Intellectual Property - eco rationale

Rationale of economic Appraisal of IP - Parvathy K

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RATIONALE OF ECONOMIC

APPRAISAL OF IP

Parvathy K.

In pursuit of Standardized Valuation

Rationale of economic Appraisal of IP - Parvathy K 2

RATIONALE OF ECONOMIC APPRAISAL OF IP

Property – conceptual outline.

Theoretical justification to treat IP as

property

Economic significance of IP

Why value IP?


PROPERTY CONCEPT Etymology –

“French propreté, or propriété, = something owned; Latin proprietas, from proprius 'own'.”

“property is the product of social rules”

‘Private property’ refers to a kind of system that allocates particular objects like pieces of land to particular individuals to use and manage as they please, to the exclusion of others (even others who have a greater need for the resources) and to the exclusion also of any detailed control by society.

- [Stanford Encyclopedia of Philosophy]

Ppty In common parlance – things

in law means rights in or to things

Private property right is an enforceable individual claim to some exclusive use or benefit of something.


LOCKEAN APPROACH “Though the Earth…be common to all Men,

yet every Man has a Property in his own Person. This no Body has any Right to but himself. The Labour of his Body, and the Work of his Hands, we may say, are properly his. Whatsoever then he removes out of the State that Nature hath provided, and left it in, he hath mixed his Labour with, and joined to it something that is his own, and thereby makes it his Property. It being by him removed from the common state Nature placed it in, it hath by this labour something annexed to it, that excludes the common right of other Men.”

LOCKEAN PHILOSOPHY – “a person who labors upon resources that are either unowned or “held in common” has a natural property right to the fruits of his or her efforts – and that the state has a duty to respect and enforce that natural right”.

SOURCE- William Fisher, Theories of IP


Locke combined the structure of a theory of first occupancy with an account of the substantive moral significance of

labor . First Occupancy theory -the first human user of a natural

resource is distinguished from all others in that he did not have to displace anyone else in order to take possession.

It did not particularly matter how he took possession of it, or what sort of use he made of it: what mattered was that he began acting as its owner without dispossessing anyone else.

These ideas, of John Locke, are widely thought to be applicable to the field of IP , where the pertinent raw materials (facts and concepts) do seem in some sense to be “held in common” and where labor seems to contribute so importantly to the value of finished products. Later, it evolved- “idea whose realization or development can become useful

to society belongs primarily to him who conceived it”


IP as a property

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Patents, copyrights and the other legal concepts within the category of IPRs began to take shape in the 18th century.

(Davoll v. Brown)The first time an American judge uses the phrase,

“intellectual property,” is in a patent decision in 1845.

“we protect intellectual property, the labors of themind, productions and interests as much a man’s own, and as much the fruit of his honest industry, as the wheat he cultivates, or the flocks he rears.”

Judges and scholars explicitly invoked Lockean property theory to justify their creation and protection of property rights in inventions (patents) and creative works (copyrights)


ECONOMIC THEORIES The history of what we would recognize

as modern economics in the western world begins in the 17th century.

At that time, the economies of Europe and the United States were changing from principally agricultural to industrial.

The primary economic school of thought of the day was the mercantilist school.

Mercantilists concluded that the primary source of wealth during the 16th and 17th centuries was gold and silver (and, to a lesser extent, other metals such as copper and iron).


In 18th century, the physiocratic school of thought, originating in France, believed that land in general and agricultural land in particular was the principal source of national and individual wealth.

18th century - easy for any country to acquire stocks of gold and silver, even if they had no mines. All they did was to trade their agricultural prodn. for the precious metals. This national source of wealth creation was also the primary source of individual wealth accumulation.

Families that owned the land (source of agricultural production ) were wealthiest in contemporary society. So, during the 18th century, agricultural land was recognized as the primary source of capital formation.

In 1776, The Wealth of Nations, Adam Smith’s monumental work, was published.

Smith’s classical school identified three sources of wealth creation: land, labor, and capital.

These are the three factors of production that contribute to national wealth as well as to individual wealth.


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Adam Smith (1776)Jeremy Bentham (1839)19th century, several classical school

economists expanded on Smith’s theories. David RicardoJohn Stuart Mill (1850s)Clark (1927)Arnold Plant (1934)

Joseph Schumpeter (1934)

Arrow (1962)Machlup and Penrose (1950)Demsetz (1969), Hirshleifer (1971)Landes and Piosner


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“The philosophy of intellectual property developed in response to the use of monopoly power to spur innovation.

Adam Smith* - was critical of monopoly power as detrimental, but justified the need for limited monopolies to promote innovation and commerce requiring substantial up-front investments and risk.

Jeremy Bentham (1839) went beyond this justification for IPRs , providing a clear explication of the differential fixed costs borne by innovators and imitators:”

“ That which one man has invented, all the world can imitate. Without the assistance of the laws, the inventor would almost always be driven out of the market by his rival, who finding himself, without any expense, in possession of a discovery which has cost the inventor much time and expense, would be able to deprive him of all his deserved advantages, by selling at a lower price.”

