I want to welcome you all here today for the 6th Annual Frey Lecture and Intellectual Property.
This lecture has come to play an important role in the strength of Duke Law School's
menu of intellectual activities
encompassing a broad range of scientific inquiry and technological innovation where intellectual property plays a key role,
including biotechnology,
telecommunications, health, and the environment. As the choice of this year's speaker reflects the focus at
Duke is distinctively
interdisciplinary with productive connections being drawn between intellectual property and economics,
philosophy, political theory, public policy, computer science, and artistic creation.
The intellectual activities at Duke, including this lecture series, have explored the core relationships between business innovation,
entrepreneurship,
politics and property, and cross national as well as
disciplinary boundaries.
On behalf of the institution I want to say how grateful I am for the donors whose generous gift makes this annual lectureship
possible: Kip and Meredith Frye who are here with us today. And
also how thrilled I am that we were able to persuade this year's lecturer, Dr.
Joseph Stiglitz, to come to Duke. To introduce Dr. Stiglitz, I will turn the podium over to professor Jerome Reichman.
Thank you, Kate, and
particularly
Kip and Meredith Frye for making this wonderful lecture series on intellectual property possible.
We also want to thank David Lang for working with the Frye's to arrange this lecture series and,
not incidentally, for also having brought James Boyle and Jerry Reichman, to Duke.
We also want to thank our precious colleagues at Fuqua and the Sanford Public Policy Institute:
Tracy Lewis, Wes Cohen,
Jim Anton, Bob Cook Gagan, and Anthony So, among others, who have so enriched our intellectual property program.
We are all delighted to have Professor Stiglitz with us today to discuss the economic
foundations of intellectual property law. As you know,
in 2001 Professor Stiglitz received the Nobel Prize in Economics for his groundbreaking
analysis of markets with asymmetric information. He helped to create a new branch of economics
known as the Economics of Information
and he's continuing his pioneering work in that area as we learned this morning in our
conversations with him. On the academic side, he taught at Yale, Princeton, Stanford, MIT, Oxford and is now at Columbia. On the
public service side he served as President Clinton's Council of Economic
Advisors and chaired it for two years. He then became chief economist at the World Bank, and
his book
Globalization and its Discontents
has been translated into 35 languages and sold more than 1 million copies.
And now he has another book out there Making Globalization Work.
We invited Professor Stiglitz to deliver this lecture, not only because he is an eminent and pioneering scholar,
researcher, educator, and public servant,
but because of the importance of his work on the increasing globalization of intellectual property.
In particular he has focused on perceived impediments that intellectual property seems to be putting in the way of both
innovation and world development
despite special interest claims that intellectual property is the key to innovation and worldwide
development. As a member of President Clinton's Council on Economic Advisors
he is on record as having opposed the TRIPS Agreement of
1994, which
Elevated international intellectual property standards for some 145 members of the World Trade Organization.
He said then that quote, it was bad for American science, bad for world science, and bad for developing countries.
10 years after the TRIPS Agreement
this topic is more controversial than ever.
Some leading developing countries, notably Brazil, China, and India have increasingly entered the intellectual property arena
with a growing number of patents and innovations and yet their governments have protested strongly
against the imbalances in TRIPS and in later free trade agreements
and they have lobbied for a more development friendly agenda at the World Intellectual Property Organization and the World Trade Organization.
Professor Stiglitz's group at Columbia, The Initiative for Policy Dialogue, has established a task force on intellectual property
to investigate these matters more systematically and I'm privileged to serve as a member of that team.
Meanwhile Professor Stiglitz himself has increasingly focused his formidable into analytical powers on these matters
and he has published a series of papers and speeches
challenging much of the received rhetoric about intellectual property.
We have asked him here today to share his insights with a broader audience
under the auspices of the Frey Lecture. We are honored that he has accepted our invitation
and is my great privilege to invite him to the podium. Professor Stiglitz.
Well, it's a real pleasure to be here
for a number of reasons. It's really been wonderful to be at a place where so many people are interested in intellectual property.
When I was, as I mentioned, when I was in the
White House Council of Economic Advisers it was hard to get anybody interested in the subject of intellectual property
other than
the U.S.TR, the us Trade Representative, whose view was the stronger the intellectual property received the better. And
trying to to explain to Mickey Kantor
what intellectual property was and why it was important to get it right
was a challenge. He nodded his head, but went off to Geneva with his own agenda
or I should say with the agenda of the of the
drug industry and the entertainment industry.
The...
last night a question came up,
you know, when did my interest in this begin and actually my work in this area actually began some 40 years ago.
A long time.
When I
realized I as I was beginning my work on the economics of information
I realized that knowledge and information are really very, very similar. In fact you can view information as a particular kind of
knowledge. And so the problems that I
had
described, was in the process of describing analyzing at the time, in
how well the market economy deals with information
also applied in a
variety of ways to how well the market economy deals with knowledge. And I'll come and talk about that a little bit more.
But what was clear is that the standard paradigms of well-functioning market solving the problems, Adam Smith's the Invisible Hand,
Just didn't work. Some of you may know one of the
important results in my work in that area
was to argue Adam Smith's Invisible Hand was argued that individuals in the pursuit of their self-interest,
maximizing profits, were led as if by an invisible hand to
the general welfare, well-being of society.
And what I had shown in a
number of my papers was that the reason that the Invisible Hand often seemed invisible was that it wasn't there.
And
this had led me to a certain degree of skepticism about the standard
perspectives on intellectual property. And
as it was mentioned when I was at the Council of Economic Advisers we opposed
TRIPS. Interestingly so did the Office of Science and Technology Policy.
So it wasn't as if we were alone
It was really,
it...
it was really
a
view of most of the people who understood the issues versus most of the people who had some special interest
on this issue.
