The Green Gap

In the Cold War, we feared a Missile Gap was a strategic weakness. Nowadays, we must awaken to the fact that the Green Gap is true strategic weakness: the nations whose economies will thrive in the coming years will not be those with the biggest factories, but those with the most sustainable, efficient, and ecological markets. What we require is a Strategic "Green Reserve" of ecological design to weather the coming changes that both climate and resource scarcity will force on the international economy.

Tuesday, 12 April 2011

Fiscal Responsibility - Part 2: Markets and Innovation, Chapter IV: Patent Catch 22

There are two very divergent and very vitriolic extremities on the spectrum of thought regarding Intellectual Property. There are those who espouse the necessity to control and maintain IP rights as strongly as possible as the best way to foster innovation. The fundamental argument of this side is that an inventor should be able to profit from his or her labour. Without the inducement of the ability to profit from labour, innovation would be rare indeed - or so they argue. Then there are those who argue for the freedom of information and the abolition of IP. They argue that ideas happen no matter what you do, and the best way for us to advance is to disseminate and propagate those ideas as fast as possible. An example of the former - IP protection - would be the pharmaceutical industry, which expends billions on research and needs IP protection to realise profit. An example of the latter - open source - would be fashion design, which must advance by constantly re-creating itself. The conflict between to IP or not to IP is, at its core, one between concentration and diffusion.

There are both good and bad on both sides of the argument, and the only real way to reckon which is the superior would be to determine which of the factors is more important in the marketplace: whether concentrating IP in the hands of the people with the profit motive is a better motivator for invention or diffusion into the hands of the greatest number of potential inventors is a greater motivator for invention. Both sides agree invention is good, but disagree on how best to encourage it. Obviously, we all want to have our cake and eat it too... we'd like to be able to have the benefits of profit motive - the fact that individuals can devote their lives to invention, or the fact that corporations will spend billions on research - combined with the benefits of diffusion - the fact that thousands of programmers will converge on open source code and advance the industry, or the fact that fashion designers have to keep coming up with new stuff or become irrelevant. We also don't want the negative sides of each argument - like the recording industry, that effectively buys up rights to the work of artists and proceeds to squeeze far more profits out of those rights than the artists themselves will ever see. We also don't want the wild west of outright piracy, where the sweat and toil of innovators are ripped out from under them. Here's a thought, though, to put things in perspective a little: the question of IP is not simply about the rights of inventors and artists to profit from their work - it's about the entire economy of ideas. This is a systems problem. IP defines the recording industry. The companies that profit from IP do so because they structured themselves to use the tool of IP to make money. If IP was yanked out from under them, they would have to find a completely new way to make money because the incentive of IP effectively structures the payout matrix of the whole system. Some companies might live and some might die, but they'd have nothing in common with their former selves. IP is one of those "inducements" in the economic system that has enormous power over how the whole of industry organises itself. Fiddling with it does more than just anger Metallica.

Deriving the maximum benefit from innovation

How can we talk about IP and speak to all the pitfalls and potential of the system? A couple thought experiments might help. The first things I'd like to talk about are industries driven by innovation that requires little to no initial investment versus industries driven by innovation that require enormous time and investment to succeed. Key examples of these two extremes would be the recording industry and the pharmaceutical industry.

Brainstorm for a moment how the recording industry would look without IP. How would the companies derive profit from the creation and marketing of music? To be honest, several models are emerging currently from bands and fans who realise that music piracy is a fact that's here to stay. Some offer their music online for free, depending on reciprocal goodwill when it comes to purchasing their albums. I know several artists who do this, and are perfectly happy... but they keep their day jobs. Others offer tidbits online in the hopes of driving interest for their tours. A business model could be constructed where a band's real work is their stage performances, and their marketing is their music writing, as opposed to vice versa. You can see how it works... whereas nowadays tours are just promotions to announce a new album, in the no-IP music industry, songwriting would be the advertising and live performance would be how bands brought home the bacon. I don't know enough about the recording industry to speak to this authoritatively, but I'd bet dollars to doughnuts someone is already working this business model. Would it be the same industry as before? Absolutely not. Would music continue to be written? Yes it would.

