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The Political Economy ofIntellectual PropertyMichael PerelmanPublished online: 28 Mar 2014.

To cite this article: Michael Perelman (2014) The Political Economy of IntellectualProperty, Socialism and Democracy, 28:1, 24-33, DOI: 10.1080/08854300.2013.869873

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The Political Economy of Intellectual

Property

Michael Perelman

Political economy is very relevant for a discussion of intellectualproperty, especially because so many people seem to regard intellec-tual property as the pinnacle of a modern market economy. Inreality, intellectual property represents a dilemma that neithermarkets nor conventional economics can successfully resolve.

Economists teach that competition is what makes markets moreefficient than planned economies. Competition sparks innovationand drives prices down toward marginal costs – the cost of producingone more unit of output.

The problem is that marginal costs are trivial in the case of intellec-tual property. If competition were allowed to take effect, producerscould not stay in business. How much does the production of a newcopy of Microsoft Windows cost? To prevent the price of intellectualproperty from falling to that level, the government grants Microsoftand other holders of intellectual property monopoly rights to stampout competition.

Of course, monopoly is a violation of the sacred principles of freemarkets. For that reason, traditional laissez-faire economists opposedintellectual property rights as a violation of market principles.

The contradictions continue. The cost structure of modern industryresembles that of the production of intellectual property. For thatreason, the problem of market incompatibility extends to modernindustry. For example, in the railroad business, the cost of carryingone more ton of freight is insignificant because that cost does notinclude previously sunk costs.

During the late nineteenth century, industry discovered first howto effectively harness the power of fossil fuel on a large scale, creatingwhat might be called “The Real Industrial Revolution.” These newmethods depended upon heavy investments in expensive capital

Socialism and Democracy, 2014Vol. 28, No. 1, 24–33, http://dx.doi.org/10.1080/08854300.2013.869873

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goods. Much as reproducing a pharmaceutical pill or a computerprogram costs very little, the cost of adding another ton of freight orproducing another ton of steel costs very little relative to the under-lying capital costs. For that reason, in the late nineteenth century, theprices of industrial products tumbled. For example, the Bessemerprocess reduced the price of steel rails by 88% from the early 1870sto the late 1880s; electrolytic refining reduced aluminum by 96%; syn-thetic blue dye production costs fell by 95% from the 1870s to 1886(Jensen 1993: 835). As this pricing problem spread, the economy experi-enced what was called “The Great Depression” until another episodeacquired that label.

As waves of bankruptcies spread across the country, faith inmarkets quickly dissolved. Terrified business leaders took refugefrom competition by consolidating industries into operations largeenough to control prices. Of course, this behavior more or less elimi-nated the imagined workings of a market economy.

The absence of competition allowed for higher prices to redistri-bute wealth and income to the already well-endowed. In addition,without the prodding of competition, business no longer felt pressureto develop more efficient methods of production. In effect, manufactur-ing was operating much like businesses today that profit from the own-ership of intellectual property.

The political economy of intellectual property

According to two distinguished scholars of intellectual property,Fritz Machlup and Edith Penrose, “At the end of the 1860s the causeof patent protection seemed completely lost.” But with the onset ofthe Depression, those principled free traders who opposed intellectualproperty rights as a violation of laissez-faire lost ground to the protec-tionists. In the words of Machlup and Penrose (1950: 5), “The idea ofpatent protection regained its public appeal when, after the crisis of1873, protectionists won out over free traders.” In the midst of this hor-rific market failure, arguments that intellectual property represented aviolation of free-market principles carried little weight.

Conveniently, intellectual property rights allowed major corpor-ations to circumvent the recently enacted Sherman Antitrust Act of1890. Before this legislation, corporations had routinely ignored theintellectual property of independent inventors. Intellectual propertyrights also helped to reinforce the powers of giant corporations,which could afford their own research laboratories and then take

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advantage of the protections afforded by intellectual property rights tocreate monopolies that got around the Sherman Act.