PARVATHI

ittheory.pdf/jstor/ IP VAL


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By the end of the 18th century, it was widely recognized that the sources of income (and the associated accumulation of wealth) were landowners’ ownership of both industrial

and agricultural land, workers’ ownership of their own labor, and capitalists’ ownership of industrial

factories and equipment. In the early 19th century, several classical

school economists expanded on Smith’s theories.

David Ricardo studied the distribution of income between landowners, workers, and industrialists. In particular, Ricardo identified that, ultimately, returns to land, labor, and capital would have to be out of balance. This is because, over time, there is (1) a fixed supply of land and (2) an expanding supply of labor and

capital.


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John Stuart Mill by the 1850s, Mill concluded that governments would have to intervene in the economic system in order to more rationally allocate income among the three sources of wealth.

Mill (1862) concurred that patent monopolies were justified, arguing that a temporary ‘exclusive privilege’ was preferable to general governmental awards on the ground that it avoided ‘discretion’ and ensured that the reward to the inventor was proportional to the ‘usefulness’ to consumers of the invention.

Clark (1927) reinforced this justification, noting that a system that did not give inventors control of their inventions would result in a rivalry in waiting for others rather than an effort to distance others in originating improvements.


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Building upon the growing understanding of oligopoly and the economics of imperfect competition (Arnold Plant, 1934) offered a more skeptical view of intellectual property rights, questioning whether such rights were in fact needed to stimulate inventive activity and investment in actual as opposed to idealized markets.

Arnold Plant argued that much invention is spontaneous and hence forthcoming without the provision of patent protection.

He contended further that first mover advantages, imperfections in markets and other factors provided inventors and publishers sufficient rewards to create and market their works even in the absence of IPRs.

Plant concluded that patent protection would lead to an overinvestment in R&D that could result in discoveries that fell within the patent domain, wastefully diverting resources from more appropriate endeavors.


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Joseph Schumpeter (1934)

Schumpeter was an economist to recognize the importance of technological change in modern capitalist economies.

Schumpeter’s work emphasized three principles: (1) innovations continually upset established relationships

in markets and organizational structures through a process of ‘creative destruction’;

(2) technological innovation provides the opportunity for temporary monopoly profit, and this linkage explains the rapid economic growth of the Western economies; and

(3) large monopolistic firms are the prime source of technological innovation because they are best able to bear the high costs of technological innovation.

He argued that the competition for innovation resulted in temporary monopolies. One monopoly followed after another; new firms tried to displace the existing monopolist.

In this sense, there could be intense competition. This kind of competition was referred to as Schumpeterian competition.


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Ronald Coase - 1960 Negotiating transfers of property rights and its effects on

efficiency is the subject of an economic theorem, known as the Coase Theorem.

Coase's Theorem, according to which granting property rights guarantees efficient allocation in the absence of transaction costs.

In a hypothetical world where rights on inventions and creations are precisely defined and where it does not cost anything to draft, sign and execute contracts, innovations would always be used by those who value them most, regardless of who made them in the first place.

In other words, leaving aside incentive issues, if transaction costs are zero, the allocation of the initial rights on innovations does not affect the wealth created. Whether the first innovator is granted a broad right or a narrow right makes no difference in terms of static efficiency.

In such a perfect world, every new word or idea could be assigned a property right and an owner and every user would have to pay to be able to use them.

Arrow (1962) provides the seminal modern diagnosis of markets for information. Arrow recognized that the marginal cost of increasing the utilization of information is zero.

Any information obtained, say a new method of production, should, from the welfare point of view, be available free of charge (apart from the costs of transmitting information).

This insures optimal utilization of the information but of course provides no incentive for investment in research.

In a free enterprise economy, inventive activity is supported by using the invention to create property rights; precisely to the extent that it is successful, there is an underutilization of the information.


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During the 2nd half of the 19th century, Karl Marx also studied inefficiency in the allocation of national and personal income (wealth) among the three factors of production.

From the 1840s, landmark Marx publications advocated the labor theory of economics.

Marx believed that landowners and capitalists (the owners of industrial factories and machinery) exploited workers by not giving them a fair return on their labor.

Marx predicted that capitalism was only an evolutionary phase of economic development, soon to be replaced by a labor-based economic system.

KARL MARX


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David Hume A man's property is some object related to

him. This relation is not natural, but moral, and founded on justice.

David Hume's conclusions. There is nothing natural about private property, wrote Hume.

Until possession is stabilized by social rules, there is no secure relation between person and thing. We may think that there ought to be: we may think, for example, that a person has a moral right to something that he has made and that society has an obligation to give legal backing to this moral right.


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MACHLUP AND PENROSE The Natural Property Right in Ideas - That a man has a "natural"

property right in his own ideas was a principle solemnly adopted by the French Constitutional Assembly in 1791.

In the preamble of the patent law passed in that year it was stated that every novel idea whose realization or development can become useful to society belongs primarily to him who conceived it, and that it would be a violation of the rights of man in their very essence if an industrial invention were not regarded as the property of its creator.

The notion of private property of ideas challenged the ingenuity of lawyers and philosophers, especially when many writers insisted that intellectual property was not different in logical nature from material property, and others went as far as to say that a man's property in his ideas was more sacred than his property in things material.

