Democracy, December 6, 2017
It is a standard practice in policy circles to claim that technology is the primary culprit in the rise in inequality over the last four decades. As the story goes, computers and other new technologies have placed a premium on highly skilled labor while substantially reducing the need for the physical labor done by less-educated workers. This raises the pay of the highly skilled while lowering the pay of everyone else.
By making technology the culprit, this story relieves policy of responsibility for inequality. It also effectively makes the alternative to rising inequality suppressing technology, which presumably few would want to do.
While this story may be comforting for the well-educated people who have benefitted from the upward income redistribution of the last four decades, it has nothing to do with economic reality. The winners and losers from technology are not determined by the technology itself; they are determined by the rules that exert control over technology; specifically, patent and copyright monopolies and other forms of intellectual property. These rules are not facts of nature. They are determined by Congress and by the courts, and they can be changed. They should be featured front and center in any discussion of inequality.
Why Is Bill Gates Incredibly Rich?
If it seems surprising that patent and copyright policy should exert such a large impact on the distribution of income, consider how rich Bill Gates would be in a world without such protections. In this world, anyone who wanted to could freely copy Windows, Word, and other Microsoft software without Bill Gates pocketing even a penny. Consumers would be able to buy computers for just the cost of manufacturing them, they wouldn’t have to pay anything for the operating system and other software.
Bill Gates would likely still be doing fine in this world; he is obviously hard-working and ambitious, comes from a well-connected family, and seems reasonably smart, but he almost certainly would not be one of the richest people in the world. In fact, he might still be working for a living.
Patent and copyright monopolies, of course, serve the important public purpose of providing an incentive for innovation and creative work. But they are not the only way to provide this incentive. We already use a wide range of alternative mechanisms that could be expanded to supplement or replace patents and copyrights.
The most obvious alternative is direct public funding for research and/or creative work. In the case of scientific research, the government spends tens of billions of dollars every year directly supporting it. The largest single component is the $32 billion annual appropriation for biomedical research that goes to the National Institutes of Health, but there are many other large pots of research funding. Foremost on this list is the Defense Department, which often supports research into areas with important civilian uses, like the Internet and the Unix operating system, which was in fact the basis for Microsoft’s DOS operating system.
We can and do provide direct support for creative work of various types. Relatively small sums come from government agencies like the National Endowments for the Arts and Humanities, but other countries provide much more generous support for cultural work. For example, the government-funded Danish Film Institute spent $82 million this year supporting the making and distribution of Danish films. This would be equivalent to $5 billion annually in the U.S. economy. The French government spent $3.2 billion subsidizing culture in various forms, the equivalent of $22 billion in the United States.
In addition, we can provide indirect support for creative work through policies like the charitable contribution tax deduction. Under this policy, the federal government effectively picks up 40 cents of every dollar that a high-income household pays to support a non-profit organization. While most of these deductions go toward other purposes, an orchestra or theater operated as a non-profit organization effectively has a large portion of its budget supported by the federal government through this tax deduction.
These alternatives are worth noting if we want to even begin to correct the simple (and faulty) assertion that without patent and copyrights there would be no incentive for innovation or creative work. We may need other forms of incentives, but these government-granted monopolies are not the only way to pay for innovation and creative work.
How Long and Strong Should Patent and Copyright Be?
Even if we were to accept the continued existence of patents and copyrights (alongside the aforementioned alternatives), there is still the question of how long we want these government-granted monopolies to last and how strong we want them to be. In the last four decades, we have moved very sharply in the direction of strengthening them.
In the case of patents, we have extended their scope in a variety of areas. Since 1980, it became possible to patent software, business methods, and even life forms. We also added a variety of non-patent protections in the area of prescription drugs, such as a period of data exclusivity for test data used to get a drug approved by the Food and Drug Administration. The current rules on data exclusivity can grant a pharmaceutical company a monopoly on the sale of a drug for five years, even if it holds no patents on the actual drug.
In the case of copyrights, we have extended the term from 55 years to 95 years for things like music, movies, and books. We also applied copyrights to the Internet in ways that make intermediaries share in the responsibility of enforcing copyrights. We also have used trade deals to extend protections in these areas to other countries, which have made life-saving drugs difficult or impossible to obtain in many developing countries. For example, in Brazil, a single AIDS drug, Efavirenz, was costing its government more than $43 million a year before it decided to circumvent the patent with a compulsory license and save more than 70 percent on the drug.
There are two main issues raised by the drive for longer and stronger protections. The first is simply whether they are actually increasing innovation and growth, as we are so often told. The logic of patent and copyright monopolies is that we are creating a short-term distortion in order to obtain a longer-term gain in innovation. However, there is nothing that guarantees the longer-term gain will always outweigh the cost of the short-term distortions, which are very large.
We can think of the price increase that results from patent or copyright protection as being comparable to imposing a tariff on imported goods. Everyone who has taken Economics 101 knows how bad a 20 percent tariff on clothes or cars would be. It distorts the market and leads to substantial economic waste.
Consider now a patent monopoly that can raise the price of a drug 100-fold above the free market price. This is the case with many drugs. For example, the Hepatitis C drug Sovaldi had a list price of $84,000, while a high quality generic version was available in India for $500. In this case, the patent is equivalent to a tariff of more than 10,000 percent in the amount of economic distortions it causes.
This is a really big deal. In the case of prescription drugs alone, we will spend more than $450 billion this year for drugs that would likely cost less than $80 billion in a truly free market. The difference of $370 billion is equal to almost 2 percent of GDP. When we add in medical equipment, software, and other sectors, the gap between the protected prices and free market prices is likely to be two or three times this size.
For this reason, it is very plausible that patents and copyrights are already stronger than would be optimal from the standpoint of promoting economic growth alone. There is some research that helps make this case. This research implies we would have more economic growth if we had weaker patents and copyrights.
But even if stronger patent and copyright protections did mean stronger growth, there is still the question of the tradeoff between growth and equality. Stronger protections means transferring money from the rest of us, to not only to Bill Gates, but to hundreds of thousands of software engineers, computer programmers, chemists, biologists, and other highly educated professionals who will directly or indirectly benefit from these protections.
The rest of us will have lower living standards both because we pay more for these protected items, and because our patent-enriched neighbors can bid up the price of housing. This is much of the reason that house prices in places like the Silicon Valley and Seattle have gone through the roof. Even someone with a solidly middle-class job in these areas, like a school teacher or firefighter, can’t afford a middle-class living standard due to the price of housing.
In other words, the tradeoff between stronger patent and copyright protection and equality is clear. This tradeoff should be front and center in policy debates. It is never true that it is simply a matter of technology generating inequality, with “owners” accidentally gaining at the expense of workers. Inequality is the result of policy that declares some people owners of technology, with the power of the state used to enforce that claim to ownership.
We certainly can structure our laws differently. We could be selling essential medicines at generic prices, letting patients pay a few hundred dollars for the latest cancer drug, rather than a few hundred thousand dollars. We could have the most ultra-modern scanning devices available at the same price as old-fashioned x-rays. And, all our software could be free. If we paid for research when it is done, there is no reason to pay for it a second time through monopoly prices. Once it is developed, knowledge is free. The additional public funding in areas like prescription drug research could easily be offset by the hundreds of billions in saving each year on the price of drugs, medical equipment, and other items.
Whether or not we go this route is a policy choice that should be decided based both on its implications for growth, but also inequality. This is an incredibly important debate that is not taking place. Instead, we have special interests pushing for ever longer and stronger monopolies with no regard for the benefits to the economy or the good of society as a whole. At the very least, let’s stop the nonsense; technology, on its own, is not responsible for inequality; we are.