For example, the faltering of the US economy at the end of the1960s set off a panic in many corners of the economy. To makematters worse, the longstanding surplus in the US balance of tradeturned negative. US corporations were rapidly losing ground toforeign competitors as manufactured goods poured into the US. Gov-ernment leaders agonized about finding ways to increase exports.This conflict between expediency and the principles of politicaleconomy came to the fore again. Strengthening intellectual propertyrights seemed to be a logical strategy for promoting exports from theUS while transferring money from consumers to business.

In conclusion, rather than symbolizing the pinnacle of marketsuccess, intellectual property rights are an expression of the failure ofthe market. Patents and other intellectual property rights come to thefore when markets threaten to self-destruct.

The most powerful multinational corporations in the US tookadvantage of this climate and energetically lobbied for stronger intel-lectual property rights (Granstrand 2000: 39, 53; Ryan 1998). A valuablejournalistic study of the subject described the change in the perceptionof intellectual property:

[A]s a flood of imports washed away millions of domestic manufacturing jobs,attitudes toward patents and their role in the economic equation began tochange. The interests of industry and labor coalesced in the search for viableweapons in the fight against foreign competition. The election of RonaldReagan further shifted the mood toward protection of intellectual property.The major philosophical argument against patent protection – that it wasinherently monopolistic – was no longer politically or, even more to thepoint, economically correct in an era of increasing trade competition. Thepolicy of using antitrust laws against companies that refused to license theirpatent technologies was reversed by the Justice Department. (Warshofsky1994: 8; see also Hunt 1999: 19)

The US government’s first reaction to growing exports was tocoerce individual countries to restrain their exports. In the words ofPaul David, an economic historian who specializes in matters concern-ing science and technology:

[D]uring the 1980s, the U.S. government responded to the concerns of Ameri-can producers – especially chemical, pharmaceutical, electronic and infor-mation technology industries – by trying to reverse the trend of thepreceding two decades. Acting with some encouragement from other indust-rially advanced countries, the United States pursued a direct, unilateralcourse of action. It did not make any major effort to negotiate agreements

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within the framework of the Paris Convention for the Protection of IndustrialProperty (patents and trademarks); the Berne Convention for the Protection ofLiterary and Artistic Works (copyrights) or other international conventions,nor did it offer some quid pro quo to other developing nations that wouldagree to such conventions. Instead, by threatening within the context of bilat-eral trade negotiations to impose sanctions on developing and newly industri-alized nations whose retaliatory leverage was quite limited, the United Statesachieved considerable leverage in convincing foreign governments toacquiesce to its position on the treatment of various forms of intellectualproperty. (David 1993: 20)

Then, the government reversed course, but not without prodding.In the words of Edmund J. Pratt, Chairman Emeritus of Pfizer, pub-lished on the company website:

In 1983, Pfizer joined with other corporations such as Merck, Johnson &Johnson, Bristol-Myers, IBM, Hewlett Packard, General Motors, General Elec-tric, Rockwell International, Du Pont, Monsanto, and Warner Communicationsto form the Intellectual Property Committee to advocate intellectual propertyprotection. The committee helped convince U.S. officials that we should takea tough stance on intellectual property issues, and that led to trade-relatedintellectual property rights being included on the GATT agenda when nego-tiations began in Punta del Este, Uruguay, in 1986.

Six months earlier, before the negotiations for the Uruguay Roundof the General Agreement on Tariffs and Trade, the chief executive offi-cers of 12 major corporations belonging to the committee met again.The result was profound: “The IPC [Intellectual Property Committee],in conjunction with its counterparts in Europe and Japan, crafted a pro-posal based on existing industrialized country laws and presented itsproposals to the GATT Secretariat. By 1994, the IPC had achieved itsgoal in the Trade Related Aspects of Intellectual Property (TRIPs)accord of the Uruguay trade round. . . . In effect, twelve corporationsmade public law for the world” (Sell 1999: 169, 172).

Domestic law also changed to enhance intellectual property rights.The history of the semiconductor industry exemplifies this trendtoward changing the legal structure to help firms gain a competitiveadvantage from intellectual property rights rather than from develop-ing an edge in productive capabilities.

