“When I started studying the economics more closely, it turned out to be less useful to lawyers than I initially thought.” (Respondent 6)
Economics offers systematic approaches to weigh the impact of intellectual property rights (IPR), across sectors, actors and countries. It helps translate concepts of socio-economics into relatively concrete numbers, rather than relying on more amorphous measures and opinions. However, economics is not well-equipped to make judgements on fairness or values, and consequently can have little perceived impact on IP in practice. Therein lies the problem. This essay reflects on the role of economic in IP law and practice, and considers some next steps.
Whereas IPR are predominantly the domain of lawyers, economists have increasingly encroached on IP policy-making and vocal about firm’s IPR management strategies. Economic-evidence-based policy has become a mantra in the neo-liberal era. Most major IP offices have economics departments; this was not the case at the start of the century. These offices are tasked with estimating economic impacts of policy change, measuring innovation and generating evidence for policymaking. While evidence-based policy is not perfect, it is particularly challenging to generate robust evidence for IP policy. IP is intangible and, by definition, novel; translating this ephemeral property and its impact into concrete evidence is a huge challenge. The lack of acknowledgement of this challenge, particularly at the ideological end of IP policy-making, contributes to economics’ reputation being cynical or reductive. This is not unique to IP, as economics is often referred to as the dismal science[1].
This thought piece discusses legal perceptions of economics in IP policy. Using qualitative data, the paper highlights challenges of incorporating economic analysis in a legal system.
Economic schools of thought and background
The basic economic justification for IPR, is that innovation and creativity would be inefficient without them. While that statement may appear fairly straightforward there are normative assumptions underpinning these analyses. However, economic analysis of IP is far more diverse that it might appear.
The majority of economic analysis of IP policy sits within Innovation Economics, Law & Economics and, for copyright, Cultural Economics. Innovation Economics, closely related to growth and development, focuses on entrepreneurship and Schumpeter’s concept of ‘creative destruction.’ Innovation studies also have much in common with Industrial Organisation (IO) studies, which focus more on the structure of firms and markets, and Development studies, which address economic growth. Law & Economics instead uses microeconomic theory, which focuses on the individual or group, and applies it to law. Cultural Economics instead looks at culture, and, in the case of IP, the production, consumption and regulation of creative goods.
Based on the author’s admittedly subjective experience, there are also substantial differences behind these schools of thought. Law & economic analysis, borne out of the Chicago School, is often performed by legal scholars with economic tendencies.[i] As a consequence, IP analysis following this school of thought is less reliant on doctrinal economic theory. An overlapping approach is Empirical Legal Studies, which is the empirical analysis of law. Economists working on patents are more likely to have science, engineering and mathematics backgrounds. Work in this area is heavily informed by econometric models on large sets of data and modelling. Economic analysis of patents is more advanced than other areas of IP, in large part due to the availability of data. In contrast, economic analysis of copyright often involves academics with social science or humanities background and personal or professional interest in music and other creative industries. There are also IP economists with philosophy or political science backgrounds; these economists tend to work on non-patent rights. There are insufficient numbers economists working on other IPR such as design rights, trademarks and trade secrets to note any particular trend.
Much of the above paragraph is also reflected in legal scholarship, where patent scholars are more likely to have science and engineering backgrounds, and copyright and trade mark scholars more likely to have arts and humanities backgrounds. This also extends to legal practitioners, in particular as practicing patent law often requires sophisticated understanding of the related subject. Economics, unlike law, is not a profession and has no corresponding regulatory body.
These roots of economic and legal analysis in the scholarly world influence the wider discussion of IP, in particular policymaking. Practicing IP lawyers are highly educated, which makes this link between the academic roots and the public discourse particularly interesting.
Policymaking and Economic Analysis
For policymaking, it is perhaps less important what economics does, than where it appears to go wrong. The IP legal community has not recovered from the perceived insult of the Boldrin and Levine[ii] arguments that the current system of IPR was not necessary to incentivise innovation, and that the costs of the current IPR system outweigh the benefits. Their core book[iii] has been critiqued by IP legal scholars as having a ‘polemical tone’ and ‘presumptuous attitude’[iv] although others have welcomed the broadening of IPR narratives[v]. What is often forgotten in this discussion is that Boldrin & Levine argue against the intellectual monopoly of the current system, its ‘collateral damage’ and in favour of increased competition, which also incentivises creativity and innovation.
