Innovation

Looking beyond IP Internalism


In a previous post, I had mentioned Kapczynski’s paper “The Cost of Price: Why and How to Get Beyond Intellectual Property Internalism“. Since then, I’ve had a chance to read it more thoroughly and will be reviewing the article here as it goes over a topic I personally find very important and relevant. (Full disclosure: I had RA-ed for Prof Amy Kapczynski in 2010 and she is also on my dissertation committee.) Also, Warning: Longer than usual and theoretical (but very interesting) post ahead! 


Previously, I have commented on alternatives / variations to the typical patent-incentive based innovation, though primarily in the health sector. (Medicines Patent Pool, Health innovation Fund). I’ve also discussed the efficiency problems within exclusion rights (ie, patents) here (and outside the blog, here). Most relevant to this current post though, I have discussed a rough framework for alternative innovation system in light of the failure of a market based framework to sufficiently align with the the interests of society

It is this last (underlined) bit which seems to be the starting basis for Kapczynski’s paper and she very clearly elucidates reasons for looking beyond the current IP framework that most of the innovation discussion seems to revolve around. She starts by identifying at least 2 other major scientific and cultural generation mechanisms that we as a society use. 

1. The Commons-based approach: In the US, about 1/3rd of all scientific R&D is funded by government and nonprofit sectors, with the results often being disseminated under norms of open scientific exchange, rather than under property rules. Similarly, in the cultural arena, with the advent of the internet and opening up of ability to share and create content, the rate of generation of content has exploded. 
2. Financial inducement prizes: This method, while once popular, declined in usage but is again generating growing interest in the field of informational economics. 

With these two in mind, let us look at IP again. 

Since information is a nonrival good (ie, my usage of it does not take away from your usage of it), the most efficient manner of sharing information is by freely sharing it, but free sharing may reduce the incentive to generate the information in the first place. IPRs provide the incentive to produce this information by removing other’s ability to free-ride on the costs incurred in generating that information. However, by excluding others, deadweight loss is generated since information is not being used by as many as it could have been. This is then countered by the argument that this deadweight loss serves as the incentive for dynamic efficiency – ie, more future production of scientific and cultural goods. 

Moreover, the IP structure, provides an advantage over government production (and other systems), because it generates market signals and these guide future allocation of resources for more production of scientific and cultural goods. As she says, “This argument has been so deeply internalized in the field of IP law that it is typically taken for granted.” And no doubt, most debates in IP, notably access to medicines, software and media related, argue how the inefficiencies within the system can be reduced. 

What her paper discusses though, are the tradeoffs between IP and other institutional approaches to innovation, such as the methods mentioned above; rather than the standard approach of trying to figure out the optimal balance between access and incentives within the IP system by tweaking exceptions and limitations. The fundamental values that she considers while discussing tradeoffs between the institutional approaches, are primarily efficiency, distributive justice and surprisingly, privacy. 

Looking at the IP system now from beyond merely an ‘internalist’ view:

Price is the factor for determining production of goods. Thus, information is produced as to what direction of investment is most likely to be supported by the market.  However, what this also means is that needs of the poor will constantly be put behind needs of the richer, and this relationship leads to a self perpetuating cycle as more information goods biased towards the rich’s needs are produced and then in turn used for further production of information goods. That is not necessarily a negative on its own. 

However, certain basic information goods are increasingly gaining importance as requirements in the realisation of important freedoms and capabilities that all should have access to. Is this a price worth paying? 


I – Efficiency Arguments: 

Now to compare with other systems. In bold is the characteristic of IP and in plain text is the comparison with the two other systems. 

A) As discussed above, the IP system inherently has negative externalities in the form of static inefficiencies caused by exclusion rights. They are later ‘justified’ by allegedly serving as incentives, but they are still present. 
— There are no exclusion rights in the two other systems, therefore no negative externalities generated by artificial price rise. This is a huge advantage for the other two systems as there is no deadweight loss and incentives don’t need to be balanced against access. 

B) As price signals determine the direction of growth, innovation is biased towards the needs of the rich and this relative lack of advances of science and culture directed at the poor leads to a reduction in the abilities of the poor to realise certain basic freedoms and capabilities. 
— Information gathering for direction of growth is a problem in the other systems. Investment would be required for finding the required information. Depending on the sector however, it is possible that the government can have better information. On the flip side, biases can be better avoided. 

C) Racing and information asymmetry leads to duplication and wastage of resources. Patent law gives its ‘reward’ to the first one who reaches it. Thus all other competitors who were also working towards that goal but do not receive the patent, have wasted their resources in chasing it. It is impossible to know which firms are working towards the same goals because firms will want to keep secret any information that gives them an edge. 
Racing is also a problem in prize systems. Government procurement though can limit the number of entrants so can reduce the risk of racing when it is a problem. 

D) IP uses private information such that companies/individuals self-select whether they are best suited to compete or not. 
— Prize systems too have this advantage too, since entrants determine whether they feel best suited to compete or not; however government procurement does not as they select (with less information) who will compete. Government contracting via auctions etc, can mitigate this risk to some extent. 

