The Dollars and Sense of Intellectual Property

Intellectual property rights are in the limelight today. The legal and policy disputes over patented innovation, such as the “smart phone wars,” are front page news and are debated endlessly on the Internet. Copyright law is a topic of discussion and concern among laypersons and specialists given everyone’s ability now to make perfect digital copies of books, music and movies—and the virtually costless and seamless distribution of these perfect copies over the Internet. Once a backwater for tech geeks and a small subset of highly specialized lawyers, patents, copyrights and other intellectual property rights are now common fare of above-the-fold newspaper articles (now read on the Internet), blog commentary, and, of course, many high-profile court cases.

For this reason, Ronald Cass and Keith Hylton’s new book, Laws of Creation: Property Rights in the World of Ideas, could not have been published at a better time.  (To be clear, Laws of Creation has long been in the making, as I participated in a roundtable discussion of an earlier draft of the monograph in 2010.)  Their engaging and well-written book is ambitious in its goals and comprehensive in its scope.  In addition to situating intellectual property rights within the general utilitarian theory of property, Cass and Hylton specifically address in separate chapters the four main intellectual property doctrines—patents, copyrights, trade secrets, and trademarks—as well as the nettlesome intersection between intellectual property rights and antitrust.

Given the breadth of its coverage, it is impossible in a short review to do justice to its discussion of the separate legal doctrines addressed in the book, each of which raises important, context-specific policy questions.  In fact, Cass and Hylton repeatedly show sensitivity to the fact that they are dealing with legal rights that, despite inclusion within a general category of “property,” are very granular in their specific doctrines and policy concerns. To take but one example: they acknowledge that copyright raises questions about “cultural spillovers” that are not raised in the context of patent law (p. 117-118). Yet, they also recognize that from the perspective of the utilitarian analysis of transaction costs and externalities, the legal prohibition on copyright-owners in internalizing all such positive externalities through such doctrines as fair use is similar to patent law’s exclusion of mathematical principles (p. 51-55, 118). Such complexities in the variety of doctrines and legal rules covered by this significant book means that I can touch on only a few highlights in this brief review, and my focus will be on patent law, as this is my primary area of expertise.

As a preliminary point, Laws of Creation is important because, unlike much commentary on intellectual property rights in the public policy debates today, Cass and Hylton provide a broad-based description and steadfast defense of intellectual property rights from a “property-centric perspective” (p. 210).  Throughout Laws of Creation, they advance the proposition that the trade off between benefits and costs that is central to the utilitarian justification for all property rights applies with equal force in justifying property rights in inventions, books and movies, corporate logos, and secret commercial processes. This is the explicit theme of their book: although there are differences in subject matter and other physical characteristics that result in variations in legal doctrines, the “trade-off” between dynamic and static effects is a general characteristic of [all] property rights” (p. 30).

But Cass and Hylton are not ideologues nor, as they admit, are they “Panglossian in their outlook” about intellectual property rights (p. 220).  They recognize that utilitarian cost-benefit analysis “is subject to criticism on some grounds” (p. 31), and they admit upfront that one of the core problems for a utilitarian theory of intellectual property rights is the lack of data in making the necessary cost-benefit analyses (p. 45-47).  (I’ll return to this concern about the lack of empirics later in the review.)  They maintain, though, that the virtue of utilitarianism is that it “provides a coherent analytical framework and a basis for assessing empirical claims respecting specific property rights and existing property regimes” (p. 31), and they consistently apply this utilitarian framework—legal rules reflect a trade off between dynamic benefits and static costs—to patents, copyrights, trademarks and trade secrets.

For anyone interested in studying the utilitarian justification for intellectual property rights, this is one of the primary benefits of Laws of Creation. Unlike many journal articles and even some previously published monographs, Cass and Hylton provide a clear and succinct summary of the utilitarian framework of assessing the trade offs between dynamic and static effects of property rights, including intellectual property rights (Chapter 3). To wit, “dynamic effects” refer to the benefits and costs of new property rights that are created by the promise of exclusive rights secured under the law, such as creating a new skyscraper on a parcel of land, a new drug, or a new book.  “Static effects” are the costs and benefits that arise from securing exclusive rights in existing resources, such as the costs of the higher prices that a patent owner can demand in selling patented innovation in the marketplace. The core question of the utilitarian analysis of intellectual property rights is “How do the static costs of such rights compare to the dynamic benefits?” (p. 44).

Their discussion of the distinction between dynamic benefits and static costs is valuable for a couple reasons. First, their presentation of this fundamental premise in the utilitarian analysis of intellectual property rights is not cast at too high level of abstraction. In fact, they make excellent use of compelling examples from pharmaceutical drugs, computer technology and other modern marvels of patented innovation to give this theoretical distinction in modern utilitarian-based economic analysis some substantive reality. In contrast to Cass and Hylton, many other presentations of this analytical fulcrum in the utilitarian analysis of intellectual property rights, especially by law and economics professors, are usually made in the form of complex and somewhat rarefied economic models. For anyone who is not an economist or who is not already deeply familiar with the literature, Laws of Creation is an eminently accessible work (and substantial endnotes point readers to the important works in the literature for further study).

A second and more important reason is that Cass and Hylton avoid an unfortunate reductionist error that is all too common in many utilitarian analyses of intellectual property rights. It is often asserted that the trade-off between costs and benefits is between the benefits of incentivizing inventors to create and the costs of the access restrictions imposed on the public by the resulting patent right in the innovation. In patent law jargon, this is called the “reward theory” of patent law. But this is an unduly narrow and reductionist account of the incentive effects for dynamic innovation created by intellectual property rights. As Cass and Hylton recognize in Laws of Creation, intellectual property rights also incentivize dynamic commercial innovation.  They make this point early in the book, writing that “capitalists who finance innovation will not do so without the promise of a reward” (p. 36).

