Patents, copyrights, and other forms of intellectual property play an enormously important and underappreciated role in the economy. Intellectual property may plausibly raise the cost of the affected items by more than $1 trillion annually over the free market price. This is roughly half of all pre-tax corporate profits. It also is a major factor in the upward redistribution of income over the last four decades, with the big winners including some of the country’s richest people. In other words, it is a big deal.
This essay makes three main points about intellectual property. The first is that intellectual property is a government policy for promoting innovation and creative work. It is not an inherent feature of the market. Second, intellectual property comes with large costs that are not widely recognized. The third point is that there are alternative mechanisms. We should not have a dogmatic commitment to intellectual property; we should be weighing it against other mechanisms to determine which can most effectively promote innovation and creative work.
Intellectual Property as Government Policy
While it is not really an arguable point, many people in policy debates seem to regard intellectual property as a fundamental right, like freedom of speech or freedom of religion, as opposed to a government policy that can be altered or eliminated altogether. As is often pointed out, intellectual property is in the U.S. Constitution, but it does not appear in the Bill of Rights, alongside other basic rights.
Rather, intellectual property appears as the eighth item listed in Article 1, Section 8, which delineates the powers of Congress, such as the power to declare war or the power to tax. There is no more of a constitutional right to a patent on an invention or copyright on a book than there is a constitutional right to declare war.
The exact wording of the clause is helpful in making this point:
“To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries;”
The granting of an intellectual property right is quite explicitly attached to a public purpose. Once the right is granted, it is reasonable for the government to respect it in the same way that the government respects other property rights. However, there is nothing in the Constitution that prevents Congress from shortening the length, or narrowing the scope, or even eliminating the option for securing an intellectual property right altogether, if it determines that there are better policies for supporting innovation and creative work.
It is also worth highlighting what should be obvious, intellectual property is a government-granted monopoly. It is not an inherent feature of the market. This government intervention may be good policy, but it is nonetheless government interference with the market. Patent and copyright monopolies are not the free market.
Patent and Copyright Monopolies Impose Substantial Costs
There are many ways in which these monopolies impose costs, the most obvious being that they raise the price of protected items far above the free market price. This is the purpose of granting the monopoly. By allowing an inventor or author to charge a price that is above the free market price, the government is giving them incentive to innovate or do creative work.
Even if this fact is generally recognized, there is little appreciation for how much money is at stake. In the case of prescription drugs alone it is likely that the gap between patent protected prices and the free market price costs people in the United States close to $400 billion annually (1.8 percent of GDP). Without patent and related protections, drugs would almost invariably be cheap since they are rarely costly to manufacture and distribute. Most drugs would sell for no more than $20 or $30 per prescription in a free market, and many for much less.
There is a similar story with other protected items. Cutting edge medical equipment would likely sell for less than one-tenth the current price in a free market. The same is true of computers and many other items with substantial development costs. And software, as well as movies and recorded music, would be free.
But the actual dollars paid out is only a part of the cost. Just as when there are price controls keeping prices down, as was the case with central planning before the fall of the Soviet Union, the large mark-ups created by patent and copyright monopolies give an incentive for a wide variety of wasteful or even harmful activities. In the Soviet Union, price controls led to a massive black market and corruption.
In the wasteful category, a large amount of resources is devoted to the legal issues around enforcing or challenging intellectual property claims. There are also ways in which patent and copyright monopolies distort the direction of research.
For example, when a pharmaceutical company is able to gain large patent rents with an important new drug, its competitors will typically try to win a portion of these rents by producing copycat drugs. These drugs are not developed with the idea that they will be better than the original drug, although that may turn out to be the case. Rather they are developed because the company believes its sales expertise will allow it to gain a substantial share of the monopoly rents earned by the innovator company.
The Food and Drug Administration determined that close to half of the drugs approved in recent decades do not provide substantial benefits over existing treatments, and therefore only warranted “standard reviews.” This doesn’t mean that all the research devoted to developing these drugs was completely wasted, they may prove better for some patients, but we likely would have been better off if these resources were used to develop drugs for conditions where no treatment currently exists.
