Greenspan on the Internet, intellectual property rights [ip]

[Declan McCullagh <declan () well com>]

http://www.federalreserve.gov/boarddocs/speeches/2004/200402272/default.htm

Remarks by Chairman Alan Greenspan
Intellectual property rights
At the Stanford Institute for Economic Policy Research Economic Summit, 
Stanford, California
February 27, 2004

[...]

More generally, in the realm of physical production, where scarce resources are 
critical inputs, each additional unit of output is usually more costly to 
produce than the previous one; that is, production, at least eventually, is 
characterized by increasing marginal cost. By contrast, in the realm of 
conceptual output, much of production is characterized by constant, and perhaps 
even zero, marginal cost.

For example, though the set-up cost of creating an on-line encyclopedia may be 
enormous, the cost of reproduction and distribution may be near zero if the 
means of distribution is the Internet. The emergence of an electronic platform 
for the transmission of ideas at negligible marginal cost may, therefore, be an 
important factor explaining the recent increased conceptualization of the GDP. 
The demand for conceptual products is clearly impeded to a much smaller degree 
by rising marginal cost than is the demand for physical products.

But regardless of its causes, conceptualization is irreversibly increasing the 
emphasis on the protection of intellectual, relative to physical, property 
rights. Before World War I, markets in this country were essentially uninhibited 
by government regulations, but they were supported by rights to property, which 
in those years largely meant physical property. Intellectual property--patents, 
copyrights, and trademarks--represented a far less important component of the 
economy, which was mainly agricultural. One of the most significant inventions 
of the nineteenth century was the cotton gin. Perhaps it was a harbinger of 
things to come that the intellectual-property content of the cotton gin was 
never effectively protected from copiers.

Only in recent decades, as the economic product of the United States has become 
so predominantly conceptual, have issues related to the protection of 
intellectual property rights come to be seen as significant sources of legal and 
business uncertainty. In part, this uncertainty derives from the fact that 
intellectual property is importantly different from physical property. Because 
they have a material existence, physical assets are more capable of being 
defended by police, the militia, or private mercenaries. By contrast, 
intellectual property can be stolen by an act as simple as broadcasting an idea 
without the permission of the originator. Moreover, one individual's use of an 
idea does not make that idea unavailable to others for their own simultaneous 
use. Even more importantly, new ideas--the building blocks of intellectual 
property--almost invariably build on old ideas in ways that are difficult or 
impossible to trace. From an economic perspective, this provides a rationale for 
making calculus, developed initially by Leibnitz and Newton, freely available, 
despite the fact that those insights have immeasurably increased wealth over the 
generations. Should we have protected their claim in the same way that we do for 
owners of land? Or should the law make their insights more freely available to 
those who would build on them, with the aim of maximizing the wealth of the 
society as a whole? Are all property rights inalienable, or must they conform to 
a reality that conditions them?

These questions bedevil economists and jurists, for they touch on some 
fundamental principles governing the organization of a modern economy and, 
hence, its society. Whether we protect intellectual property as an inalienable 
right or as a privilege vouchsafed by the sovereign, such protection inevitably 
entails making some choices that have crucial implications for the balance we 
strike between the interests of those who innovate and those who would benefit 
from innovation.

In the case of physical property, we take it for granted that the ownership 
right should have the potential of persisting as long as the physical object 
itself. In the case of an idea, however, we have chosen to strike a different 
balance in recognition of the chaos that could follow from having to trace back 
all the thoughts implicit in one's current undertaking and pay a royalty to the 
originator of each one. So rather than adopting that principled but obviously 
unworkable approach, we have chosen instead to follow the lead of British common 
law and place time limits on intellectual property rights.

It is, thus, no surprise that, as a result of the increasing conceptualization 
of our GDP over the decades, the protection of intellectual property has become 
an important element in the ongoing deliberations of both economists and jurists.

Of particular current relevance to our economy overall is the application of 
property right protection to information technology. A noticeable component of 
the surge in the trend growth of the economy in recent years arguably reflects 
the benefits that we have derived from the synergy of laser and fiber optic 
technologies in the 1960s and 1970s. This synergy has produced very little that 
is tangible in information technology. Yet the information flow that it 
facilitates has fostered the creation of vast amounts of wealth. The dramatic 
gains in information technology have markedly improved the ability of businesses 
to identify and address incipient economic imbalances before they inflict 
significant damage. These gains reflect new advances in both the physical and 
the conceptual realms. It is imperative to find the appropriate intellectual 
property regime for each.

* * *

If our objective is to maximize economic growth, are we striking the right 
balance in our protection of intellectual property rights? Are the protections 
sufficiently broad to encourage innovation but not so broad as to shut down 
follow-on innovation? Are such protections so vague that they produce 
uncertainties that raise risk premiums and the cost of capital? How appropriate 
is our current system--developed for a world in which physical assets 
predominated--for an economy in which value increasingly is embodied in ideas 
rather than tangible capital? The importance of such questions is perhaps most 
readily appreciated here in Silicon Valley. Rationalizing the differences 
between intellectual property rights as defined and enforced in the United 
States and those of our trading partners has emerged as a seminal issue in our 
trade negotiations.

If the form of protection afforded to intellectual property rights affects 
economic growth, it must do so by increasing the underlying pace of output per 
labor hour, our measure of productivity growth. Ideas are at the center of 
productivity growth. Multifactor productivity by definition attempts to capture 
product innovations and insights in the way that capital and labor are organized 
to produce output. Ideas are also embodied directly in the capital that we 
employ. In essence, the growth of productivity attributable to factors other 
than indigenous natural resources and labor skill, is largely a measure of the 
contribution of ideas to economic growth and to our standards of living.

Understanding the interplay of ideas and economic growth should be an area of 
active economic analysis, which for so many generations has focused mainly on 
physical things. This work will not be easy. Even as straightforward an issue as 
isolating the effect of the length of patents on overall economic growth, a 
prominent issue recently before our Supreme Court, poses obvious formidable 
challenges. Still, we must begin the important work of developing a framework 
capable of analyzing the growth of an economy increasingly dominated by 
conceptual products.

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