When I went to the World Bank
I continued perhaps even more so involved in the issue because one of the things that separates
developed and developing countries is not just the disparity, the gap and resources, but also the disparity of knowledge. And
closing that gap in knowledge is is an essential part of
successful development. And the World Bank has an annual report called the World Development Report where
highlights every year a key issue. When the first year I was at the World Bank
we focused on the problems of knowledge, knowledge for development. And I
included, I had a
included there a a critique of TRIPS and what we called an unbalanced intellectual property regime. I
view one of my minor
victories was that
I anticipated the U.S. Treasuries blood pressure
would rise when they saw this.
So I
arranged that at the meeting of the of the board of the World Bank, where this was going to be discussed,
I make sure that we got strongly criticized from India.
So it was right after the the U.S. Government U.S. Representative
gave the
predictable speech about how we were soft on intellectual property and had to revise our report.
India spoke up
and then a couple of other countries saying how that we our report was in fact very
unbalanced. It was too much pro intellectual property. And
after their strong criticism, which we had welcomed, the U.S. decided not to
pursue the issue anymore or lest they actually wind up with a report that was less favorable than the report that we had written.
Well the issue issue of intellectual property is one of that has become one of the major issues
I think of our global society.
Globalization is one of the most important issues of the day and
intellectual property is one of the most important aspects of
globalization and I mentioned that
In my book that just came out called Making Globalization Work.
I devote a whole chapter to the problem of intellectual property because I do think it is
an important and essential issue as we talk about the Knowledge Economy,
the new economy; the Knowledge Economy, how we regulate knowledge.
Rights to knowledge becomes actually at the center of how well this new economy, the Knowledge Economy
works, who benefits,
as well as both distributional issues and efficiency issues.
Maybe at the beginning I should express, make clear my ambiguous feelings about
intellectual property
by mentioning a story of a
couple stories of some of my first
personal encounters with intellectual property.
About twenty years ago, I got a
letter from a Chinese publisher
wanting me to write a preface to a pirated edition of one of my textbooks.
And as a good academic, I was enthusiastic about the idea
because my view was that that, you know, the reason that we write these things is not to make money
but to influence ideas, the influence the shaping of the intellectual debate.
China was beginning the transition to a market economy.
If my book helped shape that in a successful way that enhanced the well-being of over a billion people,
it would have been a major accomplishment. And, you know, looking at it
even in more narrow terms if
even one percent of those billion people read my book it was probably a larger readership that I would get in America.
Another example of the ambivalence a little bit later I was at a conference in Taiwan and
I knew that they had
mixed feelings about, we would say now,
inadequate enforcement of intellectual property rights. And
we had a break in the conference and I had a little time to go to a bookstore and as I
went to the bookstore I had a debate in my mind about what
I hoped to see when I got there. On the one hand
there was
the risk that there was the possibility that they had stolen my intellectual property, that they had pirated
one or more of my books. And of course we all know theft is a terrible thing and
stealing intellectual property is a form of theft and so I you know that would be terrible. On
the other hand the other possibility was that they hadn't stolen my intellectual property.
That is to say they
would have ignored me.
And as I walked to the bookstore I came to the conclusion that
being ignored is far worse
than having a property stolen and
I resolved that I would actually be much happier
If they had stolen my intellectual property. And I got there and in fact they had stolen it. So I was really...I was relieved.
Well, I think that...
I hope the tone of saying that as researchers, as academics,
we believe that we want our ideas to be disseminated to be...
We work quite hard.
In fact
going all kinds of places to disseminate our ideas, and that's very different from
what intellectual property does which is trying to restrict
the use of knowledge in one way or another.
And maybe I'm giving away my bottom line, which is a view that's very critical of
intellectual property.
What?
Let me begin by by talking about the
role of the intellectual property regime.
It's part of a Society's innovation system and its intent is to provide incentives to innovate by allowing
the innovator
to restrict the use of that knowledge and thereby obtaining a return on his investment.
But it's important as we think about
IPR, Patents, copyrights,
various other parts of the intellectual property system,
to realize that there are many other parts of a society's innovation system, that there are other ways of financing and producing research.
For instance
universities, government supported research labs. in fact I would argue,
perhaps modestly, that the most important ideas are not ideas that are generated.
Most important ideas are ideas that are generated in the universities and most, many of which are not
covered at all by the patent system. If you look at the basic idea underlying the computer, Turing's idea,
nothing was not protected, not protectable by the patent system.
Ideas like asymmetric information
are not covered by intellectual property.
Sometimes maybe I wish that they were. I would
probably be in a different economic position
than I am, but I think it would have been a bad thing for society had
these ideas
been covered by intellectual property.
While
many of you who are academics
with me by introspection ask the question what motivates you? It's clear
that
monetary returns is only a small part of what motivates you or you wouldn't be here.
And so
the whole framework of
what induces people to engage in research is really not captured by the intellectual property regime.
Now obviously, and I'm gonna come to this, you have to finance research. It doesn't come for free. It takes resources and
it's that question, how do we motivate but also how do we finance
research. And that's an important distinction I'll come to in a minute.
Another example of
an important
development an innovative source of innovation is the open source movement.
Again, which is not based on IPR.
Important in many areas of
software today.
And as I said in many areas of research and basic science, patents play a very small role.
There are other ways of providing
returns on knowledge than patents: trade secrets, there are first mover advantages, natural advantages in the market economy and
there are still other ways that we can think of a providing incentives. And one of them
I'm going to talk about later, which is a prize system. It's actually been a part of the innovation system
for several hundred years.
What?
Alright, I'm going the wrong way.