In their own words,
“Are we arguing that, while stealing potatoes is bad, stealing ideas is good? We are not. Economic efficiency and common sense argue that ideas should be protected and available for sale, just like any other commodity. But “intellectual property” has come to mean not only the right to own and sell ideas, but also the right to regulate their use. This creates a socially inefficient monopoly, and what is commonly called intellectual property might be better called “intellectual monopoly.” [vi]
To some in the audience of existing IP rightsholders and the IP legal sector, the argument has been critiqued as reductive and dismissing the disproportionate, negative implications such arguments hold for rightsholders. This is in part because of economics. Boldrin & Levine focus on a key goal of economic analysis: to maximise social welfare. In particular, they focus on the ‘welfare triangle’ that is the loss in total welfare arising from a monopoly. A monopoly distorts the market by moving it away from equilibrium. In equilibrium, producers/supply meets consumers/demand at a sweet spot of price and quantity. Under monopoly conditions, the producer maximises its profits and sells a lower quantity at a higher price resulting in a loss of both consumer and producer surplus known as ‘deadweight loss’. It is Economics 101. Decreasing this loss is the goal as welfare should be maximised. Under the social contract theory of IP, this welfare loss is acceptable in the short run as IP supports higher welfare arising from continued innovation in the long run.
Yet welfare is not a single concept, nor does it operate in a vacuum. Welfare is well-being. A focus on a producer and consumer discussion assumes that welfare is accounted for in demand and supply. The demand curve is a graphical representation of aggregate willingness to pay; the supply curve represents willingness to supply. Prices and quantities reflect an assessment, in financial terms, of the values consumers and producers assign goods and services.
What this core approach of welfare-maximisation obfuscates is the inherent consequentialist assumption of utilitarianism. It is the outcome that is important, not the how it was achieved nor how it is distributed. This approach leaves little room for discussions of fairness or equality, as it is assumed that an overall improvement in welfare is good. Benefits for producers are given equal weight to benefits to consumers. A large benefit for a single large firm can mask the overall costs to many small firms. Never mind that the marginal impact of the cost to the small firm is likely much higher than the marginal benefit to the large firm.
However, economics also offers more sophisticated approaches than simply the utilitarian measure of social welfare: the distribution of costs and benefits, and the related concept of efficiency. The distribution of costs and benefits may not be equal; income inequality metrics in economics allow for measurement of this inequality. For example, a classic metric is the Gini coefficient[vii], which is a statistical measure of wealth distribution. It helps express, for example, the highly skewed distribution of artist’s incomes and the copyright implications.
Along a similar vein, efficiency in economics is a measurement of whether a situation can be improved and at what cost. Pareto efficiency[viii] is a popular approach, in which efficiency is only achieved if any further changes (benefits) would come at a cost. Put another way, things are efficient if they cannot get better without making someone worse off. Pareto efficiency poses a problem for economic analysis of IP because of the policymaking context. IP policy suffers from a ratchet problem – it is easy to increase IP protection but nearly impossible to decrease it. This is compounded by significant regulatory capture. IP rightsholders, who are heavily invested in IP policy, wield a disproportionate amount of influence in policymaking. Consumers, who bear most of the costs of IP policy but are less invested, often are left out of discussions. This regulatory capture has supported the expansion of IPR and leaves little room for it to be re-sized to reach Pareto efficiency. A decrease in IP protection will invariably harm existing rightsholders, and therefore the market is already efficient under this measure. Pareto efficiency is overlooked when IPR are expanded – the costs to consumers plays little role in policymaking – and cannot be achieved when IP need to be decreased. Unfortunately, the last two decades of IPR expansion suggest this ship has sailed[ix].
The overall point of this section has been to highlight that there are many aspects to the economics of IPR, not all of which are used in single pieces of research and many of which are poorly understood across disciplines. In some ways this nuance does not matter, as the perception of these arguments, and the economics of IP as a whole, is what dominates policy narratives.
Data and Analysis
A qualitative analysis places these challenges in the wider legal narrative of IP. An open call for comments, made by the author, sought practicing lawyer’s views on economics of IP, and how it might influence interactions with clients and perspective on IP policy provoked a substantial response. This results in 20 comments on the IPKat blog and eight e-mail conversations were initiated. All respondents were either male or anonymous, and predominantly experienced practitioners (most self-identified as IP lawyers, with one former patent examiner, one academic and a few unidentified.) Given the demographics of the IP community, which is predominately male[x],[xi], this sample likely reflects the same population that has traditionally dominated IP discourse. This section provides a thematic analysis of these comments.
