Against Laissez Faire IP

Reading Doug Jones' blog posts critical of IP from a theological/ethical perspective has been kind of fun, because I've always been a huge fan of Stephen Kinsella's 2001 Journal of Libertarian Studies Against Intellectual Property. I think Kinsella, and Jones in channeling him, is right that intellectual property isn't "property" in the traditional common law or judeo-Christian sense. It's a monopoly right, pure and simple. The government affords a monopoly right to a creator, which will expire at some later date, as a prize for creating some kind of valuable good. The market ultimately determines the value of that good, and the government simply provides law enforcement to keep others from providing the same good, such as by enforcing laws against pirateers.

But I think there is still the last ethical category by which economic outcomes are usually judged, and that's efficiency. This is usually not addressed in Jones or Kinsella's writings, that I can find. The problem, again, with intellectual goods is that they are socially beneficial, but the incentives to create them don't always line up because which intellectual goods are valuable ex ante isn't known. So there's tremendous experimentation. I've read that it costs a pharmaceutical firm approximately $800 million on average to bring a drug to market. In other words, high fixed costs. Once created, though, the intellectual good is simply nothing more than a recipe - directions, in other words, to be followed by someone other than creator which will essentially make an exact duplicate. Thus, zero marginal costs of production. In a competitive market, prices fall to marginal cost, meaning zero revenues to be earned ex post. So you can do the math: q x p=total revenue, and if p=0, then total revenue equal zero, and so profits equal zero. Thus, through backwards induction, the firm never invests the scarce resources in the R&D, and the valuable good is never created.

Patents, copyrights, trademarks, trade secrets - they have serious problems and society does incur costs for their enforcement, primarily in the form of monopoly pricing. After all, the patent gives the patent holder a monopoly right, and monopolists price above marginal cost, depending on the price elasticity of demand. And this is of course, ex post, inefficient. But, my opinion is that for all the inefficiencies created by IP, it is still pareto-improving compared to that advocated by Kinsella and Jones. The real solution is to make patents expire at a point that is proportional to the benefit-cost ratio associated with the good's creation. If it takes ten years for presently-discounted benefits to equal the fixed costs of discovery, then the patent should expire in ten years. If it takes only one year, then one year. Point is, a variable expiration date on IP is likely welfare-enhancing.

Whether such a scheme is possible is another matter, altogether - perhaps the costs associated with that kind of moving patent length is itself too high to justify the welfare gains. I have no idea.