In patent law, for instance, patents certainly provide incentives to inventors to create new inventions, but this is not patent law’s only policy concern. Patent law also incentivizes capitalists who, in our division-of-labor economy, create the commercial institutions and other private-ordering mechanisms necessary to distribute these new inventions through the marketplace (see here and here). A complete account of the utilitarian analysis of patent law like that provided by Cass and Hylton recognizes that patents incentivize both inventors and commercial intermediaries to innovate in their respective contexts. These two policies—the incentive to invent and the incentive to commercialize—are both necessary in describing and evaluating the function of the patent system.  Inventors will not see the fruits of their productive labors secured to them unless capitalists create the private-ordering mechanisms that convert their inventions into real-world patented innovation, such as smart phones, tablets, medications, etc. It bears noting that these two policies apply equally in copyright law as well (see here).

Cass and Hylton are also to be commended for their sensitivity to the limitations of the utilitarian analysis of intellectual property rights. They acknowledge that, while utilitarian cost-benefit analysis requires data, “little empirical evidence exists to shed light on the issues central to the design of intellectual property rights” (p. 45). This is important because they also recognize that, according to their utilitarian theory, “Whether property in information is a good idea is ultimately an empirical question—a question of the balance between costs and benefits” (p. 48).  But, as they admit, the empirical data is mostly unknown.  In fact, given that utilitarian analysis requires assessment of static costs to dynamic benefits, the existence of this empirical deficit is unsurprising.  The benefits side of the utilitarian trade-off equation refers to benefits from yet-unknown future technologies, commercial practices, and artistic works. Since empirical data is always ex post, this means that at least one-half of the utilitarian equation must, in the words of Cass and Hylton, “be assessed in the context of broader considerations of the nature of intellectual property laws” (p. 47).

Cass and Hylton’s acknowledgment of the limitations of the empirical evidence is laudable, as some utilitarians are less than forthcoming about both the benefits and the limits of this theory of intellectual property rights. It’s also important for understanding the project of Laws of Creation specifically and the utilitarian theory of intellectual property more generally.  With respect to Laws of Creation, it explains why Cass and Hylton mostly apply very generalized comparisons of costs and benefits when they later get to the utilitarian justification for the core doctrines of the four primary intellectual property rights.  They do employ examples, especially from court cases, but careful readers will note that the type of empirical studies one expects to find in economically-framed cost-benefit analyses is mostly missing from the book. As a result, some readers might be tempted to dismiss the chapters on particular doctrines as too generalized and superficial.

But Cass and Hylton explicitly disabuse readers of committing this error of a hasty dismissal; they explain early in the book that this more generalized framing of the cost-benefit analysis is intentional, and that they apply specific evidence only where it actually exists.  For instance, there is no specific empirical evidence on whether exclusion of mathematical formulas from the patent system maximizes or undermines social welfare.  What the utilitarian theory of assessing trade offs between static and dynamic effects can tell us is that this basic rule in patent law makes sense and that it can be efficient.  Cass and Hylton thus rightly limit their claims in Laws of Creation to what they can sensibly prove given our current state of empirical knowledge about the trade offs involved in the design of legal institutions and legal rules.

Second, their acknowledgement of the limits of empirical evidence in utilitarian analysis of intellectual property rights is important for those of us who are not utilitarians, as scholars like Eric Claeys and I apply a Lockean or labor theory of property to explain and justify intellectual property rights (see, for example, here and here, and here).  The lack of actual empirical data indicates that utilitarianism is actually no more or no less determinate than a Lockean or natural rights theory in explaining and justifying intellectual property rights. Although Cass and Hylton only briefly refer to this common claim of utilitarianism, i.e., it is determinate in its normative guidance relative to a natural rights theory, their book confirms that this claim is illusory. Although the use of scientific concepts from economics and other social sciences makes utilitarianism sound determinate in the abstract, the omnipresent deficit of empirical data that is required to prove with robust conclusions that specific doctrines and their application in specific cases is efficient or not indicates that such claims to determinacy are a false promise.

This more generalized concern about utilitarianism brings me to a more specific fault of Laws of Creation.  Although Cass and Hylton provide one of the more balanced presentations by utilitarian scholars of a natural rights theory of intellectual property rights (p. 17-20), they still fall prey to repeating the mistaken conventional wisdom among utilitarians that Locke’s labor theory of property produces “absurd results” because it requires a quantifiable and measurable “proportionality” between labor inputs and property outputs (p. 19). They also repeat the conventional wisdom that Locke’s property theory “broke down when applied to goods that are nonrivalrous” (p. 24).  As I have explained in a recent article, Saving Locke from Marx: The Labor Theory of Value in Intellectual Property Theory, this is straw-man argument that produces an all-too easy dismissal of Locke’s theory as nonsensical and incomplete. It has also blinded modern scholars to recognizing how and why Locke expressly endorsed copyright as “property,” and why he endorsed “inventions and arts” as exemplars of his labor theory of property in the Second Treatise.

Applying the classic utilitarian trade-off analysis, though, the benefits of Laws of Creation far outweigh its costs. Given the intensity of the public policy debates today, Cass and Hylton’s restatement of and further development of the utilitarian theory of intellectual property rights is valuable and contributes to these debates in important ways.  This is especially true given that one of the founders of the modern economic analysis of intellectual property rights, Judge Richard Posner, is now arguing in both his opinions and in public commentary that the patent system is broken. It’s fitting that Cass and Hylton have now offered a substantive counterpoint to the arguments advanced by Posner against the patent system. Laws of Creation establishes that it’s not a foregone conclusion that the utilitarian theory of intellectual property rights now counsels that legal protections for patents and other intellectual property rights should be rolled back or even outright eliminated in some areas.