While meandering the streets of Paris, New York Times columnist Paul Krugman apparently awakened to the fact that the assignment of claims to wealth through patents, copyrights, and other forms of intellectual property is a really big deal. This is good news for those who have been jumping up and down yelling about this fact for the last 15 years or so.
There is really big money in this area. Just to take my favorite one, we spend $340 billion a year on drugs, more than 2 percent of GDP ($295 billion on prescription drugs, $45 billion on non-prescription drugs). We would probably spend about one-tenth this amount in the absence of patent protection. The difference is equal to about 20 percent of after-tax corporate profits.
And this huge gap between price and marginal cost gives drug companies enormous incentive to push their drugs as much as possible. This means concealing evidence that they are ineffective or even harmful. We routinely see stories about the drug companies responding exactly as economic theory predicts.
Of course the huge gap between price and marginal cost leads to all the predicted distortions on the consumer side as well. People have to struggle to find the money to pay for drugs that cost hundreds or even thousands of dollars a prescription when the price would be largely a non-issue if they sold for the generic price.
In the case of the tech sector, Google, Apple, Microsoft, and Samsung compete at least as much in their legal departments as in the quality of the products they develop. Patents are more often used to harass competitors than to protect innovation – and that is what the business press says.
In the realm of copyright, we have the efforts by the entertainment industry to turn as all into junior copyright cops through measures like SOPA (Stop Online Piracy Act) or PIPA (Preventing Real Online Threats to Economic Creativity and Theft of Intellectual Property Act, or Protect IP Act).
So intellectual property is a really big deal in the modern economy. And what is neat about it is that these property relations are almost infinitely malleable. (Okay, all property relations are malleable, but IP seems to offer much more room.) That’s the key point that we all have to understand because the bad guys want to convince us that patents and copyrights came to us from on high and that it is our obligation to enforce them in their current or strengthened form, otherwise we are dirty communists.
It’s great to see that Krugman may now be on the case. Perhaps he will be able to teach the economists a bit of economics. (Hint: An intro textbook goes far here. Large gaps between price and marginal cost are bad in trade. Much larger gaps between price and marginal cost are really bad when it comes to intellectual property.)