Why China Might Never Protect IP

Chris Meyer & Julia Kirby

http://www.great-wall-of-china.org/Great-Wall-of-China-Images/great_wall_china_photo_gov.jpg

In the past couple of years, the jawboning directed toward China has moved on from IP infringement — stealing content! — to currency manipulation — stealing jobs! Last month, China found a way to blunt the pressure without actually doing very much, announcing that the value of the RMB would no longer be fixed against the dollar, but would float at a carefully managed level — not yet noticeably different from the fixed value.

And this may be essentially the same tack China has taken with the IP issue. While various efforts to tighten IP rights enforcement have been publicized, it's not clear how heartfelt this effort has been. Research by the Business Software Alliance and IDC, for example, reveals that China's use of illegal software in 2009 amounted to a commercial value of $7.6 billion, a $900 million increase from the previous year (the largest increase of any nation).

The truth is that China is not working hard to protect IP, but the conventional wisdom in the west is that, once China's own economy begins to create intellectual property with global value — patents, drug formulations, movies for the world market — its government will see more gain than pain in a stringent IP regime.

But is that right to assume?

Think about it: If the Industrial Economy died and made you God (or China), what kind of IP rights would you design for the new, clean slate information economy? One knee-jerk response is to favor the same kind of regime. "Since information is so valuable," you might say, "it must be protected with even more Draconian rules." But the industrial paradigm isn't a match for the information economy. The crucial difference, utterly fundamental but only in the early stages of being worked out, is the zero cost of reproduction of information goods.

You must know this already, but let's look straight at it: if a farmer produces a bale of hay, one horse or another eats it, but not both. A steel mill's ingot goes into a sedan or a skyscraper, but not both. So a price mechanism and market is needed to mediate the competition for a scarce resource. But when a hacker produces a new capability on Linux, any number of people can use it without taking it away from anyone else. We can all have our code and eat it, too.

Given that reality, should SAP try to get Germany to ban the distribution of Linux code?
For an economist of the orthodox sort, this does not bear worrying about, because Linux must be a figment of the imagination. If the hacker isn't being paid, there is no economic incentive to produce it, and it will never happen. Yet it does happen, because the hackers take their pay in other currencies. (See Yochai Benkler's work for more on the rewards of "collaborative production.")

So let's look at a corporate case. The world's drug companies have a trove of accumulated research. The successful research is disclosed as part of the licensing process. The research leading to dead ends, however, sits alongside the Ark of the Covenant in the warehouse from Indiana Jones and The Raiders of the Lost Ark. In your Godlike view, which would be better for the economy, keeping it there or disclosing it to the world of researchers? Certainly there would be cases in which one scientist's ceiling would become another's floor, and a recombination of knowledge would accelerate progress — once again at no marginal cost. And if you add non-economic considerations like, say, the benefits of accelerated drug discovery, there's a huge welfare gain to the world's population. In a society truly based on information economics, the non-disclosure of drug research might properly be prosecuted as stealing.

The oft-cited reason to crack down on free taking of information is that limiting it is necessary to incent production. Yet the free sharing of music files has hardly stopped people from making music. In fact, music has never been a rational economic choice of profession. Paying iTunes, or bands, for music you could download for nothing isn't "rational" either. But in that corner of the economy, all the players now seem to be working out new and appropriate models. And at least we've learned enough that no one is trying to sue iPhone app developers who give their work away for free.

What about patents? Lawrence Lessig has been the definitive voice arguing that the supposed need for patents to provide incentives is a rationale, not a fact. In a world in which the competition is someone not copying you but obsolescing you, protection becomes less and less important. But in any case, we're not worried about maximizing anyone's profits or competitive advantage — we're trying to devise the economic system that works the best for the society. In Regional Advantage, Annalee Saxenian analyzed the competition between Silicon Valley and Massachusetts' Route 128 for leadership of the high-tech economy during the 1980s and 1990s, and concluded that openness, both through explicit contact and circulation of people, accounted for Silicon Valley's triumph.

This is not an argument for doing away with all patents and licenses, only that their availability should be mandatory on some reasonable terms. Creative Commons is an attempt to provide a set of terms suitable for non-fiction authors, for example.

We are still in the horseless carriage stage of the information economy. That is, we've learned how to use new devices that substitute for and add capability to what we had before, but we haven't reoriented our thinking to organizing our economy around the characteristics of the new technology. Just as the functional organization, the DuPont Equation, standard costing, and the methods of 20th Century management arose first in the innovative industrial organizations like DuPont and GM, the appropriate rules are appearing first in information-based organizations like Linux or Facebook. Reputation, acknowledgement, privacy, and accessibility are among the dimensions that matter here, as direct cost, scale, and productivity did in the past.

Executives have snorted derisively at the "gift economy" as economists sneer at Gross National Happiness. But these attitudes are founded on a deep belief in scarcity as the problem economies have to solve. The economy in which this belief is warranted isn't disappearing — we still need satellites, fibers, and silicon foundries to move that free information. Almost by definition, economists have trouble counting things that don't have costs and prices. And in the industrial world, too low a price leads to overconsumption. Excesses like the overuse of fossil fuels result. But what would it mean to over-consume knowledge?

How the two sectors — the information economy and its industrial infrastructure — will interact is subject for another day. But the next decade, as foretold by the Benklers , Saxenians, and Lessigs, will see a shift from protecting the old IP regime to figuring out the new.

Of course, China might still change its mind — the first global blockbuster film made in China was released to the world market last month. But I bet there were as many camcorders in the theater on opening day as there were cameras at Expo last month.

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