Ingenuity's flight toward rents

By Razib Khan | July 26, 2011 11:53 am

Andrew Oh-Willeke, Esq., observes:

One example of cyclicality that continues to today is the practice of law. The basic principles of Roman private law and the complaints that people made about lawyers and litigation were remarkably similar in the 300s to what they are today.

In the 6th century Justinian the Great sponsored a compilation of the body of law which was being widely practiced in the Roman Empire at the time, what is now known as the Corpus Juris Civilis. This is not an abstract or obscure point in the history of modern law:

The present name of Justinian’s codification was only adopted in the 16th century, when it was printed in 1583 by Dionysius Gothofredus under the title “Corpus Juris Civilis”. The legal thinking behind the Corpus Juris Civilis served as the backbone of the single largest law reform of the modern age, the Napoleonic Code, which marked the abolition of feudalism.

Imagine that the astronomical models of Ptolemy served as a basis for modern astrophysics! There’s only a vague family resemblance in this case. The difference is that law is fundamentally a regulation of human interaction, and the broad outlines of human nature remain the same as they were during the time of Justinian and Theodora. In this way law resembles many humanities, which don’t seem to exhibit the same progressivity of science. Our cultures may evolve, but there are constraints imposed by our nature as human beings. Human universals in humanistic enterprises speak to us across the ages. The story of Joseph and his brothers in in Genesis speaks to us because it is not too unfamiliar from our own. The meditations of Arjuna are not incomprehensible to the modern, even if they come from the imagination of Indians living thousands of years in the past. The questions and concerns of the good life are fundamentally invariant because of the preconditions of our biology.

Science is different. It is the basis for real magic, in a Clarkian sense. It is a necessary precondition for humanity’s slipping the Malthusian trap for any period more than a generation or two. Science drives innovation which increases per unit productivity fast enough that it is feasible that in concert with the demographic transition utopia is possible. Many of the other hallmarks of the modern world we cherish are not unique. The Romans had law, as shown by the experiences of St. Paul, who was a citizen and due the appropriate rights. The Greeks had the Golden Age of Athens, which produced artistic works still valued today. The Chinese had a meritocratic bureaucratic system ~1,000 years ago. The British lacked the joint-stock corporation for a century thanks to the South Seas Company fiasco, but that didn’t stop them from initiating the Industrial Revolution. Institutions and norms are important, but they are not sufficient for the flourishing of affluence. We live in an age of the “secret sauce” of just enough innovation to outpace population growth. This is singular and distinctive in the history of mankind.

This is why the most recent episode of This American Life is so disturbing to me. It is redolent of ages best forgotten. And if you haven’t heard it yet, listen now! It’s titled “When Patents Attack!” The piece narrates the misuse and abuse of intellectual property law today in the United States for the profit of a few. Sound familiar? Like the frontiers of the financial sector it is clear that a system whose ultimate purpose was to smooth the aims of innovation and ingenuity is actually squelching and smothering it one step at a time. Gangs of lawyers are now marching together as collective legions of patent trolls whose sole aim is to shakedown technology firms. This is nothing new, a clever lawyer has always been an asset. Cicero lives on today as he did in the past. What’s new are the legions of would be James Watts. Throughout history the clever, sly, and ingenious, have managed to climb to the top of the pile. What is different about the past 200 years is that the spread of the gains to productivity to the masses. The gap between the skilled and unskilled worker in 1750 was far greater than it is today (though that gap was at a minimum in 1970). This massive redistribution of wealth has occurred through the positive externalities, the spillover effects, of science & technology, as well as institutional amplifiers (e.g., welfare state) possible to a large extent enabled by the productivity surplus.

Like parasites blooming within an organism the proliferation of patent trolls is disturbing. The very fact that someone as brilliant as Nathan Myhrvold perceives rich profits in this sector is a signal of the reality that the system has structural incentives which are warped in terms of its long term aims. Most of history has been a story of the few clever and strong bullying labor and produce out of the many. We’ve seen this before. What does it profit a civilization to gain the eloquence of Cicero if it loses its silent genius? (we know what it profits particular individuals, but that’s not rocket science, those the iron laws of history we aim to keep at bay)

In this story the United States of America is alas no longer on the side of the angels. From what I can tell one way that our nation aims to maintain its “competitiveness” is not to innovate, but to extract rents from our accumulated “intellectual capital.” This is just spending down the the savings of ages, rather than building new stores. Years ago my friend Joel Grus made me to be skeptical of the long term utility of intellectual property today, but my reading of economic history since then has moved me more toward his radical position rather than further from it.

