Home > Economics in Two Lessons > Intellectual property: Extract from Economics in Two Lessons (expanded and amended)

Intellectual property: Extract from Economics in Two Lessons (expanded and amended)

May 25th, 2016

Another draft extract from my book-in-progress, Economics in Two Lessons. It’s the last part of the section on “predistribution”, dealing with Intellectual Property. Next up, “redistribution” through taxation and public expenditure.

As always, encouragement is welcome, constructive criticism even more so.

The system of property rights in market societies is based primarily on private property rights, that is, the exclusive allocation of control over some asset to a single person (or, in modern forms of capitalism to a corporate entity). The concept of ‘private goods’ in economics refers to goods that are rival and excludable in consumption. There obvious similarity between these concepts, which often leads to the assumption that the two are identical

In reality, the are crucial differences. The economic concept of private goods relates to the technological properties of the good in question. Private property is a right created and ultimately enforced by law, which may be applied, or not, to almost anything, whether or not it corresponds to the economic idea of a private good.[1]

In particular, public goods (in the economic sense) may be the subject of private property rights. The most important example is that of ‘intellectual property’, that is, rights to control the use of information, such as copyrights, patents and trade marks. Enforcement of such rights typically involves the imposition, after the fact, or penalties for reproducing information without the consent of the owner of the rights.

More than any other kind of property, intellectual property rights such as patents are obviously creations of the states that define and enforce them. Patents were originally monopolies over common goods such as playing cards, used by the Tudor and Stuart monarchs in England to reward favorites or sold off to raise money to fund wars and other expenditure.

The creation of intellectual property rights provides an incentive to generate new ideas, or at least ideas that are sufficiently distinctive in their formulation to attract intellectual property protection. But the enforcement of these rights means that use of the ideas in question is restricted, even though, since ideas are non-rival, there is a social benefit to unrestricted use. Economists have examined the trade off between the costs and benefits of intellectual property protection and have concluded, in general, that the costs of strong forms of intellectual property protection outweigh the benefits.

By the time the US Constitution was drawn up in the 18th century, patents and copyrights were recognised as a way to encourage innovation, as were the dangers of excessive restrictions on the flow of information. The powers of Congress included (emphasis added)

To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.

The first Copyright Act passed in 1790, granted authors the exclusive right to publish and vend “maps, charts and books” for a term of 14 years. This 14-year term was renewable for one additional 14-year term, if the author was alive at the end of the first time. Similarly, inventors could patent their ideas for 14 years.

The terms of copyrights and patents were extended moderately over the subsequent two centuries. Since the resurgence of market liberalism in the 1970s, however, both the duration and the scope of what now became known as ‘intellectual property’ have expanded massively.

Just about anything, from colours to chromosomes has now been made the subject of intellectual property. In 2010, Apple Computer even attempted to claim a trademark the letter ‘i’ but an Australian court rejected the claim.

The duration of copyright was extended to the life of the author plus 50 years in 1976, and to life plus 70 years by the Sonny Bono Copyright Term Extension Act of 1998, with corporate owners of ‘work for hire’ getting a further 25 years. The passage of the Act was due in part to pressure from the European Union, which has generally supported strong versions of IP [2], and in part to the efforts of the Disney Corporation, whose copyrights on cartoon characters such as Mickey Mouse and Winnie the Pooh were in danger of expiry (leading to the derisive label of the Mickey Mouse Protection Act,

The claims of IP have also been used to suppress public debate and support secrecy about wrongdoing by governments and corporations. The Church of Scientology is particularly notorious for its use of copyright claims to silence critics. Less spectacular, but almost certainly more damaging is the development of the doctrine of ‘commercial in confidence’ intellectual property. This doctrine is used, in particular to suppress information about dealings between corporations and governments, providing a convenient cloak for misrepresentation and corruption.

The expansion of patents is equally problematic. The barriers to claiming a patent have been steadily lowered, and the scope of patents expanded. Among the most problematic results have been the patenting of obvious and well-known ideas in computer programming and the development of ‘business method’ patents. The two coincided during the ‘dotcom’ boom of the 1990s, when just about any business transaction, from corporate procurement to selling dogfood, could be patented with the simple addition of the words ‘on the Internet’.

Paradoxically, this expansion of intellectual property rights has happened at the same time as the explosive developments in information and communications technology. Ideas, in the form of text, audiovisual material, open source software and the designs required to make physical products can now be shared globally on a massive scale and at almost no cost.

The result is a mess. On the one hand, intellectual property rights are routinely violated, on a massive scale, by just about everybody. On the other hand, the combination of massive scope and haphazard enforcement creates a minefield for anyone in a position to be sued. A snatch of an old song playing in the background of a movie or a few lines of recycled computer code can open up scope for costly litigation, with the result that it is usually easier to pay up than to fight.

“Patent trolls” make a profitable living in this fashion. And despite the name, these trolls include major corporations. Warner Brothers made millions suing anyone who had the temerity to perform the song “Happy Birthday to You” in public, even though the song had been in the public domain for at least a century. (The tune, with different lyrics, dates back to 1893. The words we sing evolved over time, through what is sometimes called the ‘folk process’)

Economic studies of patents and copyright have reached the similar conclusion that the damage caused by IP enforcement exceeds the benefits in terms of innovation. Is there a good survey on this?

