Protecting versus stifling innovation

A speech by U.S. Federal Reserve Board chair Alan Greenspan

In a knowledge-based economy, the ownership of ideas becomes a key concern for businesses. U.S. Federal Reserve Board chair Alan Greenspan addressed the issue of intellectual property rights in a speech at the 2003 Financial Markets Conference of the Federal Reserve Bank of Atlanta last month. The following is an excerpt.

Only in recent decades have issues related to the protection of intellectual property rights come to be seen as significant sources of legal and business uncertainty. Intellectual property is clearly more difficult to define and, hence, to protect. The physical property of one owner cannot occupy the same space as that of another. Ownership of physical property is capable of being defended by police, the militia or private mercenaries. Ownership of ideas is far less easily protected.

Indeed, the nature of intellectual property is importantly different from physical property. In particular, one individual’s use of an idea does not make that idea unavailable to others for their own, simultaneous use. Furthermore, new ideas almost invariably build on old ideas in ways that are difficult or impossible to delineate. From an economic perspective, this provides a rationale for making the calculus, developed initially by Leibnitz and Newton, freely available, despite the fact that those insights have immeasurably increased wealth over the generations. Should we have protected their claim in the same way that we do for owners of land? Or should the law make their insights more freely available to those who would build on them, with the aim of maximizing the wealth of the society as a whole? Are all property rights inalienable or must they conform to a reality that conditions them?

These questions bedevil economists and jurists, for they touch on some fundamental principles governing the organization of a modern economy and, hence, its society. Whether we protect intellectual property as an inalienable right or as a privilege vouchsafed by the sovereign, such protection inevitably entails making some choices that have crucial implications for the balance we strike between the interests of those who innovate and those who would benefit from innovation.

In the case of physical property, we take it for granted that the ownership right should have the potential of persisting as long as the physical object itself. In the case of an idea, however, we have chosen to strike a different balance in recognition of the chaos that could follow from having to trace back all the thoughts implicit in one’s current undertaking and pay a royalty to the originator of each one. So rather than adopting that obviously principled but unworkable approach, we have chosen instead to follow the lead of British common law and place time limits on intellectual property rights.

Of particular relevance to our economy is the application of property right protection to information technology. The dramatic gains in information technology have markedly improved the ability of businesses to identify and address incipient economic imbalances before they inflict significant damage. These gains reflect new advances in both the physical and the conceptual realms. It is imperative to find the appropriate intellectual property regime for each.

If our objective is to maximize economic growth, are we striking the right balance in our protection of intellectual property rights? Are the protections sufficiently broad to encourage innovation but not so broad as to shut down follow-on innovation? Are such protections so vague that they produce uncertainties that raise risk premiums and the cost of capital? How appropriate is our current system — developed for a world in which physical assets predominated — for an economy in which value increasingly is embodied in ideas rather than tangible capital?

If the form of protection afforded to intellectual property rights affects economic growth, it must do so by increasing the underlying pace of productivity growth. The bulk of this increase should show up as multifactor productivity, that is, the segment of labour productivity that reflects the impact of conceptualization — ideas generally — on economic growth and standards of living. Finding a way to isolate the effect of, say, the length of patents on overall economic growth poses a formidable challenge.

The more general challenge is to develop a framework that fosters the growth of an economy increasingly dominated by conceptual products.

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