CATEGORIZED UNDER: Culture, Economics, Science
  • Charles Nydorf

    Business competition thrives on secrecy while scientific progress thrives on openness. That is why private businesses are not the ideal source of support for scientific research.

  • juan

    On the issue of the high-IQ crowd using their talents in societally destructive ways … what do you think about professional poker players? I was watching the most recent World Series of Poker on ESPN and I was struck by how much wasted intellectual capital was being poured into this zero-sum game. Sure, they are producing some entertainment value, but these elite players have the capability to do so much more than just win money from the slightly dumber players they play against.

    At least in finance they would be, hopefully, helping direct financial capital towards better run firms and better technologies and making the market signals more efficient. With professional poker, outside of the entertainment value for viewers, it’s totally a zero-sum game where the clever take money from the somewhat less clever.

    When I watch pro sports I’m not struck by the thought of what great things these athletes could accomplish if only they weren’t playing sports 24/7.

    The poker thing is obviously orders of magnitude less potentially destructive than parasitic IP trolls, but seems broadly related.

  • http://blogs.discovermagazine.com/gnxp Razib Khan

    At least in finance they would be, hopefully, helping direct financial capital towards better run firms and better technologies and making the market signals more efficient. With professional poker, outside of the entertainment value for viewers, it’s totally a zero-sum game where the clever take money from the somewhat less clever.

    i think poker is better than the frontiers of modern finance. the latter is i think arguably negative sum for the aggregate. poker players aren’t too big to fail and don’t socialize their losses. i think don’t think efficient allocation of capital has that many returns on the whole on the margin beyond what a normal capitalist economy can produce. nathan myhrvold’s patent trolling btw has 5 billion in private venture investment apparently. they anticipate huge returns. how’s that for “efficient” allocation of capital? :-)

  • http://washparkprophet.blogspot.com ohwilleke

    “The Chinese had a meritocratic bureaucratic system ~1,000 years ago. ”

    Another example is that ca. 850 C.E. the moral equivalent of a check written in Morocco could be used to pay a debt in Sumatra.

    In a lot of ways, the patent system is less deeply broken than the copyright system. After all, patents from the 1980s are now expired, while copyrights from the Great Depression are still in full force and trademark rights never expire. Trolling per se isn’t really the problem. The biggest problem is (1) the usual remedy for a patent violation is to obtain an injunction preventing someone from using the invention rather than an order mandating that a share of the profits be distributed based upon the deal that would have been struck if an agreement had been reached before the product was commercialized; and (2) there is no natural and comprehensive way to index ideas, so it is easy to overlook existing patents that seem applicable after the fact.

    More generally, the biggest conceptual problem with the intellectual property system is that it conceptualizes the rights as a form of property rather than a right to share in the unjust enrichment that third parties receive from using your ideas without your permission. Property rights concepts have quite different natural implications than legal obligation concepts and the latter are better suited to the compensation of the people who add value with ideas.

  • EmmaZunz

    “The gap between the skilled and unskilled worker in 1750 was far greater than it is today (though that gap was at a minimum in 1970).”

    Why do you say?

  • Handle

    I look at “the shakedown” as merely temporary legal arbitrage phenomenon. Eventually corporate innovation will adapt to the new environment once these litigious-ventures become a stable and established part of the economy – just like they did to the other shakedown artists.

    My view of things is that innovation is slowing down as it takes increasing amounts of capital and time to yield inventions with relatively smaller amounts of net benefit. Low hanging fruit and all that. A friend calls it, “The End Of Ideas” – a lot of it is due to the constraints imposed upon us by physical law. Look at commercial passenger aviation or new drug approvals for some evidence of the phenomenon.

    If this is true, wouldn’t the socially optimal set of intellectual property incentives have to strengthen the existing rules instead of weaken them?

  • http://blogs.discovermagazine.com/gnxp Razib Khan

    Eventually corporate innovation will adapt to the new environment once these litigious-ventures become a stable and established part of the economy – just like they did to the other shakedown artists.

    1) i don’t think mature corporations able to afford these fees innovate. i think they perfect and extend. innovation is driven by small firms.

