Intellectual Property is Real Money

In the last four decades, US policymakers have taken major steps to strengthen and lengthen patents, copyrights, and other forms of intellectual property (IP). The normal duration of patents and copyrights have been extended, and patents have been expanded to cover life forms, software, and business methods. This strengthened IP regime has been supported by both political parties and has gone largely unquestioned in public debate.

That’s unfortunate, because there is an enormous amount of money at stake, and an enormous amount of money that is being redistributed from the bulk of the population to those in a position to benefit from owning intellectual property. While far from flashy, intellectual property rights have wide-ranging implications. They should be front and center on any progressive agenda.

The case of prescription drugs provides the best measure of the amount of money at stake. This year, the United States will spend more than $440 billion on drugs that would likely cost less than $80 billion without IP protections. This gap — more than $360 billion — is equal to almost 2 percent of GDP. It is almost a third of after-tax corporate profits.

And that’s just for prescription drugs. Add in the rents from patent and copyright protection in medical equipment, pesticides, fertilizers, seed crops, software, video games, and other areas and the figure could easily be twice as high. In other words, this is real money.

This is also an area where the textbook economics is entirely against the proponents of IP protection. From the standpoint of the textbook, pushing up prices through patent and copyright protection is the same as imposing a tariff that creates a gap between the protected price and the free market price. The biggest difference is that the size of the distortion is several orders of magnitude larger in the case of patent and copyright protection.

The idea of imposing a 20 percent tariff on imported shoes or steel would send any mainstream economist into a frenzy. They all know how tariffs distort the market, leading to waste and corruption.

But when it comes to patents and copyrights, the difference we are talking about — between the protected price and the “free market price” — is ten or even a hundred times higher than it would be otherwise.

If that sounds far-fetched, consider the Hepatitis C drug Sovaldi. It carries a list price in the US of $84,000 for a three-month course of treatment. High-quality generic versions are available in India for less than $300. Many of the new cancer drugs carry list prices in the hundreds of thousands of dollars. In almost all cases these drugs are cheap to produce; it is the patent monopoly that makes them expensive.

In addition to obstructing access, these high prices have all the other pernicious effects that Econ 101 would predict. Drug companies lobby to make patents longer and stronger, and to enforce them internationally through trade agreements. They use lawsuits and payoffs to discourage generic competition when their patents are about to expire. And they lie about the safety and effectiveness of their drugs. What else can be expected when you can sell a drug for $100,000 that costs a few hundred dollars to produce?

The inefficiency and corruption of the patent and copyright system could be viewed as a necessary cost if it were the only way to support innovation and creative work. But this is simply not the case. There are many other plausible mechanisms for promoting this work, some of which are already in use.

Take biomedical research. The US is already spending more than $30 billion annually through the National Institutes of Health (NIH), well over half of what the entire pharmaceutical industry claims it spends on research every year. The NIH funding is overwhelming devoted to basic research, but it has also underwritten the development of drugs and paid for clinical trials.

There is no reason why public funding could not be expanded and used to pay for later phases of research and clinical testing. The new drugs could then be sold at generic prices. An alternative route would be to establish a prize system under which the patents for important drugs were purchased by the government and placed in the public domain so they could then be sold as generics.

Under both systems, the research findings and clinical test results could be made fully public. This would be a huge benefit to doctors, who would be able to make more informed decisions in prescribing drugs. Some drugs may be more effective for some groups of people than others or have bad side effects when mixed with other drugs. Full disclosure of test results would make this information available to doctors.

In addition, making all research findings public should hasten the pace of research. Researchers would be able to learn from the successes or failures of their colleagues when everything was placed in the public domain, as opposed to remaining bottled up in order to protect future profits.

Both direct funding and prize systems carry some drawbacks, but they’re dwarfed by the enormous benefits of being able to buy the latest drugs for a few hundred dollars, rather than tens or hundreds of thousands of dollars. Making new drugs available at generic prices would be an enormous boon to public health while helping reverse the upward redistribution of income. After all, not many ordinary workers’ livelihoods are improved by drug companies capturing huge patent rents.

While patent monopolies aren’t as pernicious outside of the medical sector (medical equipment like MRIs would be cheap even without patents), technology would likely advance more quickly in many areas with shorter and weaker patents and more research in the public domain. Provisions in international treaties (pushed by the United States) limit a country’s ability to unilaterally reduce its patent protections, but there is nothing preventing the United States or other countries from providing incentives for patent holders to voluntarily accept shorter patents, such as access to publicly funded research.

While patent monopolies have promoted corruption, the copyright system has become increasingly dysfunctional in the digital age, even as the United States has pushed to expand the duration and strength of these monopolies. In the 1970s, the term of copyright was an already-steep fifty-five years. It is now ninety-five years. And Congress is likely to extend it yet again, to prevent Disney from losing its copyright on Mickey Mouse (seriously).

Worse than the extensions have been the increasingly punitive measures attached to enforcement. The US has sought to make copyright infringement a criminal offense, not just in the United States, but also in other countries, through trade agreements like the Trans-Pacific Partnership. In addition, it’s attempted to turn intermediaries into copyright cops through measures like the Stop Online Piracy Act, which would make web hosts responsible for removing infringing material even if they haven’t been notified by the copyright holder.

There are other, more efficient ways to finance creative work. The tax deduction for charitable contributions is one obvious model. A modest refundable tax credit could be used to bring newly produced work into the public domain, supporting a vastly larger body of work than is now supported through the copyright system. This would also largely cut out the middlemen in the entertainment industry. (I outline other alternatives to both copyrights and patents in chapter five of Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.)

The patent and copyright systems are clear examples of how the distribution of income is determined by the rules put in place as opposed to the intrinsic structure of the “free market.” There is nothing about the laws of the economy that says the government has to grant these monopolies, and it certainly was not a natural process through which their length and scope came to be extended in the last four decades.

The corporations that stand to profit from the further extension and expansion of IP laws are pushing hard for measures that go in this direction. Anyone concerned about reversing the upward redistribution of income should be pushing hard in the opposite one.

Source: CEPR