Ok the key question is
the role with a patent system with or the intellectual property regime within this broader innovation system, and
more particularly the design of the patent or IPR regime and there are a host of questions
which
absorb all the energies of all the lawyers
answering and at the level of superficiality that I'm going to be giving. I won't go into
many of these. I'll hint at these at a couple points,
but they address issues like what can be patented, the breadth of the pen, the standard of novelty
procedures
for granting patents, for challenging patents, the rules for patent enforcement, and the notion of
responsibilities as well as rights. For instance to get a patent you have to disclose
information. You're supposed to disclose enough information that somebody could
replicate what it is typically, one doesn't do that, but
or you've tried not to do that if you can get away with that. But the the notion, I mean this is
this disclosure
has long been an important part of the patent regime, you know, intellectual property regime,
arguing that this disclosure is one of the things that helps enhance, one of the reasons why IPR can
enhance innovation because people
can build on that knowledge, and I'll come back to that again. Knowledge is the most important input into knowledge.
But interestingly
in some of the more interesting recent intellectual property
disputes,
controversies, that notion is
being contested.
Microsoft has not wanted to disclose its code.
The European Union has insisted that it do that and it has done everything to
not to comply with the EU, with the EU requirement even to the point of risking
millions of dollars of fines.
And like any property right there are restrictions on the use.
The fact that you have a property right doesn't mean that you can do anything with it.
Somebody says you know owning a bat doesn't mean that you have the right to hit anybody over the head with it and
in the case of
intellectual property
one of the restrictions is you're not supposed to engage in abusive anti-competitive behavior.
And
there are important rights of the issue, the the rights of governments to issue compulsory licenses
are an important part of the patent regime.
One of the important responses to the abusive practices of
anti-competitive practices
has been
restrictions on
the use of
patents,
effectively compulsory license, forming patent pools. This is in the consent decree in the case of AT&T
in the 50s.
there was the
notion AT&T had to
make available its patents to anybody that wanted to use it. And I argued in my act filing with respect to
what should be done with the
anti-competitive behavior of
Microsoft that there ought to be restrictions on its
intellectual property as a way of dealing with its abusive practices and argued that it actually would enhance
those kinds of restrictions, would enhance innovation in our economy.
Well how these questions are answered. The role with the patent system. The design of the patent system.
How these questions are answered can affect the efficiency of the economy and its innovativeness.
There are a large cost to the current patent system and one of the questions is
are the reforms which
will improve its efficiency.
To understand or to answer these questions one has to
go back into the you might say the economic
foundations of what knowledge is. And I want to begin the discussion by talking about that.
Knowledge, the basic idea here is very important, s that knowledge is a public. good. It is a
technical term the way economists use it and let me explain when we economists use the term public good.
It's a concept that
Paul Samisen defined precisely
just over 50 years ago. And the notion of a public good is a good the consumption of which is
non-rivalress.
Difference of chair. Only one person can sit in the chair. If I sit in it, it's more difficult for you to sit in it.
Food. If I eat the food it's more difficult or you can't eat the food. So those are
private goods that
one person consumes it
another person can't consume it. Knowledge is different.
One person you know I've just told you some of the things I know just a little bit, but now you know those things.
But I also know them, you haven't taken away what I know.
So
Knowledge is,
it has this private property of non-rivalress risk consumption.
Another way of putting is there's no marginal cost associated with the use.
Thomas Jefferson put this much more poetically than
economists did and Paul Samisen did not give a footnote to Thomas Jefferson. it was an
appropriation of Thomas Jefferson's property rights, but fortunately there were only at that time limited duration of patents
and copyright.
But the way he put it was that knowledge was like a candle,
you can see this in you know, in the Thomas Jefferson Memorial.
They use the word taper, but nobody knows what that word means anymore.
Knowledge is like a candle. When one candle lights another it doesn't diminish from the light of the first candle and
understanding that
is
at the core of understanding
efficiency in knowledge. It's efficient to have knowledge distributed freely to everybody.
Now
if that were what happened it
creates problems in providing incentives for the production, and that's the
dynamic issue, but I want to first delineate
efficiency in use means it should be freely available.
The problem is that intellectual property circumscribes excuse and thus almost necessarily causes an inefficiency.
But
not only does IP create a distortion by restricting the use of knowledge it does something even worse, it creates
an even worse distortion: monopoly power.
I forget. You guys know. Who was that one  judge who said
monopoly is the supreme evil?
Anyway, I thought it creates a very large distortion in our economy. So
you know we have this this quandary. Not only
do we sanction this distortion, this inefficiency of restricting the use, creating monopoly power,
I say not only do we allow it it's part of our legal framework. Why? The reason is that we hope
that it will promote innovation, but if we don't design it right it may actually impede innovation.
So that's where I'm going to be going with the argument. Before getting there
I want to point out that the social cost of this distortion are especially high in the case of life-saving drugs.
One of the reasons that that I
opposed a TRIPS so strongly was that the intent of TRIPS,
one of the major reason,  the reason that the pharmaceutical industry was pushing for TRIPS was they wanted to make access to generic
medicines...to reduce access to generic medicines. The reason that generic medicines
are
so disliked by the drug companies is the same reason why they're so liked by everybody else.
Generics,
prices of generic drugs are very low and
the low price means that people will buy the generics and the competition with the generics drives down the price of the
pharmaceuticals and lowers their profits . And
to see the magnitude of this that's gotten a lot of attention is the aids drugs, but it's just one...
In the case of aids drugs the
year's treatment of the brand-name drugs, not the most recent ones,
but the older ones. The most recent ones are even more expensive are $10,000 a year for a years treatment.
The generic drugs are now under $200.
So if you are a poor developing country your per capita income is $300 or even
$3,000, you're not going to be able to afford $10,000.
So when those trade ministers signed the agreement, the TRIPS Agreement, in
Marrakesh in the spring of
1994, they were in effect signing the death warrants on thousands of people in Sub-Saharan
Africa and elsewhere in the developing countries.