The concepts of "property and of "intellectual product" were carefully analyzed by lawyers, philosophers, and economists. Everyone conceded that a man of course has exclusive control of his new idea before he communicates it to others; but, once he shares it with others, exclusive control is obviously gone; when others are also in possession of the idea , nothing can be done to accomplish "restitution.


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Some economists and lawyers – “To restrain others from selling products that embody the same idea is obviously a possible use of state power but has nothing to do with "natural property rights.”

They pointed out that the logical elements of the concept of property as applied to material things occupation, possession, control, appropriation, restitution, and so forth -were largely inapplicable to "ideas" or "creations of the intellect.

Machlup and Penrose depicts the basis of IP as a property as well as critically outlines the implications of IP.


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Landes and posner The economic theory of property rights emphasizes not

only their incentive effects, that is, the investment they encourage, but also their effect in optimizing current uses of property.

William Landes and Richard Posner merely assert as a foundational truism that “making intellectual property excludable creates value.”

They mean economic value when they speak of value, and they do not feel it necessary to even consider the proposition that value is created, not by the legal definition of property rights under the law, but by the labor of a creator.

The significance of IPRs, as of rights to physical property, is that they are enforceable against strangers. Without exclusive rights to the use of tracts of

land or other valuable physical objects, these properties would be overused.

Second, without exclusive rights, there will be insufficient incentives to invest in improving property.


WHY IP MUST BE PROTECTED

To save the investment of the creator with adequate incentive.

They are easily replicated and that enjoyment of them by one person does not prevent enjoyment of them by other persons.

Those characteristics create a danger that the creators of such products will be unable to recoup their "costs of expression" , because they will be undercut by copyists who bear only the low "costs of production” and thus can offer consumers identical products at very low prices.


IMPLICATIONS OF IP AS A PROPERTY

Unlike physical objects, intellectual objects cannot be

depleted or degraded. Thus, intellectual objects are

non-rivalrous, meaning one person can consume

an intellectual object without diminishing any

other person’s ability to consume that object.

Further, because intellectual objects are non-

rivalrous, the economic notion of scarcity does not

apply to them. IP can be used by many at once, without being used

up. The marginal cost of its use is almost zero ;


PROPERTY AND VALUE In concept, IP begins with identifying it as nonphysical

property which stems from, is identified as, and whose value is based upon some idea or ideas.

Locke identifies the ultimate source of property in value-creating is productive labor.

He expressly praises the value creating, productive labor in inventive activity within his exegesis of his property theory in the Second Treatise.

IPRs, such as copyrights, are justified given their economic value and overall contribution to social welfare. – Waldron

According to Locke’s theory of natural property rights, the legal enforcement of exclusion in property and intellectual property rights follows from the creation of value.

Landes and Posner- “making intellectual property excludable creates value.”

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ECONOMIC SIGNIFICANCE OF IP

Intellectual property is the central resource for creating wealth in almost all industries.

The foundation of commercial power has shifted from capital resources to intellectual property.

Earlier, ‘capital resources’ would bring to mind balance sheets of cash or pictures of sprawling manufacturing plants. Capital resources are now dominated by intellectual property such as technological know-how, patents, trademarks, copyrights, and trade secrets.



The world has moved towards ‘intellectual capitalism’. “IPRs - intangible assets - forms substantial part of

assets of company and thus increase the valuation”. IP play an increasingly fundamental role in corporate

strategy to maximize revenue and attract new investment.

IPRs allow selling, buying, trading or licensing innovation and can be used for various business purposes and like other forms of property.

Economic significance of IP

IP Valuation - Parvathy K 27

WHY IP VALUATION? IP increasingly play a lead role in promotion of

innovation and economic growth in a knowledge-based economy.

Effective management and utilization of intellectual assets is essential to business performance and competitiveness, foreign direct investments decisions, Business combination decisions etc.

Also there are other reasons for economic valuation of IP -

Transactional reasons Tax Reasons Financial reasons Legal reasons

Therefore there is a need to improve knowledge and information about the valuation and utilisation of IP.

IP Valuation - Parvathy K 28

REFERENCE

Books

Gordon V. Smith , Russell L. Parr, “Intellectual Property Valuation, Exploitation, And Infringement Damages ”, Wiley

Richard Razgaitis, “Valuation And Dealmaking Of Technology-based Intellectual Property: Principles, Methods, And Tools” , Wiley

Articles Adam Mossoff , “Saving Locke From Marx: The Labor

Theory Of Value In Intellectual Property Theory” John F Duffy, “The Marginal Cost Controversy In Intellectual

Property”. Joseph E. Stiglitz, “Economic Foundations Of Intellectual

Property Rights” Leonardo Burlamaqui, “Intellectual Property, Innovation

and Competition: Towards a Schumpeterian Perspective” Machlup and Penrose, “patent controversy 19th century” N. Stephan Kinsella –, “Against Intellectual Property” Peter S. Menell, “Intellectual Property: General Theories” Richard A. Posner, “Intellectual Property: The Law and

Economics Approach” William Fisher, “Theories of Intellectual Property”

Intellectual Property - eco rationale

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