LEADING LIGHTS:
Author James V. DeLong
An interview with Britton Manasco of Knowledge, Inc., October 1998

"In the area of information and intellectual property, as in so many others, property rights are the key to justice, economic efficiency, political freedom, and personal autonomy," writes James DeLong in his recent book Property Matters: How Property Rights are Under Assault - And Why You Should Care (Free Press, 1997). His book eloquently describes the erosion of property rights in many spheres of our lives, especially with regard to physical property. Indeed, he contends that the nature of property has evolved far beyond the ability of our legal and political systems to cope. And while he is more optimistic about current efforts to protect intellectual property than efforts to protect its physical counterpart, he warns that everyone suffers when governments and citizens fail to defend these rights. DeLong (jdelong@regpolicy.com) is a Washington, D.C.-based attorney who specializes in property law and a principal with the Regulatory Policy Center (www.regpolicy.com). In our interview with him, he explores multiple issues including digital piracy, patent laws, and current struggles between employers and employees over the rewards of the knowledge economy.

KI: You have spoken about a "continuum" connecting physical and intellectual property.

DELONG: One interesting thing about intellectual property is how many of the concepts that are useful in analyzing it are derived from our analysis of property such as land - the concept of the commons, concepts of whether you can exclude people from use, concepts of multiple use, concepts of dividing up ownership into different limited slices. It turns out that our 2000 years of history in managing land issues is very relevant to intellectual property, contrary to what some would have you believe.

KI: Let's just explore that for a minute. Your point is that there is not a separation here - that physical property and intellectual property can be grounded in the same principles. Is that right?

DELONG: Yes. There is one very important distinction though. With physical property, one person's use often excludes other people. If I have a pature and I am grazing my sheep on it, then you can't graze your sheep on it without overloading it. With intellectual property - with an idea, an invention or even a book - any number of people can use it at the same time. So this problem of exclusion doesn't come up. Nevertheless, a lot of the other problems we have and a lot of the other issues that come up in connection with managing physical property are the same - the problems of who gets what, how you split the rewards and the payoffs. There are problems of encouraging the optimum production of intellectual property and problems of dealing with governments that seem increasingly likely to ignore the importance of property rights. One of the points I make in Property Matters is that people really do have to see these things as being a continuum; if you do not defend the principle of the right to use property in one context you will find yourself alone when they come after you.

KI: Why do you think the interest in intellectual property is growing? What's at stake?

DELONG: Money. As you point out in Knowledge Inc., people increasingly perceive that knowledge is the basis of economic productivity. There are lots of examples. Farmers are using global positioning satellites to determine the exact level of fertilizer to apply - saving big money in the process. Then there's the immense increase in value of physical assets caused by better information processing. We have greatly enhanced the number of messages that can be sent through a cable; software essentially substitutes for huge physical investments. So, increasingly, the returns to knowledge are very high and the question of who gets these returns is very much a live one. People are becoming ever more concerned. Assigning property rights is the dominant means by which our society decides how to divide rewards from economic activity.

KI: What would you say is the state of intellectual property law?

DELONG: My view is that it is fairly good. I feel optimistic about it. In the other areas, I think property law has gotten much more confused. In intellectual property, so far, people are at least asking the right sort of questions. They are trying to ask, "How do we allocate this?" and "What are the proper rights?" They have somewhat less inclination to simply say, "These are all community rights and we are not going to recognize property." It seems to me that asking the right questions is half the battle or maybe three-quarters of the battle. Of course, a lot of these questions are excruciatingly difficult. You can argue all sorts of ways about it. You are trying to determine how best to enhance the right to property and how best to enhance social productivity. The answers are often difficult to settle on, but at least in the intellectual property arena it seems to me the right questions are indeed being asked.

KI: You seem to see a schism between people who want to draw on traditional law in property and people who want to completely reform or overhaul the system for intellectual property?

DELONG: Treating intellectual property differently strikes me as a mistake. As I said, there is this distinction between the physical and intellectual regarding occupation. But another distinction often made is dead wrong. People keep talking about how the marginal productivity of an additional unit of intellectual property is zero or the marginal cost of a unit is zero. In fact, that is not so. They are confusing the concepts of marginal cost and variable cost, which are two different things. The variable cost of adding a passenger to an airliner is virtually zero, but you can't say that for the marginal cost. Marginal cost includes some factor for all your capital cost and all your initial investments. Nobody every says that a business should charge variable cost. Everybody knows that's the way to go broke. So you have a lot of confusion over those two concepts in this area.

KI: And the people who argue "information wants to be free"?

DELONG: Well I think that usually means that they want it for free. A lot of people who make this argument are people who are supported in some other fashion, particularly university professors. They are supported with salaries and grants. If information wants to be free, then the only people who can play in the game are those who are supported by some other mechanism - not people who have to earn a living by developing and processing information. So, in a way, this argument is very much in their interest because it would exclude a lot of competitors. If you have to be a university professor to work on information because you have to have a subsidy, then freelancers and vendors of all sorts can't play. Not being in a university, I am not sympathetic to this position.

KI: You know, that's a fascinating thing that we have really picked up on at Knowledge Inc. Many of the roles that used to be the sole province of universities, particularly research universities, are now being taken on by think tanks, associations, research houses and consultancies.

DELONG: Absolutely, and I think that's great.

KI: Esther Dyson and others have argued that when intellectual property can be digitized and so easily transmitted it is impossible to defend. They think it's not worth trying. What are your thoughts about that?