And that is why this has generated such not surprising immense emotional
and deserving concern.
IPR is often used to leverage further monopoly power.
the most obvious example is Microsoft
where it has used its monopoly power in
its
intellectual property and monopoly power in an operating system to generate
monopoly power in
applications like office and
internet browser and used this monopoly power in a very abusive way.
The courts in the United States and the EU, Korea have all you know there's no disagreement about the fact that Microsoft has
engaged in abusive anti-competitive
practices. Everything should be clear. The only debate is what to do with it because it has so much monopoly power.
That one, it's not easy to figure out how you deal with this problem.
So it's not that if there's is an absolutely no debate about whether it has engaged in these abusive practice,
It's only about how you deal with them.
There's actually a long history of these kinds of abusive
uses of IP intellectual property rights.
Going back
the beginning of the last century,
the automobile was one of the most important innovations
and the airplane and both of those,
the success of those, the development of those were impeded by IPR. In the case of the automobile
the patent was granted,
an excessively generic patent was granted, for a four-wheel self-propelled vehicle.
Now never mind that
somebody else in the rest of the world might have had the idea before
this person. America has always been a little bit provincial in this. The United States, as you may know, gave a patent for basmati rice.
Indians had thought they had been consuming basmati rice for maybe a thousand or a couple thousand years,
but the judge in Washington or the patent office in Washington obviously hadn't had the pleasure of eating
basmati rice and they thought it was a wonderful innovation and
granted a
patent to it. And had India implemented the patent and enforced it
it would have meant that every time anybody in India ate basmati rice they'd have to send a check to
Texas to pay them for this idea that they had thought was theirs in the first place.
Well
in the case of this automobile
the guy who got the patent had no intention of
developing the automobile. He used it to form a cartel. And
one of the things those of you in business school know is that the best way of making money is not to come up with a better
idea but form a monopoly,
a cartel,
restricting competition.
Competitive marketplaces are very bad because they drive down prices and get rid of your profits, so
the IPR is an important way of maintaining a cartel and so most of the automobile companies
went along with that.
Except for one. There was one innovator who had a different conception of what what the automobile was about and that was
Henry Ford. He had the idea of a people's car, low price
that was totally inconsistent with the cartels view of a high price restricted usage,
and he challenged the patent. Had he not had the resources in the determination
he might not have been, he would not have challenged it and would not have succeeded. He eventually succeeded.
If he had failed, the development of the of the automobile would have been delayed
for a long time.
Given the concerns about global warming that might have been a good thing,
but that was not one of the issues that was on the agenda at the time.
Ordinarily property rights are argued for as a means of achieving economic efficiency
but intellectual property rights by contrast result in a
static inefficiency which could only be justified by the dynamic incentives.
Now I want to
foreshadow something I'm going to come to a little bit later. Of course any method of raising funds for
innovation as a social cost,
case the monopoly. It raises, the way you raise it is the disparity between the price and the marginal cost.
But the patent system is not an optimal way of raising money, It's not an optimal tax, it creates a
particular set of distortions, and that's why
It's particularly objectionable.
Recent advances in industrial organization suggest that these costs may be far higher than previously thought.
It is interesting that
standard competitive equilibrium theory pay very little attention
to innovation. The basic ideas that Chicago Economics is based on the Arrow-Debra Model
assumed that technology is fixed. You might say isn't that strange for
economists. How could economic theory pay any attention to models that assume technology is fixed in a dynamic economy? well
That's something that probably somebody in the sociology
field ought to address,
but it is the standard paradigm, the reigning paradigm, that ignores innovation.
But there was and
in most first-year graduate courses in economics, and most textbooks until my textbook came out, simply didn't talk about
Innovation in any systematic way.
But there was a strand of thought
associated with Joseph Schumpeter, Schumpeterian Competition, that did focus on innovation and argued that
this competition for innovation
resulted in temporary monopolies, but was one monopoly after another and so that you got a
sequence of competitive competition. It was this kind of Schumpeterian Competitionn as it was called.
But
one of the results that in my earlier analysis was pointing out that Schumpeter was just wrong about
the temporary nature of monopoly.
Once monopoly power, once established can easily be perpetuated. In fact there's an incentive to perpetuate that
monopoly power, and it's particularly evident in the case of network externalities
where there are situations where they're important switching costs, including learning.
And that's one of the reasons why Microsoft is so difficult to deal with.
Even if we stop the bad practices that led up to
having creatives monopoly power, the monopoly power persists after those bad practices have been terminated.
So the recent advances suggest that these economic costs may be higher, may be more...
may lost longer, but also that the benefits may be lower.
In particular that the incentives for R&D may be less and the
distortions in the direction, and there may be important distortions in the way money is spent that is to say in the direction of research.
And there of course, there's some further costs that
because some of these things depends on whether you view these as costs or benefits.
Transaction costs for lawyers are a benefit
because they're the source of income.
Just like the transaction costs and social security. If we move out of social security to a private social security system
those were viewed by wall street as a benefit
because the higher transaction cost hours somebody's income.
But
from the point of view of social perspective these administrative costs are a social cost
and they are high. And it also introduces a high level of uncertainty. Of course there's always an intrinsic uncertainty of research
but it's compounded by the risk of patent infringement
and the associated risk of litigation.
But
the
let me now turn to the the the issue. If
the patent system is to be justified,
given all its cost,
it's only in terms that there now make efficiency. And so that raises the question can one obtain these dynamic benefits at the
lower cost.
And what I'm going to try to argue later on is that I think at least in some cases it can.
But interestingly the worry is that the patent system
may not
because of the way it's poorly designed may even be slowing down the pace of innovation.