Themes: The Limitations of Economics
Respondents were keen to point out the limitations of economics, particularly in the realm of policymaking. As befitting of the erudite IP population, respondents included well-structured arguments which thoroughly engaged with the topic. As is expected with any interdisciplinary or multi-disciplinary interaction, there is a lack of understanding of discipline-specific differences. I write from the perspective of the economist and with the understanding that I have also likely misunderstood legal points. Here I note and comment on some themes identified in the discussions
IP and Policymaking
Respondents were fairly unanimous in their condemnation of economics for policymaking. For example, this respondent argues that economic evidence is made for policy, and not policy made based on economic evidence:
“I inwardly groan at the mention of “evidence-based policy”. Government has long used evidence-based policy, but practice has been to put the cart before the horse by deciding policy first and then getting civil servants to produce evidence to support the policy, ignoring evidence to the contrary.” (Respondent 1)
Similarly, economics is considered as not seeing the full picture and not being present in instances where it might have offer insights into challenges:
“Unfortunately, economists have not jumped in and given us the numbers for how much the economy would benefit or lose [referring to Alice, May and Myriad]. They only do the easy analyses, and don’t tackle the really complex things. And if economists don’t do this, then government has no way of seeing the real impact of what the Supreme Court was doing. So government sees no point in trying to protect the commons, because in trying to do so it will only see the criticism of the IP and R&D community, without any means to look at the gain.” (Respondent 2)
Again, this respondent views economics as reductive and insufficiently placing their analysis in the wider environment:
“IP law is so complex that no government department or any one economist is going to be able to set out policy based on its analysis. The economists I have met use very basic and simple metrics to box IP into their mode of thinking. They really don’t understand the dynamics of how it plays out in specific business situations, and their summaries of it are woefully inadequate. Giving someone an IP right affects the entire ecosystem, incentivising, disincentivising, causing collaborative communities to form or leading to increased competitiveness, and even forms of aggression. To change things (to consider policy matters) would need the identifying of all the effects of IP, and then all possible changes you could make, e.g. length of term, ease/certainty of obtaining, ways/strength of enforcing, extent of penalties/punishments, effects on core industries/research platforms. I don’t know of any economist that has appreciated IP to this extent, and so they are ill-equipped to advise on the issues.” (Respondent 5)
However, this respondent is slightly more forgiving, but again argues economics’ focus on the long run makes it less relevant to IP in reality.
“I believe IP Economics is a valuable tool for Policy Makers and, in certain few cases, for litigators. But economics are for the long rung [sic] [not the short run].” (Respondent 1)
Overall, the above quotes do not indicate the IP legal community has a particularly rosy view of economics.
Biases
A related critique argues that economics is biased, and approaches IPR with pre-ordained conclusions. Respondents took a nuanced view on this, with arguments that both economics and the IP community as a whole were fundamentally biased. This respondent argues that economic analysis is prejudices and poorly supported:
“I’m stunned to see these ill-conceived ideas, which are completely supported by nothing but a prejudice that IPRs are inherently BAD, being presented as the economic truth” (Respondent 2)
This respondent also notes the perception that economic arguments are often perceived as inherently anti-IP:
“… many anti IP advocates usually use include IP Economics in their argumentation. But as these are the same people that publicly call for the total destruction of IP, Right Owners tend to view and oppose any argument they make (even the reasonable ones)” (Respondent 3)
However the respondent also notes, it is not just economics that is biased, but that the IP community as a whole is unwilling to engage in proper debate:
“I believe to really delve into the topic of IP and economics one must confront things which are going to really upset a lot of the IP community, especially in patents. If you tried to objectively ask how the ‘commons’ needs to be protected from IP rights you would get a stream of unprintable emotive comments from many in the IP and R&D community.” (Respondent 3)
These comments on biases speak to an important point – debates are most successful when parties are willing to properly engage with different arguments and perspectives. Of all the theme identified, this this theme perhaps highlights one of the most important points – it is not economic analysis that is fundamentally the problem, but the lack of willingness of economics (and sometimes lawyers) to account for legal aspects of IP.
Contrast with competition law
A final argument compares IP law to other areas of business law, in particular the success of economics in competition law in contrast to IP law.