So what would happen to record labels in such a system? Well, they would cease to exist. The label's sole claim to profit is now IP and the merchandising thereof. Song rights are all they have now. I say that confidently because, if you talk to the owner of a label (and I have), they'll tell you that moving records is more about logistics than music. Labels were the people who had the capital to press the vinyl, the connexions to push the music on to the radio, and the coordination to move the LPs into record stores. Except for the guys who press vinyl nowadays (and they not only exist, but are pretty cool), production and distribution is no longer an issue. As a matter of fact, it's a throwback to a now bygone era that we still purchase CDs at the brick-and-mortar store. There is enough studio time out there for a lot of reasonably-priced recording, so up-front capital isn't an issue. If you are willing to go electronic, you can do it all yourself. The only things a label has are marketing and penetration, and they won't market what they don't own. If IP goes, the entire business model of recording labels ceases to exist. Does music exist because of labels? No. Would the loss of IP matter to the recording industry? Yes... but not as much to the artists; just to the people who profit from artists' work. In sum, the loss of IP for the music industry would just kill off the fat cats. Music would continue to be made, it would just be made under a different market paradigm.

The question of IP becomes far more sticky when we talk about pharmaceuticals. For all their problems, pharmaceutical companies do make stuff that makes people feel better. Some of the stuff they make even makes them better for real. The way they make money is by having a guaranteed window of time in which they can make mammoth profits from their multi-billion dollar research and licensing programs. Unlike music, many pharmaceuticals are necessary to modern existence, and the development thereof should be encouraged. Given the regulatory hoops that pharmaceutical companies have to get through to bring a product to market, such a high-stakes game has to be rewarded with some form of payback. Profit motive being what it is, pharmaceutical companies want to be able to sell high quantities of high-priced goods to the market for as long as possible to recoup costs and make a handy profit. It is, however, in the interest of public safety that the IP reverts to the public domain after a reasonable time so that generic drugs can drive prices down. Does IP work to incentivise research and development of lifesaving drugs and treatments? Yes. What would happen if IP didn't exist in the pharmaceuticals industry?

It would change for certain, but medicine would go on being done by government and university researchers. As a matter of fact, when I hear about possible cures to type I diabetes or the cure for peptic ulcers or, you know, any cure at all... I think about universities and state-funded medical centres, not big pharma. There is a place for pharmaceutical companies in the universe, but the question of whether the incentive of profit moves them to make our lives better is not as cut-and-dried as we might imagine. Cures are not as profitable as treatments. By creating an inducement to incentivise innovation in medical treatment, we neglected to say it should be to find cures rather than symptom management. Still, there is some use to the incentive of IP in this case because bringing a medicine to market does take a lot of work and is highly capital-intensive. Even cures developed by universities must go through rigorous testing that takes a great deal of time and money to accomplish.

Some industries would seem to be served well by IP whereas in others, IP perpetuates an obsolete business model. The problem is that IP is IP is IP, and whether we like it or not, the strength of IP is either exerted on a product or it isn't: it's tough to find a good balance. Diffusion benefits the producers of innovations: generic drug manufacturing depends on it. They compete on price and process, not ideas. Musicians also could compete solely on the merits of their music without the input of labels. However, for some companies, ideas are where they compete. Pharmaceutical companies are a big and important example. Innovators like 3M are another. For each model, there must be a sensible way to handle IP.

My thoughts lean toward diffusion, but not completely. IP must exist in order to act as a carrot for people with good ideas. IP can be used to advance the ends of the government as well as increase the diversity and liveliness of the economy. When deciding how to apply IP, states must consider first whether IP is the right solution to sparking competition and innovation in a market. In fashion, IP would lead to stagnation. In music, some could argue it has already lead to stagnation. Second, the decision has to be made for how long it would be appropriate to allow the IP to be controlled. In my mind, pharmaceutical companies should be allowed to keep IP for longer on cures and shorter on treatments. If cures are what interest us, then the system should be nudged in that direction. On an industry by industry basis, we have to decide whether IP orders the market in a positive or negative direction. IP, like any other policy, is a tool; it is not some Gods-given right to eternal royalty cheques. The government, for its part, should intervene when it is in the interest of the market to do so. For instance, if an innovation in efficiency would spark major gains by being cheaply and broadly disseminated, government should acquire the patent and open it for general use. A few thoughts on this:
1) Open the product for construction only within Canada by Canadian owned companies.
2) Since the patent is Canadian government property, the Canadian government would chase down IP violators outside of the country.
3) The originator of the patent would be reasonably rewarded... but forfeiture of the patent (for said reasonable price) would be mandatory.
This is a quick fix that works within the existing IP system to attempt to derive benefit from both the incentive of IP and the market benefits of diffusion.

I hope that this has made us think of IP in a different way. IP is not a right, it's a policy tool that was conceived in order to drive innovation. It's been around for so long that some people consider it a necessity to technological advancement. It is not. Its use should be studied and understood, and applied only when it is useful to the market. Whether the interests vested in IP are served by its elimination is not my concern here - our concern is the health of the market and the goal of competition through innovation. IP does not always serve that end.

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