DELONG: They certainly have a point. The classic statement about property is that it has to be definable, defensible and divestable. This means, one, you can say what it is, two, you can defend it and keep people from stealing it and, three, you can transfer it, and thus capitalize it and turn it into value. With intellectual property and of course with digitization, you can define it and you can divest it but the defensibility is a problem. But I think you have several things going the other way. There is the possibility of embedded codes, which strikes me as a very promising area. Lots of people are working on that - trying to get their own coding systems as a method of protecting intellectual property. Then you have the possibility - and I would say the probability - that companies would learn to market this stuff at a low price per unit. I have seen the estimates that say half of all software is pirated, but a lot of that includes people, for example, who have two machines and they are not going to buy a program twice. I think the software makers have learned that if they cut their price and expand their market, then essentially they won't get as much cheating.

KI: You also note that one of the biggest issues coming up is the grab for the capitalist pie, and that an interesting thing that seems to be happening is that more value is being extracted by skilled labor - the employees themselves.

DELONG: Roger Lowenstein, the Wall Street Journal columnist, recently commented that, "Capital is in surplus; skilled geeks are at a premium." This means that "geeks" are going to collect much of the reward. Take Microsoft. If you count the amount of money it spends on stock options, you'll find its earnings are pretty flat. Some people argue that the stock market is so high because it is reflecting the value of knowledge. But it is not at all clear to me that it will be the shareholders who harvest that value. Thinking this requires a hell of an assumption that corporations will be able to appropriate the value of the knowledge of their employees. I think that is far from certain.

KI: Well you intimate that there is a coming battle over these things?

DELONG: Absolutely. I don't know that there will be a formal battle. It's one of those murky things that will be fought over in a lot of different areas. But you see it coming. The common form it takes is an employee who gets a good idea and leaves his employer because he is uncertain he will be properly rewarded. He either takes it to a different employer at a time when his bargaining power is at its maximum or starts his own company.

KI: The environment certainly has changed. People seem to be more cynical about their organizations than they have been in the past - certainly less loyal.

DELONG: You can't rely on the organizations to repay you in the future or to act in a way we would call honorable in the future. People talk about how there was once an implicit bargain - that you would be very productive in your early years and that, when you slid off later in life, the company would take care of you. That bargain is now gone. And so people realize that they have to take care of themselves.

KI: It's troublesome that so many people now are getting sued over the ideas in their heads or even that companies are suing when competitors pursue their employees. How do you expect those kind of issues to shake out? Does this just mean people and their companies must more clearly define what is and what is not permissible?

DELONG: Yes. I think that is an area where you have a lot of litigation. Part of the reason is because the rules have been so unclear. But you really do have a very difficult question of what should belong to whom. Some classic forms of intellectual property, such as customer lists and that sort of thing, can readily be perceived to belong to the employer. After all, the employee generated them on the employer's time. When you have things that are much more dependent on the individual's spark of creativity - that aren't the result of simply a reasonably intelligent person investing time, but are the results of a creative burst - then I think you are going to go much more the other way. You are more likely to believe that is the individual's product. But how do you draw that line? It is especially difficult when you get into things that judges don't understand, like developing software. And what about group projects, where many employees make a contribution?

KI: Let's talk a little bit about the patent system. There is a fair amount of discussion right now on Capitol Hill about new legislation to overhaul the system. What is essential about this system in terms of the success of a knowledge economy?

DELONG: With patents, you have the problem of rewarding innovation without at the same time over-rewarding it. The classic example is the horse collar, invented in Europe 1500 years ago. The horse collar was a tremendous piece of intellectual property in that it multiplied the load that could be pulled by a horse by a factor of five. If you now think in terms of a cartage system - where you have a horse, a horse collar and a cart - the question is who gets the benefit if you multiply the productivity of that system by five. Is it the owner of the horse, the owner of the collar, the owner of the cart or the consumer? All of them are going to stake a claim. Here's the perennial problem. If you give a patent to the horse collar owner, then he will wind up with all the extra money and the other three are going to object quite vehemently. They would say they are contributing too. In fact, the horse collar is actually worth zero without the horse and the cart, so in their view they should get a hefty share of the gain. We have evolved some very rough and ready ways of allocating these rewards, particularly the idea of limiting the patent to a workable invention, not to an idea. You cannot really invent just anything that will go around the horse's neck or anything that would help improve the horse's pulling power. So you evolve these doctrines in patent law that something has to be novel, it can't be within the state of the art, it can't be overly broad, it can't be a formula, or basic principle of nature. We have a lot of litigation over these concepts.

KI: What are we trying to accomplish with our patent system?

DELONG: We are trying to provide some protection for innovation but not let anybody patent the whole intellectual commons and appropriate it all. So we limit patents in time. It's a reasonable system and it has worked pretty well for us. Some economists, such as Douglas North, who won the Nobel Prize a few years ago, think that the invention of intellectual property and its protection really caused an explosion in creativity that was the basic force behind the Industrial Revolution. I think the current debates over patents are very much in the same tradition. It's just that the contexts are new in terms of figuring out what to do with the products of digitization. But the questions are the same. How do you allow enough protection to encourage innovation but not so much that you let people collect monopoly profits forever?

KI: Are some countries going to be more successful than others because they work out these issues of intellectual property protection in an effective way?

DELONG: I think good clear property rights really are a very important factor in economic growth and the creation of wealth. I think the countries that get this straight will do better and companies that get this straight will do better. I think increasingly, as Paul Strassmann has said, companies that figure out how to increase their knowledge capital will do a lot better than those that can't do anything but destroy it. I think in the long run we will find that Professor North is right. Clear rules that guarantee the right to property - intellectual and physical - are going to be major factors in growth in the future as they have been in the past.