So it's not that the patent system is encouraging innovation, it may have an adverse effect on
innovation. And
the fundamental problem, and it's important to understand this, the fundamental problem is the rewards do not correspond to the marginal social returns.
So this is and everything after this is really a
fallacies from this, that that the patent system does not reward
people on the basis of what is the marginal social return of their contribution.
It's a proxy for that, and it's a very bad proxy. And
a result of that it increases a distortion and
everything after this is in a way of second third and fourth best economics. And
so that really is the
among the critical insight.
The margin of social return is having the innovation available earlier than it otherwise would have been.
That is to say if the idea was going to happen anyway
by somebody else then your contribution is just that the idea occurred a little earlier.
For those of us who write articles this is always a very frustrating thing. We like to ignore this. We think that you know
if it had not been. if I had not
solved the problem of how markets with asymmetric information
worked the problem would not have been solved. But the reality is that I know that when somebody else would have done it
maybe the next day or certainly the next month or the next year or maybe maybe of 10 years, but it would have happened.
So I can't really claim that you know the contribution wasn't really solving it was really solving a little bit
faster than anybody else did.
And that's what ought to be rewarded. If you believe in rewards corresponding to people's marginal social returns and
economic efficiency requires that people whose compensation is related to their marginal social returns. A
clear case where
you saw the distinction between what the people got and
what the marginal social returns has to do with the human genome project.
How many of you know this was a major project of decoding the human genome an international effort
and that
by certainly by the
early 90s. It was clearly on you know underway
clear view that it would be done within a few years - some debate about when it would be done,
but it was pretty clear that it would be done within a few years.
There was a race though among the private intrapreneurs
to get it down a little faster
and
they were willing to spend lots of money to get it done a
day faster, a month faster, Maybe a year faster. Why?
Because if they could
get
decoded,
identify a gene say the gene for
breast cancer. If they could get it done a year earlier,
they would have a patent and that would mean that anybody who wanted to get it tested
for to know whether they had a likelihood of getting breast cancer would have to pay a huge amount of money.
They would have a monopoly on the
use of this
gene,
and
Myriad got got this patent. It's been using, or I would say abusing, this patent.
There are others who have been willing to make the diagnostic test free,
but because they have they say no, you know, it's ours we own your gene.
You might think that you own it,
no they own it and to do this test you have to pay if you pay market price several thousand dollars. And
the result of this is of course that if you don't have insurance, and 50 million or more Americans do not have insurance,
it means that you cannot afford,
for most of these people who don't have insurance their income is not unlimited they can't afford to several thousand dollars that you have
to pay and they're not getting the test and many of them will die as a result of not having the appropriate diagnostic tests.
So that's a case where there's clear social cost and no benefit or
a very little benefit. The benefit was getting it one year and one month
faster than it otherwise would have done and the whole host of things of
examples of that of that kind.
Interestingly this is a case where other jurisdictions have taken another view. A case of Ottawa in the case of and
in Canada they've said this is too outrageous. We will not allow this patent and they've just not allowed it to be patented.
And so people in Canada can get this test.
There are further distortions
associated with monopolies that I've already talked about.
Monopoly does not have an appropriate incentive to do research in any case.
And finally much of the returns can arise from what is called
in closing the commons. I think Jamie was the first person to use that term in closing the commons,
taking
something that ought to be in the public domain and privatizing it and
in this case of course when you're privatizing, what is in the public domain there was a cost but no benefit and this
is evident in the controversy over biopiracy.
How many of you know the concept of biopiracy? The first time was introduced to the
concept of biopiracy I was in a small
village, an indigenous, Indian village in the high Andes of Ecuador and
you always get astounded at what
people will
talk to you about, what they know about. And they may know less about a lot of things
but there's certain things that they know a lot about.
They were in one of the villages I was there
they' were very worried about what I thought was going to happen to the euro dollar exchange rate because it affected their sales to Brazil.
But in this particular village
the mayor
went on a great length about what was happening in Ecuador because of biopiracy. Biopiracy is the patenting of
indigenous
medicines,
plants, a variety of indigenous ideas, traditional knowledge,
by American and other foreign
companies and again, you know, taking what was in the public domain and privatizing it.
Another example was basmati rice and another example that is equally dramatic
is the healing property of turmeric. Turmeric is a kind of a spice, a root
that has been known for its healing properties for
hundreds, probably thousands of years in India.
Two South Asian doctors working in the United States
recognize that under
American Law
you can,
they thought they could get a patent on this even though
it was known as I say in India they knew that probably the patent examiner in Washington wouldn't know it.
And
the view was it's not published of course any of you know there's a difficulty of publishing things that everybody knows
everybody except the patent examiner. So you have this problem of this
cach-22. You can't publish it because it's known but then if it's not published it's not known,
it's not prior and so you can get a patent. Well
so they got the patent
and so the
again the result is if India had recognized this in India had forced it would have meant that anybody in India
that used to Tumerick for healing purposes would have to send a check to these
Indian doctors in the United States
in recognition of their patent. Well it's obvious
this was not a patent that was generating research, an advance of knowledge in any way.
Well
these all help explain why it is that
the returns to patents do not correspond to
the social benefit,
but I want to go further and explain why it is as that patents may slow innovation and the
most important aspect of this is that knowledge is the most important input into the production of knowledge
and
intellectual Property restricts the input,
restricts access to knowledge and therefore, in other words, one way of thinking about it is to think about any production process.
If you increase the price of the input, it reduces the supply of the output, and
the input is knowledge. You would increase the price of the input. It restricts, it reduces the output
and
of course
incentives for innovation with monopolies are best then for a more competitive marketplace.
Monopolist can increase the profits by discouraging innovation by rivals and raising rivals cost.
