Friday, February 3, 2012

That DVD Incident, Intellectual Property, and Innovation

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This photo is being circulated in Facebook
 by a certain Jerry Ocampo. It may be part of
the systematic demolition job vs. Llamas.
This is related to an earlier article:

We all know that Presidential Political Adviser and known socialist Ronald Llamas is again the subject of another controversy – that of being caught buying “pirated” DVDs. We all know that he apologized (for putting the government in an awkward position) and that President Aquino announced that he will stay in office despite the protestations of the noisier members of the chattering class. But amid the brouhaha, the question of substance remains unasked: what should be our government’s policy on intellectual property?

Here is an unsolicited advice: the government can continue with the rhetoric against intellectual property “theft”, but it should be lax in its implementation. It’s simple: placate the international community by token efforts to address “piracy” (and even this can be staged – just set up a DVD booth and pretend to smash it in front of international TV) while letting the underground economy persist, providing millions of unemployed Filipinos a lifeline while keeping digital entertainment cheap.

Copying your Way to Modernity

Lest one should accuse me of being insane (or worse, a scoundrel), we have to remember that this is the same policy employed by China for the longest time, and they have been doing well these days. And unless one may forget, it is the same track followed by South Korea when Samsung was busy ripping parts of Sanyo collections and copying them one by one, and even Japan when it first launched poorly copied versions of American automobiles (earning “Made in Japan” a derogatory connotation not unlike “Made in China” now, but what the heck – they’re rich now).

Also, never mind the fact that the United “IPR” States stole many ideas from the British Empire during its industrialization period. Until now, instinctive copying – legally or illegally – practically remains in their genes. Consider, for instance, the plan to blatantly copy Sherlock.

"Piracy, my dear Watson."

But in fact, almost all nations which successfully leapfrogged from poverty to modernity did not respect intellectual property until after they can produce intellectual stuff that can already be propertied. Cambridge economist Ha Joon Chang made a very good point on this:
The historical record reveals that industrialised countries did not recognise or enforce patents until after the process of industrialisation was complete. Switzerland introduced a patent law that protected mechanical inventions in 1888, but a comprehensive patent law was introduced only in 1907 (Schiff 1971). The Netherlands first introduced a patent law in 1817, but then abolished it in 1869 because patents were seen to create a monopoly that was inconsistent with the country’s commitment to free trade and free markets (Schiff 1971). Patent law was reintroduced in the Netherlands only in 1912. Interestingly, the 19th-century economists that were most committed to free trade and free markets rejected patents because of the monopoly argument (Machlup and Penrose 1951).
The lesson? Respect for intellectual property is an outcome, not a requisite, of economic development. One should not put the cart before the horse. But of course, we can understand where the developed nations like the United States and those in the European Union are coming from - they don't want their hegemony in technology, arts, and entertainment challenged. And since we live in an international community in which they set the standards - the best way is to pay token respect to the standards and pretend to respect Intellectual Property Rights (IPR) while doing otherwise.

Actual Determinants of Innovation

But what are they actually saying on IPR? Their strongest argument is that by granting innovators and artists the commercial right on their creation, we allow them to benefit economically from the fruits of their ideas and labor. Thus, we promote further generation of ideas. Moreover, proponents of IPR protection argue that commercial protection offered to the innovators and artists actually incentivizes the disclosure of the details of the innovation or creation – and thus, paves way to the public’s eventual access to it (once protection is there) for the furtherance of knowledge or the arts. Without IPR protection, it may never have been disclosed to begin with.

But economic incentive is not that strong determinant of innovation and art or its disclosure. For one, the primary incentive of an innovator or an artist is largely psychological - the joy of contributing, or of creating, is usually enough. Financial reward (due to a period of IPR-driven monopoly) may in fact only be a far second. I guess the important thing is that we make sure that our thinkers are (1) publicly recognized for what they did, (2) they live relatively good lives (and not on subsistence jobs, like Filipino inventors forced to sell rights to countries like Japan as an important industrial inputs, or award-winning independent movie makers forced to create mainstream junk), and (3) our education system allows for emergence, nourishment, and development of science and the arts.