As late as 1981, Roger S. Borovoy, vice-president and chief counselfor Intel Corporation, complained about the need to strengthen thehold of intellectual property rights because “In the electronics industry,patents are of no value whatsoever in spurring research and develop-ment” (Anon. 1981). A recent study published by the Philadelphiabranch of the Federal Reserve System describes the dramatic transition

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that came soon after Mr Borovoy’s evaluation of the importance of thepatent system to his industry:

Within the US semiconductor industry, reverse-engineering was a well-estab-lished practice. But by the late 1970s, American firms objected to similar behav-ior by Japanese firms when they began to increase their market share in themore standardized products, such as computer memory chips. The level ofcompetition eventually became so intense that, by the mid-1980s, most Amer-ican companies abandoned these segments entirely.

When it became clear they could no longer dominate Japanese firms on thebasis of production technology alone, American firms attempted to consolidatetheir comparative advantage in research and development. To do this, theywould have to find ways of reducing their competitors’ ability to reverse-engineer their products. To that end, American companies began to lobby Con-gress to increase intellectual property protection for their semiconductordesigns. In 1984, Congress created a new form of intellectual property right,called mask rights, especially tailored to address the needs articulated by theindustry. (Hunt 1999: 19–20)

During this period, Texas Instruments and National Semiconduc-tor were both tottering on the verge of bankruptcy. Irving Rappaport,former vice-president and associate general counsel for intellectualproperty at National Semiconductor recalled:

I’m not exaggerating when I tell you that National Semiconductor was onlyweeks away from bankruptcy in late 1990. . . . All the papers had been signedbefore it was decided to continue the business and give licensing a moreaggressive push. And without a doubt, patent fees bought us valuable timein which to complete our restructuring process. For a while there, in fact,three-quarters of our revenues came from patent licenses. (Rivette and Kline2000: 125–126)

Texas Instruments struck first. Typically license fees ran about 1percent of revenues. In 1987, Texas Instruments raised its royaltieson chips to 5 percent (Dwyer et al. 1989: 79). The company filed asuit against one Korean and eight Japanese semiconductor companies,accusing them of infringing on semiconductor patents. The settlementsyielded the company more than $600 million in payments, according toa 1990 report. The company became so aggressive in seeking royaltiesthat by 1992 it earned $391 million in royalties, compared to an operat-ing income of only $274 million (Warshofsky 1994: 111).

In effect, these companies were beginning to transform the semicon-ductor industry from a manufacturing industry to a service industry,just as the postindustrial utopians would have them do it. Accordingto one industry insider, James Koford of LSI Logic, “Silicon Valley andRoute 128 are worlds of intellectual property, not capital equipment

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and production. Most of the employees of US high technology live insoutheast Asia” (cited in Florida and Kenney 1990: 237). Some, likeGeorge Gilder, applaud this arrangement, arguing that these companieswill rationally maximize their profits by specializing in the design ofcomputer chips (Gilder 1989). But this new legal framework allowedsome of the most important high-tech enterprises to become a perversekind of service sector. Rather than directly providing services, theymerely demanded payment for their intellectual property.

Not only did the administrative arm of government become moresympathetic to the rights of intellectual property; the judicial system,with vigorous support from the legislative side, also moved toembrace intellectual property rights more warmly. In 1982, the FederalCourts Improvement Act established the Court of Appeals for theFederal Circuit as a central patent appeals court to streamline the litiga-tion process and create a judicial body for appellate review of the patentinfringement decisions of the lower courts (Warshofsky 1994: 9).

This court has been very sympathetic to the claims of patentholders. Previously, the percentage of court decisions that upheldpatents had been increasing from roughly 60 percent in the 1950s tomore than 70 percent in the 1970s, suggesting a possible weakeningof standards (Scherer 1980: 155, 449). The new court now upholdspatents 80 percent of the time (Warshofsky 1994: 9).