You know one of the arguments against Microsoft, and I think a correct argument, was that this is what they did and
that in fact in one of the states one of the charges brought against Microsoft in it was not only that
Microsoft's behavior raised prices, but it actually slowed down innovation.
And that argument was also an important part of the EU art case
against Microsoft.
Another important
problem with a patent system
arises from the fundamental
difficulty in defining what it is, what a piece of
intellectual property is
A
case of land you can stake out the land, you can describe the land.
You still have boundary disputes, but pretty well, you can define what it is
the piece of property that you're talking about.
But intellectual property is different, it's very hard to define precisely what it is.
That you is your property and what else is there for what is in the public domain? What is out somebody else's
property?
It doesn't have clearly demanded, you know, longitude/latitude kinds of
specifications and the result of this is that
you get
what is called a patent thicket and that patent thicket can impede innovation again. This is a problem
that's been known for a very long time. The other, as I said, important innovation beginning of the last century was the airplane and
a patent thicket
impeded the development of the airplane.
There were
Here in North Carolina, you know,
about the Wright Brothers. You even have on your
license plate,
they got a Kitty Hawk here in 1903. They they got
some patents, but so did
Curtis Wright and the problem was it wasn't clear
If you wanted to develop an airplane who you paid off. If you paid off both of them, what they both demanded,
It didn't pay to develop the airplane. If you paid all the funding to one,
you risk the suit from the other. And
so the airplane wasn't developed until
World War I came along.
World War I it was recognized it was more important to
be able to bomb Germany than to
allow the patent lawyers
to make money,
so in that valuation of social benefits they decided to have a
patent pool. The government basically seized the patents and said we'll determine how much is paid to whom and
development of the airplane proceeded very quickly thereafter.
Of course not only is it
the case that patent says they say may
discourage innovation in general, it also may lead to a distortion in how in the pattern of innovation
our R&D activity can be directed at circumventing,
on the one hand,
monopolies getting around a patent or strengthening monopolies.
Clearly one of the...
arguably one of the concerns about
Microsoft's New Vista
Operating system is that it's
being designed to make interoperability more difficult, to strengthen
its
monopoly power.
In contrast has been creating new products and learning costs which enhance welfare.
So the point is that stronger intellectual property rights may not lead to faster pace of innovation.
Well, I want to,
as I said,
one needs to look at
the patent system.
Copyrights are within the broader innovation system and
there are a number of tasks as you look at that that one wants to identify.
This is not a complete list, but I think it identified at least a
partial list. The first is the selection of projects and researchers.
Now who is going to, who's going to do research
and what projects are going to be undertaken. The second one is financing. Knowledge is not constant,
so there has to be some way of financing it. Risk
absorption and research is risky you know if you knew the outcome it wouldn't really be research.
There is an inherent uncertainty about
research.
You have to incentivize
I don't know if that's an English word, but
you have to incentivize
individuals to do work, work hard, and you have to disseminate the knowledge when it is produced.
And
the key attributes in evaluating different parts of the innovation system is how well they perform these roles,
the cost they imposed in the economic system. I already referred to the patent systems high transaction
distortionary cost. I didn't mean a high distortion cost as well as the transaction cost.
Now I would argue that a well-designed innovation system will be a mixed system
involving the patent and other things like government provision of research, basic research:
university. And the question is are we relying too heavily on the patent system and
particularly is the patent system well designed for achieving the objectives? Should we reform it?
The critique of the patent system is that
besides the large static and dynamic distortions that I've just described, there is the problem of
finance. As I said before the way the system works is it's financed out of Monopoly profits.
That's how researchers finance, out of the Monopoly profits.
But you can view
conceptually the difference between the price and the marginal cost as a tax. In
other words you could think of this it's equivalent to...
you could think of this as a competitive system, but then I'm adding on to that a
tax on the marginal cost to bring it up, to raise the price to the price that is charged.
So you can think of the monopoly distortion as a tax,
with the revenue being used to finance research.
Now part of the problem is a lot of that revenue doesn't go to finance research. The drug companies spend more money on
advertising and marketing than they do on research.
Next financed by that discrepancy and of course as you probably know they spend more money on
lifestyle drugs like for hair than they do on life-saving drugs. So
there's a lot of you might call leakage in this particular tax system.
It's an inefficient tax system in delivering the revenue into
research where it's supposed to go.
But putting that aside you can ask
is it a good tax system, is it a good way of raising revenue for financing R&D? And
the answer is
no. It has one desirable property. It
actually, I think it's a
undesirable property but has one property that some people like it's a benefit tax.
That is to say the only people who are paying for a
heart medicine are the people who use the heart medicine.
So there's a linkage between who benefits and who pays,
but in most other areas we do not believe
it's a good thing to have a benefit tax and we particularly don't believe that it's
a good way of
raising revenues for diseases because one way of thinking about it
is that it's bad enough that you have a heart problem
but then to say because you have a heart problem you should also have to pay for
the medicine it is sort of like a double penalty. To put another way, if you wrote down any
utilitarian social welfare function, any Rawlsian Social Welfare function, any
model, philosophical model of Social justice,
you would not in the case of drugs use a benefit tax.
You just cannot justify it. There are other products in which a benefit tax might be justified, but not in the areas of
life-saving medicines.
But the other property is that it's a distortionary tax and
one of the major areas of public finance in the last thirty years has been to analyze what are the least
distortionary tax systems.
And
the benefit tax is
more distortionary and more inequitable than alternative tax systems.
So the the bottom line is the way we raise revenues for financing research through
the granting of monopoly power is not one that could be justified by any principles of public finance.
There's another problem which I think has not gotten
adequate attention. I know among lawyers almost everything has gotten attention, so I feel nervous about this,
but there is a bias toward success of patenting. And
that is
it arises because there's an asymmetry
between
the granting of a patent and fighting a patent.