The Copyright Term Extension Act of 1998 provoked an extraordinary response from the economics profession, spanning the gamut from free market advocates like Milton Friedman to interventionists like Akerlog. These and others (including a total of five winners of the Economics Nobel) joined an amicus brief to the US Supreme Court in a case challenging the constitutionality of the Act, a challenge which unfortunately failed.

The conversion of ideas into IP has had even more corrosive implications, by providing one of the key vehicles for global corporate tax avoidance. The basic method is simple: ideas developed or bought by corporations based in the US and other large countries are turned into the IP of a subsidiary located in a tax haven which specialises in concessional treatment of such property. Ireland, for example, charges only 6.25 per cent on income from IP. Companies then pay themselves (or rather their Irish subsidiaries) large amounts for the right to use their own ideas. This payment reduces their profits at home, while the Irish subsidiary pays almost no tax.

The basic method was, until recently, improved by using a second Irish company located in a Caribbean tax haven (the ‘double Irish’) and then rerouting the profits through the Netherlands (the ‘Dutch sandwich’) thereby eliminating tax altogether.

The problems of international tax avoidance and evasion are complex and the effort to curb such avoidance will take many years to succeed, if indeed it does. But reversing the shift towards stronger and stronger IP would be an important step in the process, as well as being beneficial in itself.

What could take the place of strong IP? In many cases, no replacement is needed. No social purpose is served by restricting publication of the works of long-dead authors, who could not possibly have anticipated this outcome when they wrote. Even looking forward, it’s absurd to suppose that I (or any author writing today) am writing in the hope of providing an income for my unborn great-grandchildren.

Similarly, most of the new categories of patents that have exploded in recent decades (business methods, adaptations of standard ideas to the Internet and so on) are positively undesirable. If a new patent required a positive demonstration that the alleged invention was in fact novel, non-obvious and socially beneficial most of these patents would disappear, along with the ‘patent trolls’ who exploit them to blackmail genuine innovators.

In some cases, such as pharmaceuticals, it is necessary to reward the private corporations that produce new medicines. Around 15 per cent of the total revenue of pharmaceutical companies is allocated to research and development, a figure matched only by the information technology and communications sector.

But nearly all of the money these corporations receive from patent-protected medicines comes, directly or indirectly, from governments. In the United States, and other developed countries, governments contribute to the pharmaceutical industry through support for basic research. Much more important, however, are payments through Medicaid and Medicare, which have greatly expanded as a result of Medicare Part D, introduced under the Bush Administration. In addition, the US government subsidises health insurance for most of the population through tax benefits for employer-provided health insurance and through the Affordable Care Act (Obamacare). A substantial part of this subsidy flows through to support the purchase of prescription drugs.

Unlike other governments, the US government does not bargain with pharmaceutical companies over the price of medications (Medicare is explicitly banned from doing so). Rather, companies set their own prices in bargains with private insurers. Unsurprisingly US pharmaceutical prices are around 50 per cent higher than those in other developed countries.[3]

Advocates for the pharmaceutical industry claim that this system enables funding for research and development, and that other countries are effectively being subsidised by the United States. There is some truth in this claim, but the higher prices in the US owe at least as much to marketing efforts and to the ability of pharmaceutical companies to secure monopoly profits thanks to the protection of intellectual property.

It would be far better for the US to follow the example of other countries and negotiate directly with pharmaceutical companies through mechanisms like the Australian Pharmaceutical Benefits Scheme. Companies with a new medication (or even a prospective new medication) could negotiate for an agreed rate of payment and a period after which generic alternatives would be allowed. Ideally, the current exemptions for poor countries would be expanded to allow immediate access to lifesaving treatments at or near the cost of production.

There would certainly be difficulties in sharing the global costs of such an arrangement between the US, EU and other national governments, replacing the current effective US subsidy. But these would be minor compared to that amounts currently wasted through the IP system.

Finally, and most importantly, governments could do more to support contributions to the public domain. Historically, the most important form of government support has been the funding of (mainly university) research through bodies like the National Science Foundation. However, the public good motivation for funding research sits uneasily with continuing pressure to ‘commercialise’ research through patents and other forms of intellectual property.

The emergence of the Internet creates a vast range of possibilities for expansion of the public domain. While much of this will take place spontaneously, governments could help in many ways. First, and most importantly, ‘fair use’ exemptions from …

A more active form of support would be the provision of grants to assist creative projects, ranging from cultural work to open source software that make their outcomes available through the public domain or through variants like the Creative Commons licensing. Repositories such as Github (for open source software) would be an obvious model. While it would be undesirable for governments to seek to control the outcomes of such projects, this is an area where relatively modest financial support could yield substantial social benefits.

As far as intellectual property rights were concerned, the drafters of the US Constitution2 understood the Two Lessons better than their successors two hundred years later[4]. Property rights are social constructions, with both benefits and opportunity costs. Markets cannot determine the appropriate balance between the two because they only permit trade in property rights that have already been created. So, the determination of property rights is a crucial aspect of predistribution.

—-
1 For example in Britain, army officers could buy and sell their commissions, a practice which continued until 1871 https://en.wikipedia.org/wiki/Purchase_of_commissions_in_the_British_Army

[2] Anecdotally, one of the forces pushing for protection was the Bavarian government, which held the copyright over Hitler’s Mein Kampf and had prohibited publication. While we might sympathise with the desire to suppress this evil book, the case indicates the way in which copyright limits the flow of ideas of all kinds

3. The absence of direct bargaining contributes substantially to this outcome, but it is not the only causal factor here. The quasi-private system prevailing in the United States produces higher costs in almost all areas of health care.
2 Of course, in other respects, most importantly the implicit acceptance of slavery, the Constitution’s treatment of property rights was appalling.

