This conference is addressing a few of the many problems facing the intellectual property industries generally, and copyright industries in particular. The rumors of the demise of the intellectual property industries are a little exaggerated and a little premature. In fact, the copyrights have done better, and continue to do better, than the rest of the economy.

The Copyright Industries are Large and Growing

Next week is Copyright Week, and, as part of that celebration, the International Intellectual Property Alliance will be releasing the latest annual study that measures the size of the copyright industries. The study has been prepared by Steve Siwek of Economists Incorporated. Many years ago, I coauthored the annual reports with Steve, and I am glad to see that they are still going strong.

Next week, I expect the annual report will show what previous studies have shown: the copyright industries continue to grow in good times and in bad. The core industries alone account for approximately 5% of the national economy, not a small contribution to a 10 trillion dollar economy.

That is just the core of the copyright industries. Patents and trademarks contribute much to the economy as well. No one knows exactly how much intellectual property enhances the U.S. economy, but the contribution is substantial. In good times and bad, the intellectual property sector has grown more than other sectors of the economy. I am not sure that the same can be said to the same degree about any other country.

The Law and Economics of Intellectual Property

Why is intellectual property important? To an economist, assets are valuable not because they merely exist, but because they can be bought and sold and traded. I can exchange my work for money, and with that money, I can buy a CD with the music I want to listen to. In order to make that transaction possible, clear laws are needed. The laws that form the basis for intellectual property have a similar structure to laws that form the foundation for other forms of property. These laws have three elements: protecting property rights, protecting contract rights, and defining liability rules for those who violate the property or contract rights. In a nutshell, that is what intellectual property law is.

The beauty of intellectual property laws is not that they define technology, or new ideas, or exactly the nature of each and every idea that can be protected by law. Nor do the laws define how to protect intellectual property from each and every technological means of theft. Rather, the laws define the rights that the owner of intellectual property has to exclude others from use, the rights to enter into contracts, and the forms of liability for theft or misuse.

Many intellectual property laws have the coincidental appearance to apply to one and only one technology. In practice, they apply to an endless array of technologies.

Technologies change more rapidly than any individual can grasp. Laws, which change only once in many years, cannot possibly keep track with broad sweeps of technological changes that occur every few years, much less daily changes in technological applications.

Why are intellectual property laws important? Without laws to protect it, few would invest in intellectual property. Gold and jewelry, guns and cars, food and clothing, can all exist without laws defining and protecting property. The same cannot be said for intellectual property.

Intellectual property is in some ways the highest form of economic activity. It is a form of property that would not exist absent law. Many of the most subtle and complex forms of contracts in the world involve intellectual property. We also have a natural experiment: a few countries, including the United States, take intellectual property laws seriously; and much of the rest of the world does not. Not surprisingly, the countries with serious intellectual property laws have substantially more intellectual property and investment than the countries that do not take the laws seriously.

The United States as an Intellectual Property Leader

The U.S. is the international intellectual property leader not because of any natural resource allocation. It is not because we have great forests, or natural resource deposits. Nor is it because we are smarter than other people.

The United States is strong in intellectual property because we take intellectual property serious. We have laws that protect intellectual property more here than in most countries around the world. And, even more importantly, we have a government that takes enforcement of those laws seriously. Not as seriously as some would like, but seriously nonetheless.

As a result, and precisely because we are not smarter than other people, smart people from around who want to capitalize on their own intellectual property gravitate to the United States. Whether it is software engineers to Silicon Valley, recording artists to Nashville, video artists to Hollywood, writers to New York, manufacturing geniuses to Chicago, medical geniuses to Boston, many people with ambition to develop their own intellectual property wants to be in the United States.

We Americans are all the better for it.

We should want to keep it that way. We don’t want the best and brightest American kids looking overseas to develop their talent in the same way that most countries have their best and brightest emigrate to the United States.

Reducing the Costs of Breaking the Law

The topic of this conference is the effect of digital communications on intellectual property. Digital communications have certainly made it easier and less costly to do the following:

Illegally copy intellectual property
Illegally reproduce intellectual property
And illegally disseminate stolen intellectual property.

To some, the digital age and technologic change are threats to intellectual property. Who should react: intellectual property holders or the government? Too often in Washington, that question is translated as: shouldn’t the government do something?

Coping with changing technology: economics and management

What should the government do with changing technology? Let me answer that question by explaining two concepts: economics and management. At first blush, they may appear to be the same. Let me suggest that they are quite different.

Let me tell a story about a 17-year old who was accepted to West Point and his early introduction to the difference between economics and management. The 17-year old was me, more years ago than I wish to recall.

After being accepted to West Point, the 17-year old visited an alum, a full colonel who told him of the wonders of West Point. Then the colonel asked the youngster about his planned course of study. I replied "Economics."

The colonel scowled and frowned. He was obviously displeased. Perhaps he thought I said, "Sociology," or "Go Navy." He regained his composure and said: "Young man, you want to major in management."

I explained that I liked economics, and that the West Point course catalog included a major in management. The colonel, in an avuncular way, explained that the Army does not need economists. It needs managers, and that is why I should major in management. I said "Yes, sir."

Despite this conversation, I wound up not going to West Point. The Army does need managers. Management is what private firms do with their own assets. Management is how private firms protect, defend, and develop their own assets. When technology changes, as it constantly does, firms develop new techniques to manage and assets, and all of these techniques are disseminated by the private market.

A Government that Should be in Search of Good Economics, not Good Management

In contrast, economics is how assets are allocated across different firms and individual. This is a topic not of great interest to the Army in managing its own resources, but of great interest to the government as a whole in leading to greater wealth from the benefits of trade. Government policy should be based on good economics. Let private businesses decide how to manage their own firm and their own assets without the government telling them how to do it.

When the government speaks of management of privately controlled resources, watch out! It is all a code word for government control and even expropriation, whether "spectrum management" or "digital rights management." These are great words for a private firm, and indeed dozens of firms have entered the field of digital rights management for use by other private firms. But it is a poor word choice at best to describe a government program.

And yet many of the solutions to intellectual property problems that we hear are largely management solutions:

Specific technologies to protect property; outlawing other forms of technology
Specific forms of contracts where today there is endless diversity of contractual relationships
The threat of using government edicts to impose solutions when private parties do not reach a mutually beneficial contract.

All of this sounds great in Washington, as long it is the government telling someone else how to manage their property. It does not sound very good if it is your property that government wants to control. Little will harm intellectual property more than having the government impose a management solution on it.

An economic solution, instead, would rely simply on property, contract, and liability rules. It would define the associated rights as carefully and clearly as possible, and then get out of the way. It would not change with every new technology. The proper government role with private property is little more than can be supported by a cost-benefit analysis that could withstand Ronald Coase’s scrutiny. It is not a new approach; it is quite ancient. And it works.