When you
get a patent
you enclose
the commons, you make what otherwise would be public private, and so you get a private return.
There's a private return for getting a patent, but when you challenge a patent you create a public good.
Because if you successfully challenge a patent, that piece of knowledge then becomes in the public domain and
anybody can use it.
So challenging a patent is a public good. As in a case of other public goods, there's an under supply of public goods.
So the very structure of the patent system leads to a bias towards excessive patenting.
The result of course there will be under investment in fighting
bad patents and an over-investment
in trying to get bad patents.
And the problem can be exacerbated by
bad procedures.
There are in addition
a
number of inequities associated with IPR.
I
mentioned at the beginning of this talk that knowledge was a public good.
In fact it's a global public good, so the benefits could be enjoyed by anybody in the world, and
the standard principles of equitable finance say that a public work should be financed by those most able to pay.
But unfortunately IPR does not, for the most part, recognize differences in
circumstances other than the extent to which profits can be extracted. In other words differences elasticity's of demand
but not any other circumstances and therefore inherently
will be inequitable.
Moreover the legal system can lead to unfair outcomes. The high cost of
implementing IPR, including the high cost of challenge patents, puts developing countries at a disadvantage,
exacerbating the risks of biopiracy. Now one of the arguments was don't worry about these biopiracy things.
The patents won't survive.
The answer is it's very expensive to
challenge it. India as a rich, relatively rich/ poor country and it can afford challenging it.
But Ecuador
doesn't have the resources, and even in the cases where they've been challenging, one of the other
examples of biopiracy is a
variety of uses of Neem Tree, Neem Oil,
which again is used if you go
anywhere in India. You can get Neem Oil, used for a variety of purposes. The US and Europe granted
patents on, a large number patents, for a variety of uses of the Neem Oil even though they have been known in
India for a long time.
in Europe they were challenged, and
the challenge was sustained. That is to say the patents were overturned, but the U.S.
refused to overturn the patent, so the Neem Oil, the Neem patents were a continuum play enforced the United States
even though in another jurisdiction
they've been overturned.
The
one of the complaints I mentioned earlier was the access to generic medicines and
in the
TRIPS Agreement there was
something like in WTO has its own vocabulary; they call it flexibilities.
They have the flexibilities that allow people to issue generic medicines.
The flexibilities are very inflexible, however,
they're designed to make it difficult
to get it. There there are a whole set of procedures. If they really were interested in making sure that people had access to generic
medicines, they would have designed a completely different set of procedures. That would have looked very different.
And
relevant this is an issue that
Paschal Nami, who is the head of the WTO has been very upset at
my giving these lectures explaining how the WTO is causing people to die.
He thinks this is an unfriendly act towards the WTO so he he wrote me and said
we've known each other for a long time, said
you, you're forgetting about the flexibilities. But what he's forgetting about, as I said, the inflexibilities the flexibilities and that in fact
exacerbating the problems is the fact that when other countries
threaten to use a compulsory license the United States comes down on them with a like a ton of brick says that if you do that
we'll take all kinds of other actions and
even when they are complying with all the the rules of TRIPS. So it's not just that the rules were designed
to make it more difficult, but the way they are being implemented makes it more difficult to get access to these generic medicines.
This is probably one of the most important, most visible
concerns of the developing countries, but there are a whole set of
others.
One of the problems, one of the complaints of the developing countries is that while they are being forced to pay high prices,
brand-name prices,  the current system provides little incentives for R&D on diseases that afflict them. I
mentioned that the drug companies are spending very little money. We're spending more money
on marketing and advertising than on research. More money and
research on life-saving drugs than on,
or rather on
lifestyle of drugs than on life-saving drugs and almost all the money that they spend on
life-saving drugs go to diseases that advance industrial countries
and that's predictable. One of the problems of being poor is that you don't have any money,
and one of the problems if you don't have any money you can't spend a lot of money on drugs
even though you'd like to, even though if you don't spend the money you die. So
they clearly have a potential demand there if they only have the income but they don't have income
so the drug companies of course realize this and they've made it very,
some of them have been very upfront about it, and said you know we cannot solve, the a patent system does not provide us
the incentive for developing
cures, vaccines for the diseases that afflict developing countries.
It's taken a long while but finally
the World health organization has also recognized that the intellectual property regime is not addressing these concerns.
The
other concern is the one I mentioned at the beginning what separates developing developed countries is the gap in knowledge and
TRIPS has made it more difficult to close that gap.
More broadly even advocates of
free trade, are like Jagdish Bhagwati,
argued that TRIPS should never been part of the WTO.
At the same time, as I've already made clear, it provides a little protection for their intellectual property and
it's not just the issue of bio powers piracy, it's protection of biodiversity and
although this is not just TRIPS the fact is that the US has refused to sign the biodiversity
convention that was intended to provide some protection
for their
biodiversity.
The result of this is that the developing countries have called for a development oriented intellectual property regime.
It should be clear that there is no reason to expect that the design of an IPR system, which balances costs and benefits,
which is optimal for the United States, would be optimal for developing countries, and
they are,
as a result, calling for a more balanced intellectual property regime.
Well, I want to just conclude by, as I said,
arguing that we want to view IPR as part of an innovation system,
that there are other parts of this innovation system, government supported research for instance,
grants,
are an important part. The very, probably the most important part in supporting basic
research and basic research is obviously a very important part of our innovation system.
I want to talk very briefly about an alternative called the price system,
which gives a prize to somebody who comes up with innovation.
For instance you say if you come up with a cure for aids or vaccine for aids
you come up, you get a big prize. If you come up with a cure for Malaria, you get a
big prize. You come up with a me-too drug with slightly different side effects you might get a small prize.