In the harmful category, we have situations where intellectual property monopolies give companies incentive to mislead people about the quality of their product. The most obvious example of this problem is in the case of the opioid crisis, where several major pharmaceutical companies paid billions in settlements, over the allegation that they deliberately misled doctors about the addictiveness of the new generation of opioids. If these drugs were selling as cheap generics, it is unlikely the companies would have made as much effort to push them so widely.
Intellectual property has also played an important role in the upward redistribution of income over the last four decades. The money earned by patent and copyright rents goes overwhelmingly to those at the top end of the income distribution, including many of the very richest people in the country. While it is common to claim that technology was a major factor in upward redistribution, the real story is our rules on our intellectual property. If we had structured these rules differently, we would not have seen such a large share of the benefits from new technology go to those at the top.
Finally, we also have to recognize that the rents that result from patent and copyright monopolies are an implicit form of government debt. In effect, the government is allowing pharmaceutical companies, software designers and other holders of intellectual property to charge a tax, as an alternative to directly paying them for their services. If the government were to write a check to a pharmaceutical or software company to pay for their work, everyone would recognize it as debt, however when it grants a monopoly as payment, no one counts it as debt. That is illogical and shows either an unfortunate ignorance or a lack of seriousness in debates on government debt.
Alternatives to Intellectual Property
In policy debates over intellectual property issues, there is little appreciation of the fact that alternative mechanisms exist to finance innovation and creative work, and that these alternatives are in fact already widely used. In both cases, instead of granting monopolies, the government also supports a large amount of work either directly through government spending, or indirectly through tax subsidies.
In the category of direct government funding, the federal government spends tens of billions each year funding research in a wide variety of areas. The National Institutes of Health (NIH) alone gets more than $50 billion a year in federal funding. The government also funds research many other areas, some of it defense-related, but much of it for civilian purposes.
The main route for indirect funding is the income tax deduction for charitable contributions in the tax code. The value of this deduction varies depending on the tax rate a person faces at the time, but when the top tax bracket was close to 40 percent, it effectively meant that a wealthy person could have the government cover 40 percent of the contribution to the organization of their choice. This means that if a person wants to give $100 million to an art museum, symphony, or writers’ workshop, the government is implicitly kicking in $40 million of the $100 million.
These mechanisms are important for any discussion of intellectual property because it is essential that people recognize there are alternatives. And in many cases, the trade-offs are very direct. For example, most of the NIH funding supports more basic research, such as the development of the mRNA technology that proved so useful for developing effective vaccines against the coronavirus. However, public funding can also be used for further downstream development, as was the case with the money paid to Moderna for developing its vaccine.
If we use more public funding, we are less dependent on patents and other forms of intellectual property to support research and development. Policy should be structured in a way that explicitly recognizes the trade-offs between patent monopoly financing and direct funding, acknowledging the relative efficiency of each route. Public funding also has the advantage that it can be open-sourced, with the requirement that all results be posted on the Internet as soon practical so that researchers around the world can quickly benefit from new findings.
As an alternative to copyright monopolies, we can build on charitable contribution tax deduction and give people a refundable tax credit to support creative work. The main condition for receiving the funding would be that a person could not also get a copyright monopoly for their work. They can only get one form of government subsidy, not two.
Conclusion: We Need Clear Thinking on Intellectual Property
The economic importance of intellectual property has grown enormously in recent decades. An ever-growing share of the economy is subject to forms of intellectual property protection. In addition to the economic impact, in the case of access to drugs, vaccines and other medical products, the high prices resulting from intellectual property protections can mean the difference between life and death.
To have a serious discussion of rules on intellectual property we must first recognize that patents, copyrights, and other forms of intellectual property are the result of public policies for fostering innovation and creative work. They are not inherent rights or natural features of a market economy.
We also must clearly understand their costs. These government-granted monopolies create perverse incentives and lead to economic distortions in the same ways that we would expect from any form of government intervention.
And, we must recognize that alternative mechanisms for supporting innovation and creative work do exist. People might be persuaded to work for patent monopolies, but they can also be persuaded to work for money. More people need to recognize this fact.