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  1. Newtownian
    May 25th, 2016 at 14:00 | #1

    As far as intellectual property rights were concerned, the drafters of the US Constitution2 understood the Two Lessons better than their successors two hundred years later.

    Really? I suggest their politicial successors understand the current game just fine. They are beholden primarily to their funders who by in large are the corporations (or should we say the key powerbrokers within those organisations?) who benefit from intellectual property extension especially in the short term and so they go along with the grotesque extension of property rights so nicely summarize.

    With regard to the objections by economists of both sides against the copyright extension one must agree with them. But the problem is perhaps as much with Economists thinking they were being listenned to because they had bright ideas, rather than their proposals suiting the powers that be at various times. Friedman’s market tunnel vision is I suggest illustrated by the Chile created by Pinochet https://en.wikipedia.org/wiki/Miracle_of_Chile which even now is the most unequal society in the OECD.

    This tunnelvision to my mind inhibits the revival of political economy where the greed and self interest of powerful individuals and families and of course the banks etc. is not factored into economics (do you John have a chapter on political economy, as afterall its an important an externality as the environment?).

    I have to admit an intellectual property dispute did give us one of the best illustrations of how loopy the concept of property rights is/can be https://en.wikipedia.org/wiki/Monkey_selfie . Its a great dinner party conversation stimulator when things get a bit slow.

    Finally thinking about the offering above I note one item missing from the book extract, the matter of whether a corporation should have the rights of people without the responsibilities, how this came about and how for the most part corporate controllers can escape prosecution for being naughty like with the 2008 financial crisis.

  2. PeterM
    May 25th, 2016 at 14:53 | #2

    Interesting to see the 1917 US Aircraft industry patent pool (https://en.wikipedia.org/wiki/Patent_pool) as an example of the downside of patents is now under attack. (http://icc.oxfordjournals.org/content/early/2014/03/03/icc.dtu003.abstract) The generally accepted facts are that despite fact that the US had pioneered powered flight, patent log jams between the major US aircraft firms meant they could not produce viable military aircraft that were competitive with those in Europe during the first world war. A government legislated patent pool was created to remove the log jam.

    So, I suspect your statement about economists generally agreeing that the costs of strong IP are greater the benefits will come under fire. Do you have any strong evidence to backup this statement?

  3. James Wimberley
    May 25th, 2016 at 18:24 | #3

    Akerlof.

    The history is very US-centric. No mention of Queen Anne’s Act or the contemporaneous Longitude Prize, a fine example of an incentive to innovation not relying on IP. A less well-known benefit was that after Harrison solved the problem with his last chronometer, others were able to improve on it quickly and bring down the astronomical cost, allowing large-scale deployment in the Royal Navy and civilian shipping.

    Pharmaceutical innovation is slowing down. This is well documented. One plausible partial explanation is that being based on patents, the research labs of big pharma work in secret and in isolation. Open-source incentives like DARPA’s prizes and competitions in say robot vehicles have led to rapid progress.

  4. Malcolm
    May 25th, 2016 at 21:47 | #4

    I’d like to put the view that the term “intellectual property” is misleading, pernicious and best avoided.

    Firstly, to characterise these rights as akin to property rights is crude and tendentious. For instance, trade marks cannot be freely bought and sold, and the moral rights attached to copyright are not transferable. One author has observed that copyright infringement has more in common with trespass than theft.

    Secondly, to view copyright, patents and trademarks as a single category overlooks fundamental differences in their nature (e.g. the differences between a creative expression and an invention), not to mention differences in their purposes and social costs and benefits.

    Finally, the phrase has become attached to a lazy, misguided concept of “IP”, a misconception that ‘ownership’ of ideas exists in law and is even a type of natural right.

    I admit to being influenced by Richard Stallman’s ideas here. His essay criticising the term ‘intellectual property’ no doubt makes a much better argument than I have.

  5. May 25th, 2016 at 22:02 | #5

    Well said!

  6. Dick Veldkamp
    May 25th, 2016 at 23:03 | #6

    Dear Prof. Quiggin,

    I assume that you know that Stiglitz has some things to say on the subject of patents too, but just in case, here is a link to a lecture of his: https://www.youtube.com/watch?v=DBmzjZ_hTQo

  7. James Wimberley
    May 25th, 2016 at 23:25 | #7

    In current practice and in political economy, there is a sharp distinction between patents and copyright. The time span of patents has grown little, no doubt because businesses are consumers as well as producers of them. There is a rough-justice balance. Many patents in IT are defensive and not enforced: they are stockpiled as ammunition to deter rivals from starting a patent war. Copyright in contrast has dispersed and vulnerable consumers, so corporations like Disney have been able to secure one extension after another, well beyond the bounds if any economic or moral justification.

  8. BilB
    May 26th, 2016 at 01:13 | #8

    Needless to say, JQ, I disagree with you profoundly on the subject of patents. I don’t include copyright as I have no knowledge or experience there. As an Inventor , Patent Holder, Product Designer, and Manufacturer competing internationally I say that you are completely wrong in you assertions as to patents.