E) IP ties the incentive for production to the market, so generally private players have sufficient information about the market value of a desired creation or invention. 
— IP has relatively more certainty in incentive than the other two systems. However, prizes can be structured to give ex-post rewards, with the reward being tied to the social value of the product. Recent work has also shown that rewards can be tied to market signals as well. However, the government often is less likely to know about the possibility for creations or inventions and thus, even less likely to know their value. 

F) Transactions between those who create and those who benefit are hazy, thus there can be high transaction costs. Ie, the uncertainty about what fair use means, or the scope of a patent, etc. 
— On the other hand, commons based production have flown so smoothly that consumers are often producers as well. (youtube, open source software, etc). This is due to a combination of the price (since it no longer needs to be balanced against an incentive) and self-selection of producers/consumers. From my observation, this is seen especially strongly amongst those who’s primary incentive is not financial. 

—- There may have been some more points she’s raised in the article that I’ve missed, if so, please point them out in the comments section —-  


Thus, comparing IP with the other two systems in terms of efficiency, it is seen that  compiling and comparing all the efficiency points between systems, there is no clear reason to view IP as more efficient than the alternatives. 


Once this is established, it is helpful to look at values other than efficiency to help guide us to a system. 


II – Distributive Justice Arguments 

She makes a number of fair points regarding the scope for improving distributional justice within the IP system (page 993 – 1000), but I’ll skip over those for now. Continuing from the externalist perspective, ‘distributive justice’ can be considered a state wherein there has been a ‘just’ allocation of resources – here – informational goods. 

Naturally, the Commons have an immediate attraction to the distributive justice perspective as ‘free access’ removes all price barriers. Aside from this obvious connection though, it also has advantages in that price-less distribution ensures that informational resources are allocated and further prduced regardless of existing wealth, which means that other signals such as perhaps creativity or even simply ‘need’ become more relevant. 

However, Governmental production has an even bigger advantage in terms of distributive justice. Since it would be focusing resources to consumers who ‘need’ them more, and will (likely) be funded through some sort of progressive tax system, it will essentially be using money of the rich to fund and produce informational goods for the poor – thus  also redistributing wealth. This is also it’s disadvantage though, as it excludes transnational systems due to a lack of an ‘international tax’ system. 

Her paper does not discuss the inherent question with this though – what exactly is a ‘just’ allocation of resources? I get the feeling that this question has been glossed over in favour of the assumption that while it may be difficult to determine what exactly ‘just’ is, in more broad and current terms, it is simple enough to identify the clearly unjust allocations – and an attitude of “we will deal with the finer nuances of ‘just’ when we come to them as they’re still a long way off”. 

As long as certain information goods – such as education and healthcare – provide access to certain basic freedoms and capabilities, distributive justice advantages will be very persuasive. Contrarily, IP, with it’s dependance on market signals (price) for development direction, is not a useful system for fulfilling this goal. 


III – Privacy Arguments

While at first, it seems confusing that ‘privacy’ is taken as a value, this is perhaps the most interesting angle that the paper takes. As stated before, static inefficiencies enter the IP system because rents need to be taken. When taking these rents, the deadweight loss suffered by is sought to be reduced as far as possible through means such as price discrimination – ie, exceptions and limitations. To perform this price discrimination though, personal information of the consumer is required and this is not required in other systems. 

So, what is the value of information privacy? Once again, very interestingly, the paper points out 2 issues

Firstly: what happens when there is a lack of privacy – constant surveillance, which in turn hampers robust public debate as repercussions contribute to the guidelines for the content of our debates.  
Conversely, when our private information is used to direct content towards us, the filter-bubble effect becomes a cause of concern. (I had written a less articulate version of the same concern earlier this year here). Essentially, in an extreme form, this means that we surround ourselves with our own views till we can no longer see criticisms by others or even just other viewpoints. In a less extreme form too though, we limit our constructions and creations by limiting the input we get. 

She further discusses several more nuanced aspects of the two issues here, for those who are interested in reading up on it. These two concerns need to be treated very differently, of course, but the main takeaway here is that the IP system pushes us towards a system which generates a tension between information privacy and efficiency. (more privacy = less efficiency, and vice versa) 

Looking at the alternatives: Government provisioning and prize systems will also require certain amounts of information, however not the same detail of private information that is required for price discrimination. More vaguely defining possibilities such as aggregate data for certain classes of people, or age ranges, etc, are possible manners of collecting information. 
Commons based production, on the other hand, seems more random. With incentives ranging from ‘personal desire to create’ to ‘reputation’ to ‘user driven’ innovation, etc, there is no clear connection between private information of a consumer and generation of a product. Sometimes it may be high, sometimes it may be zero. She gives the example of Wikipedia receiving the least ‘intrusive to privacy’ score in a comparison of the top 50 websites of USA. 

Conclusion
Her paper gives a strong backing to the argument that IP does not have any clear efficiency advantages over other systems of science and culture generation. Once this is understood, taking a step back and looking at other values that can be used as determining factors for an innovation system becomes a sensible step. She does not mention other values that could be used, and perhaps there are more. But the values that she does take into consideration – distributive justice and information privacy – are ones that show alternatives to IP to be more desirable than IP. She rightfully does not pick a particular system, but merely puts forward a few different ‘externalist’ tradeoffs that can (and probably should) be evaluated while taking the discussion on innovation systems forward. 

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