Dr. Jonas Salk, the inventor of the first polio vaccine, was asked if he would patent the vaccine (and thereby earning him millions, more likely than not). Salk replied: “There is no patent. Could you patent the sun?” Regardless of the legalese involving intellectual property (and property as defined by law), the point here is simple: ideas are as natural for humans as the sun is. Why should anyone own ideas when all we add to knowledge are a product of what we have learned from others?

Another argument is that you are not violating IPR if you are only using it for non-commercial purposes. You can, for instance, reverse-engineer an invention as long as you don’t use the knowledge you gained from the product for commercial purposes (as per R.A 8293, Section 72.2). This is another issue altogether, one that deserves more explanation because it is actually how IPR becomes an obstacle to economic development. Let us then tackle innovations that have economic value.

Innovative Firms and IPR

To explain this better, we have to separate first the innovator from the manufacturer. As I argued, the primary incentive for the innovator is the act of innovation itself. However, the primary incentive of the manufacturer is profit. By preventing the commercial use of an innovation by other firms even if they can replicate the product more cheaply or are willing to sell them at a less price, what IPR does is to stifle the efficient manufacturing and dissemination of the innovation while doing very little to incentivize innovators.

The developmental consequences are staggering. Even if the knowledge had become known to the public because of disclosure polices, products based on those knowledge cannot be mass manufactured except by the source of innovation – which usually rakes in exorbitant profits and rents because of its monopolistic position. Because of these firms' ability to impose artificial scarcity (to maximize profits), people are denied access to some of life-improving innovations, in medicine for instance. This lead to outright opposition, with Thailand producing some generic antiviral drugs in 2002 (prompting US to put it in the list of copy right violators) and Brazil declaring efavirenz (of Merck) a public interest medicine. Opposition to TRIPS also emerged in India in the 1990s.

Even if there are those who may eventually waive their IPR for the sake of collective good, there are thousands more – usually companies – who are willing to stop the production of a product based on a good idea if it harms their economic interests. Just consider the killing of electric car in the US, or the failure of solar energy to take-off because of exorbitant cause of royalties. Moreover, there are "patent trolls" (among those accused are Intellectual Ventures and even Thomas Edison himself) who will opportunistically register a lot of patents with the intention of reselling them.

It would have been justifiable if the actual innovators (the people) are the ones who usually benefit financially. But the real world points all too clearly at the real beneficiaries – the majority shareholders of transnational and multinational corporations (the 1%, in "Occupy Wall Street" parlance) which have the actual innovators – the scientists and artists – in their payrolls. The real innovators then receive compensations that are usually far less than the profit-taken by their employers. This is true from the entertainment (we know how much really goes to the artist after studios get their chunk) to the pharmaceutical (leading India to oppose the TRIPS agreementon medicine products) to the ICT industry.

Not surprisingly, developing economies dedicated to a modernization project usually ignore IPR restrictions when manufacturing products for exports (and fortunately for these economies, with a majority of consumers usually ignoring this fact as well). This is true in the case of Japan, South Korea, and in the recent decades, China (now known as the hotbed of piracy). Looking at it at a global perspective, ignoring IPR has the effect of accelerating global technological development, because firms retain their competitive position by innovating more and keeping them on their toes.

Government intervention

This effectively debunks the argument that IPR is an effective way to induce firms to invest on research. In fact, all evidence points at the opposite. But even assuming (without conceding) that it is, should innovations emerge only out of private investment of firms? Why not from the public as a whole through direct government support for innovators?

This is where we argue again for government intervention. It ensures that innovations remain in the public domain and there is no limitation to its commercial use by firms (which then subjects it to competition, driving down costs). As for the innovator, public and peer recognition for her or his historical contribution is usually enough, on top of the government assuring them of good and respectable life through welfare and other incentives.

US Defense Advanced Research Projects Agency (DARPA) was responsible for
creating the basis for  Global Positioning System (GPS) and Internet technologies
Come to think of it, if the innovators still innovate despite their meager compensation (relative to their shareholders of the firms which employ them), imagine how cheaply we can actually manufacture innovations if they receive support and compensation from another entity, like the government for instance.


To summarize, not only is partial excludability of innovation through IPR a weak incentive for innovators, it is in fact a huge obstacle for overall technological development. It keeps costs high, it delays the progress of innovations, and together with weak government investment for research, makes innovators dependent on the financier.

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