    Where you say that Economists have evaluated the costs and benefits of Intelectual Property and judged the costs outweigh the benefits, to that I suggest this to be a collection of creativity devoid individuals making evaluations for which they have no understanding. The only parallel I can think of to carry my meaning is where a tone deaf person might choose to tell Elton John that he is wasting his time poking keys on a piano, it will never achieve anything usefull.

    How can a professional field with such little real achievement as the “science” of economics quantify creativity, or more importantly the lack of incentive to create. Certainly economics is a field of human endeavour that suffers badly from the lack of incentive of profit. Apart from Keynes and Riccardo there are very few economists who have achieved significantly in their time. Why is this so? Could it be that apart from becoming traders of shares or money, economics offers little more than a high salaried position as there are no obvious multipliers with which to concentrate achievement as an incentive for creativity in this field.

    Mr Bitcoin is and an exception, but also a sliver of evidence that there is potential reward for creative thinking for economists. What the world is expired of hope for is some great unifying economic theory that explains all and illuminates a path to a fair, sustainable and eqitable future for all on this Earth. Instead we are plagued by false prophets whose sole aim is to create extreme inequity via political opportunism.

    In short, if there was ever a field of human endeavour in desperate need of a reward mechanism such as patents , trademarks, or copyright, in order to promote greatness of mind it is the “science” of economincs.

    Imagine how excited and engaged with Economics the global public would be if each week there was another great piece of economic hardware such as Hans Rosling’s GapMinder providing economic performance weather forecasts

    https://youtu.be/WjVHvC9EeB4

    Did you learn anything from that animation? Here is a question for you, despite this software product having been available now for many years, have you ever seen a portrayal of Australian economic activity presented in that way? If the answer is no, what does that say to you about the level of imagination amoungst our nation body of economists? Let me suggest lack luster and desperately in need of a mechanism to attract some new fresh and energetic talent.

  9. Ikonoclast
    May 26th, 2016 at 04:54 | #9

    I refer to the opening passage. It is so abbreviated I suspect it is a summary draft.

    “The system of property rights in market societies is based primarily on private property rights, that is, the exclusive allocation of control over some asset to a single person (or, in modern forms of capitalism to a corporate entity). The concept of ‘private goods’ in economics refers to goods that are rival and excludable in consumption. There obvious similarity between these concepts, which often leads to the assumption that the two are identical

    In reality, the are crucial differences. The economic concept of private goods relates to the technological properties of the good in question. Private property is a right created and ultimately enforced by law, which may be applied, or not, to almost anything, whether or not it corresponds to the economic idea of a private good.”

    It reads like a rough summary for an introduction (which it may be at this stage) rather than a full and illuminating introduction. It needs expansion. Ordinary readers will need more explanation before they can understand concepts like “rival” and “excludable” in this economic context. I had to look up what these concepts meant. The sentence “There obvious similarity between these concepts, which often leads to the assumption that the two are identical.” is awkward, quite apart from elided words, because it is unclear which concepts it refers to or qualifies. Initially, in the prose flow, one thinks it refers to “rival” and “excludable” but as this makes no sense one then searches for the concepts referenced and realises that these must be “private property rights” and “private goods”.

    This next sentence seems odd too. “The economic concept of private goods relates to the technological properties of the good in question. ” Is “technological” the right word here? An orange is a rival and excludable good but does it have “technological” qualities? Well, to be pedantic it might have in a sense if it is the result of selective breeding or genetic modification. However, generally speaking I don’t see how the economic concept of a private good relates to its “technological” properties as such unless you are using “technological” in some specialised economic jargon sense. In the latter case, you again need to explain to the lay reader what you mean by such terms.

  10. Ikonoclast
    May 26th, 2016 at 05:32 | #10

    Second post.

    In addition to differentiating between “private property rights” (to assets) and “private goods”, would it be useful to differentiate between assets for production and assets for consumption? A house rented out is an asset for production of an income. A house lived in is an asset (and even a good in a sense) for consumption. From the point of view of s o c i a l i s m, there is a very clear difference between a private asset for production and a private asset for personal consumption.

    Ignoring what went before (to enable the private asset for personal consumption to be appropriated as private), the actual act of personal consumption of an asset, in itself, requires no more economic participation. However, the process of production for profit requires a continuing economic interaction. Either labour is expended (in a factory or office) and pre-distribution of wages and product occurs or (in the case of a rented house) the “consumption” of the asset must be accompanied by an economic transfer of rent.

    It is important to note that s o c i a l i s m of any form does not preclude private possession and private use of non-producing assets. Clearly, it does not and cannot workably preclude private consumption (e.g. eating of food for one’s own sustenance). It is in the arena of productive assets that s o c i a l i s m, of any form, proposes to set up different relations. These different relations pertain to ownership patterns, pre-distribution decisions and command and control of the asset and those working with it.

    The problems you are struggling with J.Q. cannot be solved within capitalist relations. If you logically and comprehensively follow the reasoning path you have commenced you will eventually arrive at this conclusion.

  11. Geoff Edwards
    May 26th, 2016 at 08:23 | #11

    @BilB
    BilB
    Prof John doesn’t deserve your generalisations. Yes, there are many economists who are barnacles on society’s progress, but not all. It’s analogous to saying that all inventors and manufacturers are corrupt tax cheaters. Sadly, true too often, but not universally true.