Prior to 1986, federal courts frequently decided the validity of apatent based on a preponderance of the evidence standard, that is,which side presented more convincing evidence. In 1986, the FederalCircuit ruled that a patent should be presumed to be valid untilproven otherwise by clear and convincing evidence, a more difficult stan-dard, based on several legal precedents (Hunt 2001, referring MedtronicsInc., Intermedics Inc., and Hybritech Inc. v. Monoclonal Antibodies Inc.

This trend toward upholding a larger share of patents comes at atime when the scope of patents has broadened at an unprecedentedrate. For example, in recent years, the patent system has begun grant-ing claims for computer software, life forms, and even business prac-tices. When moving into such previously uncharted terrain, agrowing number of questionable proposals would be expected tocome up for consideration. Nonetheless, the proportion of patentsapproved has continued to increase.

Each year, the US government moves to strengthen intellectualproperty rights still further. Patents now last 20 years instead of 17,despite the fact that high technology typically becomes obsolete inless time than ever before. In addition, a new law recently has trans-formed many types of copyright infringement into criminal offenses.

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At the time of this writing, furthering the powers of domesticholders of intellectual property in the international marketplace isone of the highest priorities of US economic policy, if not the highest.The creation of the World Trade Organization (WTO) in 1995 symbo-lized this expanding role of intellectual property. The forerunner ofthe WTO, the General Agreement on Tariffs and Trade, had themission of liberalizing trade in goods. The WTO, in contrast, vigor-ously enforces trade in intellectual property.

The costs of intellectual property

Intellectual property was intended to rescue capitalist interests. Itdid so to the extent that intellectual property managed to transfer con-siderable amounts of money from the public to a narrow swath of thecorporate sector. Nonetheless, the unintended consequences of intel-lectual property seem to have proved counterproductive.

To begin with, control of intellectual property rights put apremium on antisocial behavior. Most absurdly, patent trolls buy upbankrupt companies for their patents, which they then use to sueother companies for violations of intellectual property rights. For themost part, paying off these patent trolls is cheaper than goingthrough a multimillion-dollar lawsuit. The resources wasted in thisway are a deadweight loss to the economy.

The problem was made worse by largely defunding the US PatentOffice, making it dependent on the fees it charges. This policy had atwofold negative effect. First of all, patent examiners’ wages are verylow relative to those of a private patent attorney. Second, because ofthe need for fees, examiners were expected to pump out patents tooquickly be able to effectively evaluate them. The result is to create aweb of confusion due to overlapping patent claims, leading to wastefullegal processes.

This arrangement means that developers of intellectual propertymust go to great pains in order to figure out how they can navigatethe complex patent thicket without being liable for violating somebodyelse’s virtual property. Another defensive measure is to attempt topatent everything but the kitchen sink. Whoever might be tempted tosue for violations of intellectual property would then have to face acountersuit. In doing so, the patent thicket is made even thicker.

Secrecy is a major form of defending intellectual property becauseothers would like to claim the same work as their own intellectualproperty. Of course, science and technology depend upon the cross fer-tilization of information. In fact, one of the major justifications for the

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patent system was to make inventors reveal their work in return forwhat was a relatively short period of monopoly.

That the system turned out to create incentives for secrecy isfurther evidence of the dysfunctionality of the whole system of intellec-tual property. As if the damage from secrecy were not enough, a sim-ultaneous defunding of higher education took a serious toll. As asubstitute for public funds, research universities increasingly turnedto seeking profits from the production of intellectual property, oftenunder contract with major corporations. This arrangement distorteda good deal of higher education. First of all, the bulk of new develop-ments in science and technology come from university or governmentresearch, both of which have been defunded (except that related tomilitary needs). Universities have shifted away from the developmentof basic science, the economic payoffs of which are uncertain.However, a good number of breakthroughs in basic science have hadrevolutionary benefits for society.