    2) you see to imagine that economic equilibria are a good robust model for what’s going on. i don’t think so.

    perhaps i misunderstand you.

    My view of things is that innovation is slowing down as it takes increasing amounts of capital and time to yield inventions with relatively smaller amounts of net benefit. Low hanging fruit and all that. A friend calls it, “The End Of Ideas” – a lot of it is due to the constraints imposed upon us by physical law. Look at commercial passenger aviation or new drug approvals for some evidence of the phenomenon.

    i think there are some areas where low hanging fruit has been picked. there are basic laws of physics which are going to make qualitative improvements in long distance transport very difficult just as you say. unless you invent teleportation or something! but in some areas of bioscience there’s going to be lots of possibilities (e.g., if gene therapy can be applied into genetic re-engineering).

    btw, “My view of things is that innovation is slowing down as it takes increasing amounts of capital and time to yield inventions with relatively smaller amounts of net benefit.” is scary. it might be true. so i need to think about your last suggestion….

  • Tom Bri

    The low hanging fruit of jet transport has been picked, without some serious and now unimaginable (by me) advances in materials. Maybe sub-orbital ballistic shots will eventually cause another burst, but that looks to be still quite a ways out.

    But, the computer revolution is still going strong, no end in sight. Biology, as Razib mentioned, has many many possible branches, and just a few years down the road. Improvement of the human genome, anyone? It’ll start with simple things like cures for obvious defects, but pretty soon we’ll have stupidity and ugliness defined as genetic defects, and only the Amish and a few reactionaries will hold out.

    Fusion power? Lots seems to be bubbling up recently, and that’s a game changer, if any sort of positive energy production can be won. Hard to emphasis how big a game changer.

    And those are just a few off the top of my head. We are no where done for technological change. For the US and other Western nations I see political sclerosis as a much bigger impediment than technology. It may be up to the Indians to carry us forward…

  • http://entitledtoanopinion.wordpress.com TGGP

    Energy is a pretty small component of the economy, so I’m skeptical it would be that big of a game changer.

  • Handle

    @Tom Bri: The argument is not that there aren’t plenty of possible remaining technological innovations out there. Though, I must say, I think a lot of people (like “the singularity” crowd) are caught in a sort of presentist futurism (now doesn’t that sound pretentious…) cognitive bias of just having blind faith expectations of rapid progress in everything and the notion that it’s just impossible to exhaust a hypothetical infinity of new possibilities. It just so happens that a particular end-user consumer technological sector is advancing rapidly and changing people’s lives, and this is bound to create spillover impressions of what is happening in general, but these are erroneous extrapolations. I think it’s more likely that we’re approaching what my TEOI friend calls “Plateaupia”.

    The analysis would be better sector by sector. Feynman, for example, made his famous, “There’s plenty of room at the bottom” lecture, which provided a good logical, physical argument as to how much room for progress there was given existing understanding, needing only research and development into the technical details of craft mastery. But an argument that says, “The model says we should be able to make this existing technological component with far fewer atoms”, is a different kind of case than one that merely hopes for speculative leaps into innovations that do not currently work.

    I’d like to see more solid, “There’s plenty of room at the bottom” arguments to support the assertions of future progress. My friend has persuaded me that these days it’s much easier to make a “Actually, there’s not much more room left at the bottom anymore” case in a lot of existing fields, having fully matured after generations of engineers and scientists have squeezed every last ounce of increased efficiency out of them.

    At any rate, the argument is actually an Economic one. It doesn’t much matter for our society in terms of welfare-enhancement if new inventions are possible if they aren’t cost-justified. For example, we have alternative energy, but despite decades of development it isn’t cost competitive and no business would buy it unless compelled by law. I think almost all manual labor could be replaced by the end of the decade by autonomous robots, agriculture providing the best example. I can very easily imagine self-driving combines and turning those Army EOD robots (like you see in The Hurt Locker) or maybe that famous laundry-folding robot into 24-hour produce picking machines.

    But the problem is that to be economically justified, the fully-burdened rent of an agricultural robot has to be cheaper than human labor which can be (and is) had for just a few dollars an hour. If labor available for manual work was scarce and wages were high, the business case for R&D would make sense. But we have oodles of surplus labor, “reserve armies of the unemployed” and in markets which are exposed to open global competition, that amount of cheaply available human labor is in the trillions of man-hours per year. These robots are possible now, but humans will be cheaper for the foreseeable future. And at a macro level it’s a catch-22 – because the more you replace humans with robots, the more surplus human labor becomes available, which lowers their wages further.