    There is a genuine discipline of economics which comes in handy in managing the macroeconomic affairs of a society, among other functions. We don’t want our Reserve Bank, for example, to be staffed (entirely) by inventors with bright ideas, just as we don’t want it staffed entirely by economists in the monetarist tradition that has lost its way.

  12. BilB
    May 26th, 2016 at 09:07 | #12

    Geof E,

    I am directing my comments to “Economists (who) have examined the trade off between the costs and benefits of intellectual property protection and have concluded, in general, that the costs of strong forms of intellectual property protection outweigh the benefits” and asking “how can a body of people who have largely not demonstrated any ability as ‘creative thinkers’ properly quantify the efforts of those who have?”. And I press the point further with the observation that when one of their number does show some real creativity with a truly remarkable piece of technology, GapMinder, which expands understanding, this body of professionals fails to adopt it.

    Patents particularly serve a number of functions. For starters they are a mechanism of recognition of achievement much as the Oscars are, and to that end people strive to create to join that level of creative achievement. Secondly patents serve as a means to enable innovations to be developed fully for market entry and offer a time frame in which sufficient commercial return can be achieved to cover the cost of the development. Thirdly a patent serves as the starting gun in a race to get an innovation in to the market. A patent is not an automatic right to exclude others from using an idea, any patent can be stripped from its creator if the idea is not implemented. There is a five year window beyond which a patent can be challenged by others wanting to utilise that innovative concept.

    I would like to see upon which criteria it is that patents have been judged by economists to be not worth the effort, and therefore not exist.

  13. Ikonoclast
    May 26th, 2016 at 10:18 | #13

    @BilB

    J.Q. advanced the general finding of those economists that “in general, that the costs of strong forms of intellectual property protection outweigh the benefits”. The key word here is “strong”. This is not the same as saying patents should not exist.

    Admittedly, in a full socialist system, patents would probably not exist or exist for a much shorter time and in a weaker form. It is easy enough to point to real systems where people developed ideas for the intellectual and social rewards (and a standard scientist’s or technician’s wage or even as students) and freely shared such work and its rewards with others. There is plenty of good science, leading to useful technology, which has been developed via state funding. These include GPS, the Internet, the Microchip, the Touchpad, Vaccines and advanced Wind Turbine design.

  14. Moz of Yarramulla
    May 26th, 2016 at 15:17 | #14

    A more general example of the second footnote is the acceptance of property transfer at gunpoint. Both Australia and the USA were founded that way and the practice continues to this day. Perhaps that would be more controversial.

    A different way of reforming things might be to require all government funded research to be open via creative commons or public domain licensing. The would make it harder for “pure IP” to be commercialised by universities, and would make some of the current crop of business partnerships/sponsored research slightly more complex to set up, but I think would result in significant net benefit. Not least because a whole pile of currently protected content would become open, rendering many silly arguments moot.

  15. John Quiggin
    May 26th, 2016 at 15:27 | #15

    Some responses:

    @1 “one item missing from the book extract, the matter of whether a corporation should have the rights of people without the responsibilities” This was covered in another extract I posted recently. That’s why they’re called “extracts” 🙂

    @3 The book is for a US publisher (Princeton) and a mostly US audience, so I’ve left out material I would really have liked to cover, and have done in previous work.

    @4 Trade marks absolutely can be bought and sold – like other property rights, there are rules about how to do this. Moral rights are a constraint on IP, not a type of IP. I should mention this. But the general thrust of both the extract and the book is to agree with Stallman. As I thought I made clear, there’s nothing natural about property rights of any kind, and this is particularly obvious with IP

    @BilB I’m mystified. GapMinder is produced by a non-profit foundation.

  16. Tim Macknay
    May 26th, 2016 at 16:30 | #16

    This is a minor comment, relating to the statement that “Patents were originally monopolies over common goods such as playing cards, used by the Tudor and Stuart monarchs in England to reward favorites or sold off to raise money to fund wars and other expenditure”.

    Without disputing the accuracy of that statement with regard to the use of patents under the Tudors, I’ve been led to believe that patents originated in Italy during the early fifteenth century and that the early patents were awarded for genuine inventions (for example, the architect Filippo Brunelleschi was a awarded a patent for a design for a floating crane in Florence in 1421).

    The key point of your paragraph (I think) is that patents were unquestionably monopolies granted by princes, rather than conceived of as property rights.

    On that basis, I suggest that the phrase I quoted might be improved by amending it along the lines of “early patents were frequently monopolies over common goods like playing cards…” or something similar.

  17. derrida derider
    May 26th, 2016 at 16:36 | #17

    “How can … economics quantify creativity, or more importantly the lack of incentive to create.” – Bilb

    These two things – “creativity” and “incentive to create” are very different. The first is indeed hard (impossible?) to measure in a meaningful way. The second is not – it is an entirely different question.

    It is perfectly possible for a tone deaf person to tell if Elton John is making any money or not. Sorry, Bilb, but assertions of the moral worth of The Artist are beside the point here because the purpose of IP is entirely about incentives, not aesthetics. So discussions of it must focus on the actual effects of those incentives.

  18. Malcolm
    May 26th, 2016 at 17:55 | #18

    Thanks John. I do agree with most of the substance of your piece.

    To put my point in another way, allowing the discussion to be framed as one about “property” is a trap — just like accepting terms such as “economic reform” at face value.

  19. Ernestine Gross
    May 26th, 2016 at 19:33 | #19

    @BilB

    Re: Hans’ visualisation of economic history using 2 parameter.

