Suppose we lived in a world where Bill Gates could not get copyright or patent protection for Windows and other Microsoft products. Anyone who wanted could duplicate these products without charge, sending Bill Gates a thank you note, if they were so inspired.
In that world, Bill Gates would certainly not be the world’s richest human with a fortune of more than $70 billion. Even without copyright protection Mr. Gates would probably still be doing fine – he seems reasonably bright, works hard, and comes from a wealthy family – but he would not have amassed his huge fortune if he could not get government granted monopolies on his software.
This simple and obvious point matters because it is popular in many circles to claim that income inequality is just an inevitable, even if unfortunate, result of technology and globalization. In fact, there is nothing inevitable about patent and copyright protection, these monopolies exist as a result of government policy. The fact that Bill Gates and many others have gotten hugely rich as a result of these protections is a result of government policy, not an inevitable outcome of technological progress.
And, there is a huge amount of money at stake here. The fortunes going to Bill Gates and other beneficiaries of intellectual property protection come out of the pockets of the rest of us. The clearest case is prescription drugs where we will spend over $440 billion this year for drugs that would likely sell for less than $80 billion in a free market.
The difference of $360 billion a year is a bit less than 2.0 percent of GDP. If we carry this out over the course of a decade we’re likely talking about more than $4 trillion. By comparison, the battle on repealing Obamacare largely boils down to a fight over $600 billion in tax cuts for the rich, an amount that is less than one-sixth this size.
And this is just the money at stake with prescription drugs. Patent and copyright protection also hugely inflate the cost of medical equipment, software and computers, pesticides and fertilizers, video games, and recorded movies and music. Adding these all together, we can easily be talking about an amount that is more than twice as large.
While it is not really debatable that Bill Gates is immensely rich because of a government policy that has allowed him to become immensely rich, the relevant question is whether there are alternatives. We have copyrights and patents to give people an incentive to innovate and do creative work.
Even if we decide these government granted monopolies are necessary, we could still make them shorter and weaker. In the last four decades, policy has gone in the opposite direction. We have made patents and copyrights both longer and stronger.
This has not produced a noticeable payoff in productivity growth. Productivity growth has moved along at just over 1.0 percent annually in the last decade, roughly one-third of the pace in the long Golden Age from 1947 to 1973.
So we are clearly paying a big price for this increase in protection in the form of greater inequality, with no obvious benefit in more rapid economic growth. Of course even if we did see evidence of more rapid growth it would still be reasonable to ask whether it was worth the price in higher inequality. But we can’t have that discussion until we stop pretending that it is technology causing inequality rather than policy.
The other factor that needs to be brought into the discussion is that we do have alternative mechanisms for financing innovation and creative work. The federal government spends more than $32 billion annually on biomedical research through the National Institutes of Health. There is no reason in principle that we can’t double or triple this spending to replace the patent supported research done by the pharmaceutical industry. (We likely would want to change the government’s funding structure also.)
The great advantage of direct funding is that all research findings would be fully open to other researchers, physicians, and the general public. And drugs would be cheap. The next life-saving cancer drug would sell for a few hundred dollars instead of a few hundred thousand dollars.
Much creative work is already supported now by the tax deduction for charitable contribution. When a wealthy person gives money to support an orchestra or art museum, the government picks up 40 percent of the tab by reducing the person’s tax liability. We could have a different structure under which everyone gets a modest credit to support whatever creative work they value. This work would then be in the public domain, free of any copyright restrictions.
There are many other ways to support innovation and creative work, we don’t have to decide on the best path here. The point is that we have a policy that involves one particular path, which has very questionable merits on efficiency grounds, and looks really bad in its impact on equality.
It is understandable that the people who have gotten rich from our policies on patent and copyrights would not want to see them at the center of public debate. But what is the excuse for everyone else who is not talking about them?