http://www.federalreserve.gov/boarddocs/speeches/2004/200402272/default.htm Remarks by Chairman Alan Greenspan Intellectual property rights At the Stanford Institute for Economic Policy Research Economic Summit, Stanford, California February 27, 2004 [...] More generally, in the realm of physical production, where scarce resources are critical inputs, each additional unit of output is usually more costly to produce than the previous one; that is, production, at least eventually, is characterized by increasing marginal cost. By contrast, in the realm of conceptual output, much of production is characterized by constant, and perhaps even zero, marginal cost. For example, though the set-up cost of creating an on-line encyclopedia may be enormous, the cost of reproduction and distribution may be near zero if the means of distribution is the Internet. The emergence of an electronic platform for the transmission of ideas at negligible marginal cost may, therefore, be an important factor explaining the recent increased conceptualization of the GDP. The demand for conceptual products is clearly impeded to a much smaller degree by rising marginal cost than is the demand for physical products. But regardless of its causes, conceptualization is irreversibly increasing the emphasis on the protection of intellectual, relative to physical, property rights. Before World War I, markets in this country were essentially uninhibited by government regulations, but they were supported by rights to property, which in those years largely meant physical property. Intellectual property--patents, copyrights, and trademarks--represented a far less important component of the economy, which was mainly agricultural. One of the most significant inventions of the nineteenth century was the cotton gin. Perhaps it was a harbinger of things to come that the intellectual-property content of the cotton gin was never effectively protected from copiers. Only in recent decades, as the economic product of the United States has become so predominantly conceptual, have issues related to the protection of intellectual property rights come to be seen as significant sources of legal and business uncertainty. In part, this uncertainty derives from the fact that intellectual property is importantly different from physical property. Because they have a material existence, physical assets are more capable of being defended by police, the militia, or private mercenaries. By contrast, intellectual property can be stolen by an act as simple as broadcasting an idea without the permission of the originator. Moreover, one individual's use of an idea does not make that idea unavailable to others for their own simultaneous use. Even more importantly, new ideas--the building blocks of intellectual property--almost invariably build on old ideas in ways that are difficult or impossible to trace. From an economic perspective, this provides a rationale for making calculus, developed initially by Leibnitz and Newton, freely available, despite the fact that those insights have immeasurably increased wealth over the generations. Should we have protected their claim in the same way that we do for owners of land? Or should the law make their insights more freely available to those who would build on them, with the aim of maximizing the wealth of the society as a whole? Are all property rights inalienable, or must they conform to a reality that conditions them? These questions bedevil economists and jurists, for they touch on some fundamental principles governing the organization of a modern economy and, hence, its society. Whether we protect intellectual property as an inalienable right or as a privilege vouchsafed by the sovereign, such protection inevitably entails making some choices that have crucial implications for the balance we strike between the interests of those who innovate and those who would benefit from innovation. In the case of physical property, we take it for granted that the ownership right should have the potential of persisting as long as the physical object itself. In the case of an idea, however, we have chosen to strike a different balance in recognition of the chaos that could follow from having to trace back all the thoughts implicit in one's current undertaking and pay a royalty to the originator of each one. So rather than adopting that principled but obviously unworkable approach, we have chosen instead to follow the lead of British common law and place time limits on intellectual property rights. It is, thus, no surprise that, as a result of the increasing conceptualization of our GDP over the decades, the protection of intellectual property has become an important element in the ongoing deliberations of both economists and jurists. Of particular current relevance to our economy overall is the application of property right protection to information technology. A noticeable component of the surge in the trend growth of the economy in recent years arguably reflects the benefits that we have derived from the synergy of laser and fiber optic technologies in the 1960s and 1970s. This synergy has produced very little that is tangible in information technology. Yet the information flow that it facilitates has fostered the creation of vast amounts of wealth. The dramatic gains in information technology have markedly improved the ability of businesses to identify and address incipient economic imbalances before they inflict significant damage. These gains reflect new advances in both the physical and the conceptual realms. It is imperative to find the appropriate intellectual property regime for each. * * * If our objective is to maximize economic growth, are we striking the right balance in our protection of intellectual property rights? Are the protections sufficiently broad to encourage innovation but not so broad as to shut down follow-on innovation? Are such protections so vague that they produce uncertainties that raise risk premiums and the cost of capital? How appropriate is our current system--developed for a world in which physical assets predominated--for an economy in which value increasingly is embodied in ideas rather than tangible capital? The importance of such questions is perhaps most readily appreciated here in Silicon Valley. Rationalizing the differences between intellectual property rights as defined and enforced in the United States and those of our trading partners has emerged as a seminal issue in our trade negotiations. If the form of protection afforded to intellectual property rights affects economic growth, it must do so by increasing the underlying pace of output per labor hour, our measure of productivity growth. Ideas are at the center of productivity growth. Multifactor productivity by definition attempts to capture product innovations and insights in the way that capital and labor are organized to produce output. Ideas are also embodied directly in the capital that we employ. In essence, the growth of productivity attributable to factors other than indigenous natural resources and labor skill, is largely a measure of the contribution of ideas to economic growth and to our standards of living. Understanding the interplay of ideas and economic growth should be an area of active economic analysis, which for so many generations has focused mainly on physical things. This work will not be easy. Even as straightforward an issue as isolating the effect of the length of patents on overall economic growth, a prominent issue recently before our Supreme Court, poses obvious formidable challenges. Still, we must begin the important work of developing a framework capable of analyzing the growth of an economy increasingly dominated by conceptual products. ### _______________________________________________ Politech mailing list Archived at http://www.politechbot.com/ Moderated by Declan McCullagh (http://www.mccullagh.org/)
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