So you could calibrate the prize with the nature, the magnitude of the contribution.
This idea is actually an old one. I was giving a talk in
Edinburgh, as part of the book festival last August, on my new book Making Globalization Work and
though my lecture was sponsored by the Royal Society of Arts and Technology
and
they were extremely enthusiastic about, and I discussed this idea in
that book, and they were extremely enthusiastic because they say they've been advocating this for 200 years.
And actually not only advocating it, using it.
Jaime was pointing out that they for instance
they thought it was important to come up with an alternative to
chimney sweeps, you know they used to send boys down chimneys
and they had to be small so they didn't feed them so they could get down the chimney.
And it was obviously not exactly a socially desirable way of cleaning your chimneys, but not cleaning your chimneys
meant that you risk fires.
It's a serious consequences, and so they offered a prize for somebody coming up with a mechanical way of doing that and
and it worked. The prize provided incentives and
an idea, something came up. There are a whole host of things where they have offered prizes.
The notion is that the prize,
the current system is a kind of a prize system,
but it's a very inefficient one because the prize is the monopoly power and the monopoly power means that there are incentives to restrict
the use of the knowledge. And so remember if you go back to what I said before the characteristic of a desirable
innovating system, one of the characteristics is
dissemination, usage of the knowledge. And this system is one which is designed to restrict the use of knowledge.
Well the alternative is to
use the competitive market to ensure the efficient
dissemination. So with a competitive market, where you say license to large numbers of people,
you use the force of competition to drive down the price and to increase the usage of the knowledge.
So you use market forces in both cases. One is the market forces the incentive to restrict knowledge,
raise the prices. The other is the market forces of competitive markets to drive down the prices and disseminate knowledge.
Moreover
it has the advantage that you, there's less waste on advertising,
other anti-competitive behaviors design to Enhance Monopoly profits.
And you
studied how the drug companies I mentioned that they spend more on advertising and marketing than they do on
research. There's a good reason for this. There's a return on this. It's not just
providing information to the market,
most of what they do to the extent
there's some information, it would be more disinformation if they could get away with it, but
it's mostly oriented, you can actually look at it,
intends to reduce the elasticity of demand, which allows them to raise the price and increase their monopoly profits.
So they have incentives to spend money to reduce
elasticity's of demand and to enhance monopoly profits, which from the point of view of, a social point of view, is dissipative.
There are a number of ways of trying to design the prize prizes
that I don't have time to talk about.
One of the ideas that many people who've become aware of the problems of the current system,
and that advocated, is a
current purchase fund where the world Bank or
the Gates Foundation
would guarantee a billion dollars, two billion dollars if somebody came up with a vaccine for aids, a cure for aids.
So you say okay,
we know the poor people can't afford it
but we can guarantee you a billion or two billion dollars, and that is like a prize guaranteed,
but it maintains the inefficiency of the monopoly system. If you think that
guarantee is enough to motivate people, and it clearly is,
it's far better to use that guarantee to buy the patent and
make it available freely than to use the the
monopoly system.
Well what I try to do here is is to in a little
chart
summarize
some of the attributes of these alternative systems as they might, my view is that you will want to go towards a portfolio.
The
first attribute I talked about was selection.
The
advantages of both the patent and the prize system is that they are decentralized
based on self selection. Those who think that they are the best researchers
make that decision, go ahead, and think that they're going to win the prize. So it has that advantage over the government funded
where you have a group of peers,
bureaucrats, you can call them,
deciding who is the best researcher and people worry about capture and so forth. On the other hand one of the
disadvantages of both the patent and the prize system is the lack of coordination.
One of the risks that each researcher faces is he doesn't know how many other people are engaged in that research. That increases the risk, the risk
and in some cases could actually discourage innovation.
Yeah, we were having a discussion earlier about
the Bayh-Dole one of the arguments for Bayh-Dole was that it may have the advantage of reducing,
of enhancing the this, the ability to coordinate.
But in that sense, if you think of that important,
it goes against both a patent and the price system. The government funded can be obviously more coordinated
in the structure of the selection problem. In the finance
the patent system is the worst. It's high in distortion and inequitable
and the government-funded can use
because it is less restrictive, is obviously the most efficient in terms of risk. The patent system is the worst because of the
huge amounts of
litigation risk.
The government is the best because it
matures of
paying for the input rather than the output, that is say you get money for doing the research,
whereas in the prize in the patent system you only get money if your research is successful. So
there is a a very big difference in the nature of the risk in these areas.
The reason that risk is important is
in equilibrium.
Consumers have to pay for the risk. Somebody has to pay for that risk.
People in general terms are
risk-averse, and if there's risk they have to be compensated for it. So the fact that the system makes people bear that risk,
one has to remember, they don't bear the risk without
getting compensated for it. So society, the rest of society,
bears the cost of that risk and that is one of the costs associated with the the patent system.
The Innovation incentives are strong with the patent system, but they are distorted. Whereas the prize system can have equivalently
strong innovations, but less distorted.
But the government funded based on input cannot work when the objective or
the problem with the prizesystem is that it cannot work when it's not well-defined.
Finally, in terms of dissemination incentives,
it's most limited with a patent, the prize, and the government-funded can be a
much more positive use of knowledge.
The transaction cost, the distortions in the economic system, are much higher with a patent system than with the other two.
So let me conclude
IPR, our intellectual property, is obviously important,
but I think the importance of IPR has been exaggerated. It is only one part of our innovation system.
It needs to be seen
as part of a portfolio of instruments. I
would argue that we need to strengthen the other elements of this
portfolio and to redesign IPR to increase it's benefits and reduce its cost.
Thank you.
Questions? There is to be a reception outside this lecture room
right now, so please join us out there. Thank you again for coming.