    You ask: “Did you learn anything from that animation? Here is a question for you, despite this software product having been available now for many years, have you ever seen a portrayal of Australian economic activity presented in that way?”

    While your question is addressed to JQ, I allow myself to reply from my perspective.

    1. No I did not learn anything from the animation, which is not to say that nobody can benefit from it. I do not use the word “learn” because the animation excludes too much information (2 parameters plus seemingly static ‘country’ and ‘region’ information, using a geometric form and colours). For example, if only a third parameter would be added, namely CO2 emissions, then the viewer might learn that the dynamic may change more than the Spanish flue event.

    2. No I haven’t seen Australian ‘economic activity’ represented in this fashion, however I have seen a visualisation of a dynamic process of ‘demand pressure’ in financial securities. This was around 2001, in Sydney, at a conference organised by a newly minted PhD in Management, with a background in IT.

  20. Ernestine Gross
    May 26th, 2016 at 20:42 | #20

    “Markets cannot determine the appropriate balance between the two because they only permit trade in property rights that have already been created. So, the determination of property rights is a crucial aspect of predistribution.”

    Exactly.

    Imagine Middle Eastern mathematicians had corporatised and put an IP on the “0” (zero) (a true intellectual invention at the time) for the life of the cultural corporation, presumed to be indefinite. Where would the IT industry be now? Or rather, how profitable would the IT industry be?

  21. Ernestine Gross
    May 26th, 2016 at 21:33 | #21

    JQ, your text regarding USA pharma is subsidising other countries may no longer be empirically valid, if it ever was.

    A trusted source with scientific research experience in both IT and medical research and links to South America told me a long time ago that a lot of pharma research owned by USA and Western European companies is carried out in South America (ie ‘outsourced’). A quick internet check on revealed:

    http://www.nearshoreamericas.com/argentina-major-player-cro-industry/

  22. BilB
    May 26th, 2016 at 22:37 | #22

    GapMinder, yes, JQ, good point. I am looking at what the product could be, not necessarily what its creators and the market have made it become. To my mind this is a grossly underutilised visualisation mechanism.

  23. Geoff Edwards
    May 26th, 2016 at 22:37 | #23

    I agree with ikonoclast that the first part of the essay does need to be restructured. It gathers strength as it proceeds.

    Yes, intellectual property is a creature of the state, like many other forms of property such as land – critical to the concept of property is that it must be defensible against other claimants and this more or less requires legitimacy in the eyes of the state. Yes, the state can create property out of air – which it does, witness telecommunications spectrum.

    But I can’t quite get my head around “The economic concept of private goods relates to the technological properties…” . I wrote an encyclopedia entry of 2500 words on the economic concept of public goods a few years ago and the more I delved into it, the more foggy it became. Is education a public good, or only the physical school that delivers it? If education, only that delivered at public schools or also that delivered through a commercial college? Is excludability achieved by charging a fee of any kind or only by charging a substantial fee that discourages the general public from joining up? I concluded that the term had only a loose generalised meaning.

  24. BilB
    May 26th, 2016 at 22:50 | #24

    Ernestine @20,

    Those sample visualisations are just that, examples of what might be achieved.

    I agree it would be so much more instructive with more parameters.

    I dearly want to see Jacob Hacker’s essay

    http://www.policy-network.net/pno_detail.aspx?ID=3998&title=The+institutional+foundations+of+middle-class+democracy

    ….presented in GapMinder along with Hackers history narrative while demonstrating graphically and proportionally how the Wealth of the US was shifted from one body of people to another, over time, and overlaid with CO2 emissions and Global CO2 levels. I don’t think that is too much to take in.

    And then I can think of dozens of other visualisations that people NEED to see.

  25. BilB
    May 27th, 2016 at 00:16 | #25

    Earnestine @ 20, (previous was 19 oops)

    Intellectual property is not perpetual. Your example, the fact is that such concepts at the time did have limited access. They were not available to the general population at the time.

    As to knowledge created in Universities, as students pay an ever greater proportion of the costs of their education there is a very real case to be made that innovative work performed by post graduate students should actually be owned in part or whole by them.

  26. Ikonoclast
    May 27th, 2016 at 10:17 | #26

    Marxist economics identifies the spheres of production, distribution, exchange and consumption. What J.Q. terms pre-distribution, Marxism terms distribution. In each case, the term essentially means the initial distribution of wages and the ownership of produced goods and services. Wages go to the workers. Ownership of the produced goods and services goes to the owners of the factory, firm or enterprise. Owners realise returns and, they hope, profits by selling the product in the market. Ownership of assets, patents and copyrights also confers income as J.Q. has detailed.

    I have first a question about terminology. If what Marxians term “distribution” is termed “predistribution” by J.Q. and presumably by standard economics then what does standard economics regard as “distribution”? I assume maybe standard economics does use the term “distribution” as I think it uses the term redistribution for tax and welfare effects. Logically, if one is talking about predistribution and redistribution then the term distribution might also have a specific place in the scheme. However, I can see that “distribution” might become an overloaded term; a term with too many tasks. “Distribution” variously regarded could mean predistribution as above or be a reference to statistical distribution or a reference to logistical or market-mediated distribution of goods and services. If the latter is the case, Marxian economics would file this under exchange which encapsulates markets and circulation of money and goods. This is as I understand it.