The new emphasis on applied science at the expense of basicscience – often done at the behest of large corporate interests – prom-ises quick profits at the expense of the kind of research that drivesbreakthrough science and technology. To make matters worse, in thisnew effort to finance universities, excessive resources are channeledto those parts of the university most likely to generate valuable intellec-tual property. In addition, in order to increase the probability of intel-lectual property bonanzas, secrecy becomes a priority, damaging thefuture prospects of science and technology.

Intellectual property creates another serious form of waste.Although intellectual property is intended to block others from usinga particular kind of knowledge or technology, competitors devote con-siderable time and energy trying to reverse engineer technology byworking around pre-existing claims – in effect, reinventing wheels.

Reverse engineering, in turn, creates another form of waste;namely that corporations take competitors to court for their efforts toreverse engineer. Such court cases can routinely cost tens of millionsof dollars. These costs do not include the public expenses for payingfor judges and other personnel, over and above the constructing andmaintenance of the physical infrastructure used for conducting thetrials. One might also count the time jurors waste, hearing thesetrials that can last for months. Finally, highly paid lawyers and otherexperts spend considerable time and expense in bringing themselvesup to date in the intricacies of technology and the state of intellectualproperty law in order to participate in the highly lucrative businessof overseeing the bickering of greedy corporations. Probably even

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greater than all these costs is the value of the scientific and technicalprogress that might have occurred in the absence of intellectualproperty.

An international inversion

For most of the nineteenth century, the US was notorious for itsunwillingness to respect copyrights from other countries. As soon asan important publication appeared in England, representatives ofAmerican publishers rushed across the sea to pick up a copy toreprint without paying royalties.

Once the US had matured to the point where it became more of aproducer of intellectual property in the late nineteenth century, copy-rights were also strengthened. Many developing countries behavesimilarly for the same reason as the US did – because they weremostly consumers rather than producers of intellectual property.

While the new regime of intellectual property is corroding the USeconomy, other countries are seriously funding higher education inorder to produce a more vibrant system for developing science andtechnology. As this new version takes hold, the US, still the primarycheerleader for intellectual property, finds itself more as a customerthan as a producer for new intellectual property.

Conclusion

One of Karl Marx’s most interesting insights was that efforts toovercome contradictions in capitalism tend to create new contradic-tions that can be even more troubling than the initial problem. Intellec-tual property is a case in point for two reasons. First, an analysis ofintellectual property provides evidence of a serious defect in the sup-posed science of economics. While competition is presumed to be thedriver of a market economy, intellectual property demonstrates howcompetition can also be the destroyer of a market economy.

Second, as a strategy for overcoming the immediate economic con-tradictions of competition, intellectual property creates new problemsbecause it impairs both scientific progress and the competitive pressurerequired for the development and application of new science, technol-ogy, and design. In short, while competition is presumed to be thedriver of a market economy, competitive pressures left to themselveswill cause a market economy to self-destruct unless it has external sup-ports – such as intellectual property rights – to limit competition.

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Anon. 1981. “The Patent Is Expiring as a Spur to Innovation.” Business Week,Industrial/Technology edition (11 May): p. 44 C.

David, Paul A. 1993. “Intellectual Property Institutions and the Panda’sThumb: Patents, Copyrights, and Trade Secrets in Economic Theory andHistory.” in Global Dimensions of Intellectual Property Rights in Science andTechnology, eds. Mitchel B. Wallerstein, Mary E. Mogee, and Robin A.Schoen (Washington, DC: National Research Council): 19–62. ,http://www.nap.edu/books/0309048338/html/19.html.

Dwyer, Paula et al. 1989. “The Battle Raging Over ‘Intellectual Property’.”Business Week (22 May): 78–89.

Florida, Richard and Martin Kenney. 1990. The Breakthrough Illusion: CorporateAmerica’s Failure to Move from Innovation to Mass Production (NY: BasicBooks).

Gilder, George. 1989. Microcosm: The Quantum Revolution in Economics andTechnology (New York: Simon & Schuster).

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Rivette, Kevin G. and David Kline. 2000. Rembrandts in the Attic: Unlocking theHidden Value of Patents (Boston MA: Harvard Business School Press).

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