than free trade.

Overall, if one accepts copyrights, patents and other forms of intellectual property protection as a necessary evil in the form of a temporary monopoly the shorter it will be the better. Because, being a form of censorship, it precludes the greater good that comes from sharing each other’s ideas and discoveries.

Moreover, the Internet has created a new tool to achieve the ancient dream of compiling all human knowledge and culture and to store it for free use by present and future generations. The benefits of this universal access to knowledge may outweigh those of granting temporary protection to intellectual property.

However, this requires a difficult judgement whose answer depends on whether free access would erase the profit motive and the rate of capital accumulation. So far, the so-called creative industries have continued to develop through a mix of conventional secrecy, intellectual property protection and new business finance models based on the winner takes all dream and crowd-funding. Whether these new business models will be more capitalist-friendly or not is still too early to know.

Capitalism and Private Property

The acceptance and protection of private property is fundamental for capitalism. By private property we mean not only the individual or joint ownership of produced and natural assets but also the respective property rights in relation to its use and disposal.

The distinction between property rights and property ownership as well as its use for personal or commercial purposes is essential to discuss any acceptable limitations to such rights.

Obviously, personal private property is indispensable even in the most utopian of the communal organizations. For instance, in a hippie commune one could share the food in the fridge but not the toothbrush, and sooner or later, if someone likes only a specific kind of yogurt, he or she would like to be sure that such brand would be left untouched for his private use. However, when discussing capitalism we are not talking about such minutiae in relation to personal objects but rather on what Marxists call productive capital or means of productions.

The means of production may be divided in at least four categories: 1) land and other natural resources, 2) materials, tools and equipment, 3) labor, and 4) know how. Likewise the various forms of ownership must be split into individual, joint, and communal (state) or international. The first two types we call private and the rest we call collective property.

All types of property and ownership coexist in every economic system, but the various economic systems differ on the relative importance and role taken by private property. For instance, in primitive hunting and gathering societies land was the main mean of production and was mostly used for pastures and game and owned collectively. Other natural means of production inseparable from land like water, wind, minerals, air waves or landscape were not perceived as scarce and valuable. Likewise, intellectual property was not important then.

So, collective ownership of natural resources was as important in primitive societies as intellectual property is in modern capitalism. Yet, any limits on the property rights of specific types of property are critical not because of the nature of such property but because of their impact in the of accumulation capital and its efficient use. In this regard joint ownership as opposed to collective ownership became an important lever for competition and capital accumulation despite the obvious drawbacks introduced by large corporations.

Since the late XIX century, a rise in the size of corporations and its share of total assets were inevitably associated with the prevalence of joint-ownership over individual or family ownership. Yet, joint-ownership through joint stock companies and similar organizations does not invalidates the need for private ownership. If anything, increases its scope by facilitating capital accumulation through diversification and risk mitigation. But, it introduces a new reality – the separation of ownership and control and the associated problematic of the relationship between principals and theirs agents.

This separation, inevitably questioned the old stereotype of the capitalist as embodying simultaneously the financier, the entrepreneur and the manager. And, in the early XX century, some economists began replacing the traditional view of capitalism by a system of managerial capitalism. In their classic “The Modern Corporation and Private Property” Berle and Means (1932) described this process and its consequences in terms of corporate law and governance. They claimed that the owners no longer were served by a profit seeking controlling group. The realization that many industries had become oligopolistic and big businesses were run by a new class of professional managers rather than shareholders led some to question whether we still needed capitalists, private property and competitive markets.

For instance, Keynes (1936) in his “General Theory”, although refuting a system of State Socialism, conceived that to achieve an optimum rate of investment “a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment”. Likewise Schumpeter’s (1942) theory on the demise of capitalism claimed that the success of capitalism would lead to a form of corporatism and a fostering of values hostile to capitalism, especially among intellectuals, that would replace entrepreneurship with “laborism”.

Since then the separation between ownership and control has deepened by the rise of another layer of intermediaries between the ultimate owners and their investments. That is, capitalists progressively lost control not only over how to run their assets but also over the allocation of capital, and are now often reduced to choosing professional fund managers.

Still, regardless of how removed ownership is from control, the preservation of this last domain of private property power and rights is indispensable to preserve the profit motive and the role of markets in a capitalist economic system. Otherwise, wealth owners would lose the freedom to dispose of their property, including the right to bequest it as they like, and lose any incentive to venture and to accumulate the capital indispensable for economic growth.

The fact that nowadays most people own a substantial share of their wealth through pension funds owned or regulated by governments and that prudence recommends that they should not be able to withdraw their funds as they please does not invalidates the previous assertion. That is, private property continues to be an essential foundation of capitalism.