    As J.Q. points out, “the determination of property rights is a crucial aspect of predistribution”. He demonstrates clearly that this sphere is not market mediated in its initial setup (except perhaps by reactions to feedback effects). It is a set of pre-market settings essentially generated by law, custom, theory, ideology and moral entrepreneurship (the creation of ethics and mores to suit certain sectional interests) .

    In commencing to look at predistribution assumptions and the possible effects, ethical, social and material, of those assumptions when implemented as social and economic rules, JQ has entered a field somewhere on the boundaries between philosophy, economics and science. This is to the good IMO. It ought to lead to a (re-)questioning of many of the assumptions of current dominant socioeconomic theory and practice.

    Nothing annoys me more in current neocon economic debate than the assumption, and indeed the normative edict, that society is nothing more than a market or should exist as nothing more than a market. It is clear, even legally-economically, that society is much more than just a market.

    Below is an interesting essay. It does not directly bear on this topic but I thought I would slip it in. It addresses the general failure of modern economics (around the failure of the great moderation and the GFC) which topic J.Q. himself has addressed in the past.

    https://www.ifw-members.ifw-kiel.de/publications/the-financial-crisis-and-the-systemic-failure-of-academic-economics/KWP_1489_ColanderetalFinancial%20Crisis.pdf

  27. BilB
    May 27th, 2016 at 11:23 | #27

    Ikonoclast,

    Why of why are you still relating everything back to Marx?? If you persist you should also be using old English (or old German) to carry your arguments.

    The problem you are facing in matching the terms is that Marxian Economics (AFAICT) does not include Income Tax, as such was only ever levied in times of war.

    Hacker’s predistribution is about setting appropriate wages so that you do not have to use taxation disbursements (taxation distribution) to correct for social inequalities.

  28. Ikonoclast
    May 27th, 2016 at 13:15 | #28

    @BilB

    I wasn’t aware of Hacker’s work. Hacker’s recommendation “about setting appropriate wages so that you do not have to use taxation disbursements (taxation distribution) to correct for social inequalities” is much the same as one of the arguments I have made many times in the past on this blog. My ideas in turn are not original as they come from Marx and other socialists. This indicates that such ideas have been around much longer than Hacker’s work. Those who forget, or have never learned, certain developments in philosophy and political economy are forced to reinvent them as Hacker did (or plagiarise them without giving credit perhaps).

    Yes, quoting Marx puts people off. That’s a pity because there is much that is still of contemporary application in his thinking. Early forms of certain theories are often precursors of later, better developed theories. Jargon changes of course. The early term and its concepts are often viewed as wholly archaic and discredited when in fact they are still applicable and even sometimes vindicated in their essentials. Clear examples are “dialectical materialism” and “metabolic rift” although Marx never used the former term precisely. Admittedly, later Soviet developments in dialectical materialism might well have to be disregarded as ideological rather than philosophical or scientific.

    “The main idea of dialectical materialism lies in the concept of the evolution of the natural world and the emergence of new qualities of being at new stages of evolution. As Z. A. Jordan notes, “Engels made constant use of the metaphysical insight that the higher level of existence emerges from and has its roots in the lower; that the higher level constitutes a new order of being with its irreducible laws; and that this process of evolutionary advance is governed by laws of development which reflect basic properties of ‘matter in motion as a whole’.” – Wikipedia.

    If one can’t see here prototypes (or echoes) of complex systems thinking and the philosophical and scientific concepts of supervenience and emergence, then one just isn’t looking. The same goes for Marx’s ideas about the “metabolic rift” between economy and environment which today we describe with terms like “ecological unsustainability”. In some ways, “metabolic rift” is a better term. It carries connotations of complex systems at odds or artificially riven. Only a system can have a metabolism: literally if it is a living system and a little metaphorically if it is a non-living, complex system with circulations, stores and flows. A progressing rift also carries connotations of sustaining links being progressively broken and implication of eventual unsustainability.

    There is indeed a metabolic rift between the human economy and the natural environment. In the global ecological sense, civilization is a zero sum game and probably even a negative sum game. Everything we take for human life is detracted from other forms of life; indeed detracted in multiples. The current anthropogenic mass extinction event is clear proof of this fact. We neglect the older philosophers, in whose number I for one place Marx, at our peril.

  29. Ernestine Gross
    May 27th, 2016 at 18:13 | #29

    @BilB

    The Gap-minder animation did contain a little more information than what I had acknowledged in my post. Since you didn’t comment on my omission, I’ll supplement my first post because I believe it is important.

    The presenter showed that the program can be run to give a visual impression of the distribution of the two parameter values for geographical regions within a country (China) at one point in time and compare it to the historical time series of the (presumably) averages of the two parameters. The visual impression is consistent with Stephen Hymer’s ‘uneven development’ argument in the context of multinational firms, based on empirical data, from more than 40 years ago. It is also consistent with my repeated assertion on this blog-site of concentration of wealth within and across countries being too high (Ikonoclast may vouch for this, since he seems to read most of my posts) and my reservations about macroeconomic data organised by ‘countries’.

    The animation of data may be useful for winning public policy arguments; it may be useful or it can be misused, IMHO.

    (As for teaching purposes, for a long time many if not all Uni administrators, the ‘chiefs’, assumed the application of IT would save time instead of realising that to do more than send messages and put lecture notes on the net requires resources and interdisciplinary teams. Where is the funding?)

