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.
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