“Either economic thinking is fully adopted, as arguably happened in competition law, and then economic analysis will be the primary methodology and determinant of an argument’s validity. Or it is not adopted, in which case it is business as usual for lawyers who employ legal arguments … I wonder what room there is in between for economics to play a meaningful role, especially at the level of litigation?” (Respondent 6)
The respondent makes a very good point – why is it that economics is so wholly embraced in competition law, but spurned in IP law? In competition law, the approach is to contrast the factual with the counterfactual, in determining what constitutes fair competition. In IP, it is also often the factual with the counterfactual (e.g. estimating damages), but in relation to property rights. Private ownership reigns supreme in capitalism, and has an inherent bias to anything that looks like weakening property rights. Ironically, however, competition authorities often embrace economic analysis of IP. Competition authorities, “Competition authorities take into consideration firms’ brand assets, in order to identify the relevant product market and assess the competitive effects of the proposed M&A.”[xii] Where the M&A might reduce competition inappropriately, authorities may require divestment of trade marks.
Conclusion
This thought piece has attempted to identify the limits of economics in an interdisciplinary content, in particular how economics influences IP policymaking. The reader should consider three key points. First, the economic analysis can be reductive, but there is richer intellectual diversity behind economics that might outwardly appear both in terms of core approaches and analytical techniques. Second, there is a significant sense of distrust amongst the IP legal community with respect to economic analysis. This poses a problem, as it means the insights into the wider impact of IP policy offered by economics are unfairly dismissed. Third, there is a long way to come in terms of bringing together opposing ‘sides.’ The fact that different arguments are considered sides is already a problem, but productive debate in the IP community requires engagement with different points of view.
[1] Economics as a dismal science comes from the Thomas Carlyle quote, ““Economics is not a gay science. It is a dreary, desolate, and indeed quite abject and distressing one; what we might call, by way of eminence, the dismal science.” Carlyle Thomas, “Occasional Discourse on the Negro Question,” Fraser’s Magazine for Town and Country (December 1849), 1849, 672–73. What is not well discussed is that this was in the context of Carlyle arguing for the re-introduction of slavery.
[i] Examples include: Ben Depoorter, Peter Seth Menell, and David L Schwartz, Research Handbook on the Economics of Intellectual Property Law, 2019, https://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=2237165; Steven Shavell, “A Model of Optimal Incapacitation,” The American Economic Review 77, no. 2 (1987): 107–10; William M. Landes and Richard A. Posner, “Trademark Law: An Economic Perspective,” The Journal of Law and Economics 30, no. 2 (October 1987): 265–309, https://doi.org/10.1086/467138.
[ii] Michele Boldrin and David Levine, “The Case Against Intellecutal Property,” American Economic Review 92, no. 2 (2002): 209–12; Michele Boldrin and David K Levine, Against Intellectual Monopoly (New York: Cambridge University Press, 2008).
[iii] Boldrin and Levine, Against Intellectual Monopoly.
[iv] Richard A. Spinello, “A Case for Intellectual Property Rights,” Ethics and Information Technology 13, no. 3 (September 1, 2011): 277–81, https://doi.org/10.1007/s10676-011-9267-5.
[v] Neil Wilkof, “When History Is More about Patent Present than Patent Past,” Journal of Intellectual Property Law & Practice 10, no. 7 (July 1, 2015): 487, https://doi.org/10.1093/jiplp/jpv098.
[vi] P. 209 Boldrin and Levine, “The Case Against Intellecutal Property.”
[vii] For a discussion and explanation of the Gini coefficient, see: Joe Hasell and Max Roser, “Measuring Inequality: What Is the Gini Coefficient?,” Our World in Data, December 28, 2023, https://ourworldindata.org/what-is-the-gini-coefficient.
[viii] Aldo Montesano, “Pareto’s Analysis of Efficiency and Its Interpretation,” History of Economic Ideas 5, no. 3 (1997): 7–18.
[ix] Matthew David and Debora Halbert, Owning the World of Ideas: Intellectual Property and Global Network Capitalism (Sage, 2015).
[x] Gráinne de Búrca, Rosalind Dixon, and Marcela Prieto Rudolphy, “Gender and the Legal Academy,” International Journal of Constitutional Law, March 2, 2024, moae010, https://doi.org/10.1093/icon/moae010.
[xi] Nicole Fortin, Thomas Lemieux, and Marit Rehavi, “Gender Differences in Fields of Specialization and Placement Outcomes among PhDs in Economics,” AEA Papers and Proceedings 111 (2021): 74–79.
[xii] P. 128 WIPO, “World Intellectual Property Report 2013: Brands: Reputation and Image in the Global Marketplace” (WIPO Economics & Statistics Series: World Intellectual Property Organization …, 2013).