    That is the question I asked Razib and which he wrote he would have to ponder (I very much look forward to reading his thoughts on the matter). The theory of the utility of intellectual property mirrors the case for tangible (real and personal) property – in the absence of such a legal right, potential innovators wouldn’t be adequately incentivized to invest their capital in “improvements” (in this case, risky R&D ventures) because some copycat could swoop in and charge the marginal cost of production, whereas the inventor had to recoup the fixed cost. We give the inventor a temporary monopoly so that he can reap extra profits to recoup those fixed costs, but then we demand open competition in terms of marginal costs.

    Ok, everybody understands the nature of the problem. The problem is that we accomplish this is a very clumsy way with some arbitrary number of years. We’ve tried to refine it recently by giving different sectors different time periods, but it’s still a very arbitrary way to go about it. One could imagine a system where each patent gets filed with an accounting of its R&D costs, where profits are monitored, and the holder’s monopoly extends only as long as it takes to recoup the fixed costs, but the administrative burden of policing such a complex system and preventing gaming of the rules might itself be counterproductive (see: IRS) or prohibitive.

    But to the extent that our IP rules are not patent-customized, then they reflect an arbitrary “balancing” judgment that should be subject to modification as conditions and circumstances change.

    Now, what Razib and Grus are saying is that they think the direction of those IP rules should go down. What I am saying is that if R&D costs are going up, and the net consumer-surplus per new patent in going down, and the pace of innovation is slowing (and I believe all three of these things are true), then the economic analysis would tell us that IP rules should become stronger, not weaker.

    This is why my view of the “shakedown litigation patent troll” phenomenon is that this is not a problem with IP protection in general. Like I said, I think it’s merely arbitrage and best assessed with a “Coasian Bargaining” analysis, which is highly counterintuitive and affronts the instincts of most people. “What? The innocent homeowners should pay the factory to stop polluting? That makes no sense! It’s unjust!” Actually – it makes sense, but it’s subtle. Is patent-trolling really different?

    Now, what had been proposed is a kind of “use it or lose it” reform for IP. If you’ve got a patent, but you don’t actually commence production in a relatively short time, or, in the alternative, if you abandon production and sales (in copyright one has so-called, “Orphan” works, or perhaps all of Nintendo’s old games simulated on your PC), then the monopoly protection terminates.

    This makes some sense to me, but I can also see how it might be gamed because those that invent and those with the unique productive infrastructure are not always the same people and you might have “wait it out” situations. I think if something is very expensive to R&D, then a rational company would try to recoup its costs as quickly as possible and not sit on its patent, but on the other hand, if a company thinks an invention is not currently competitive, but will be profitable, say, in 5 years, you wouldn’t want them to either lose their property right or lose the patent race with their competitors.

    The whole area is fraught with these sorts of problems and the complex effects of the rules on various incentives. The mechanisms we’ve produced to encourage what we want also make some undesirable activity possible, and I think it may be inescapable and just the price we’ll have to pay. That’s why I’m skeptical of most oversimplified good-guy vs. bad-guy, and good-law vs. bad-law stories. There’s no substitute for thorough analysis.

  • http://washparkprophet.blogspot.com ohwilleke

    “there are basic laws of physics which are going to make qualitative improvements in long distance transport very difficult”

    In a medium distance airplane trip, say from Denver to Las Vegas, the business of getting to the airport, through security, getting the passengers and luggage on board, waiting for approval to takeoff, and then circling while getting approval to land, taxiing to the gate, disembarking passengers and luggage, and getting to the final destination, is easily a majority or even two-thirds of the travel time. Improve those parts of the process which are not bound by the laws of physics and you can get travel times comparable to those of flights at speeds of the fastest supersonic jet fighters in an otherwise conventional air travel format.

  • abb3w

    …and you’re still considering yourself a “conservative”? Perhaps you might wish to consider whether a new brand-name is in order. I’m partial to “pragmatist”, myself. =)

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About Razib Khan

I have degrees in biology and biochemistry, a passion for genetics, history, and philosophy, and shrimp is my favorite food. In relation to nationality I'm a American Northwesterner, in politics I'm a reactionary, and as for religion I have none (I'm an atheist). If you want to know more, see the links at http://www.razib.com

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