  30. James Wimberley
    May 27th, 2016 at 19:01 | #30

    @John Quiggin
    Should non-American academics really be encouraging the American tendency to believe that the country invented everything, from IP to space flight and the Web?

  31. John Quiggin
    May 27th, 2016 at 21:00 | #31

    They can have IP, as far as I’m concerned.

  32. Geoff Edwards
    May 27th, 2016 at 21:22 | #32

    An aside.

    While the bright boys who were negotiating the Australia-US Free Trade Agreement in 2004 focused on market access for our primary products, and congratulated themselves on prising open a promise by the Americans to import more of our beef in 18 years’ time, the Americans were far more interested in extracting rents from us. The extension of copyright to 70 years after the death of the author is a classic.

    The most egregious example, however, is probably Microsoft which vacuums rents from around the world because of its monopoly over a substandard product that has retarded computing by a couple of decades. Prof John, your book might benefit from a 400 word case study on Microsoft.

  33. BilB
    May 28th, 2016 at 00:30 | #33

    Thanks for that Earnestine,

    And you are right, the far right could use this software for negative purposes, but I believe they would have to use corrupt data to achieve that, and that eventually gets found out. The postive uses for GapMinder are far too great for it to be not used.

  34. BilB
    May 28th, 2016 at 11:00 | #34

    ….further, what GapMinder helps us to appreciate is incremental change over time. We have a tendency to think of the present as being a constant, the way it always was and should be because we are comfortable with that reality.

    We are comfortable with the way we move resources around as being a sustainable part of our resource driven world. But the reality is that humans are moving more minerals around now than all of natures processes combined, and we use fossil fuels to power this.

    The other uncomfortable reality is that every Australian is consuming energy at a rate of seven kilowatts continuously, 24/7/365. So a baby asleep in its cot is consuming 7 kilowatts of energy to do so.

    We need to be seeing how these realities came to be over technological time, as without that knowledge clearly implanted into the heads of every voter, we will never be able to address global warming in time to protect our civilisation.

  35. Ernestine Gross
    May 28th, 2016 at 11:40 | #35

    @BilB

    “Your example, the fact is that such concepts at the time did have limited access. They were not available to the general population at the time. ”

    The point of my ‘counterfactual’ is that the invention of the “0” by Middle Eastern mathematicians is a superb example of a pure intellectual invention that is extensively used in the IT industry, without ever paying an IP licence fee. You provide a partial reason for it; IP rights are legal constructs, which have changed over time. But as I shall illustrate, there is another reason that has something to do with JQ’s distinction between a ‘private good’ and a ‘public good’. Furthermore:

    But some structures seem to remain unchanged. Now IT corporations are very quick to take out IP rights even though some (eg Microsoft) benefit for decades from crowdsourcing (eg obtaining feedback from the public, which is used in error correction, without paying for the feedback). In recognition of this apparent constant structure, I put the word counterfactual in single quotation marks (it all depends what one looks at).

    “As to knowledge created in Universities, as students pay an ever greater proportion of the costs of their education there is a very real case to be made that innovative work performed by post graduate students should actually be owned in part or whole by them.”

    I am not up-to-date on the IP arrangements within Sydney’s universities. But I do know that in the not too distant past universities in Sydney did have shared ownership arrangements for ‘innovative’ work of the kind that lends itself to ‘commercialisation’. (I also know of a case where a Professor from a WA university won a court case against the university which attempted to exclude him.) But how would the intellectual inventions by mathematicians, including post graduate students be treated? It seems to me JQ’s reference to ‘private goods’ (vs public goods) becomes relevant here.

  36. Peter T
    May 28th, 2016 at 17:10 | #36

    As societies become more complex, more and more becomes “public goods”, in the sense that they become critical to the efficient functioning of the whole, rather than some part (education, health, transport and communications are all good examples). Their general benefit makes it impossible to partition payment in any other than an arbitrary way – just as complex production submerges any single person’s contribution into a whole, making remuneration more a social custom than a reward for individual effort.

    Conversely, efforts to use state or private power to partition costs and benefits to particular people or groups signals a devolution in complexity.

  37. BilB
    May 28th, 2016 at 17:25 | #37

    Ernestine,

    You example of the number 0 was a clever choice. To take it further if the novel concept is used publicly without IP rights being claimed, then that concept is thereafter public domain. So if the first users did not have the international recognised legal structure with which to register “first use” of number zero then their opportunity (limited) would be lost.

    There are a variety of ways with which to protect an idea. One of the most effective is to “fill the market” or manufacture at such a rate and with clever branding to deliver at a price that no-one is able to compete against either for price or against the identity. This tactic works well for simple plastic and some electronic products where the production is entirely automatic, but it does not work for more complex products or products that require servicing. Combinations of product streams where some are not protected but delivered volume into a high demand building product identity and customer satisfaction will lay the sales groundwork for more complex but higher priced IP protected products.

    In the above linked lecture by Stiglitz he complains that he was “copied anyway” despite his IP (hard to believe). He makes the point that the best he could hope from his work was to gain recognition. To that end publishing at minimal cost to attract volume would be the best tactic as it would make copiers efforts marginal and “take the field” in his name rather than theirs.

  38. James Wimberley
    May 28th, 2016 at 20:30 | #38

    In defence of (some) IP, I suggest the ARM ecosystem is worth a look. By accident, luck and skill, a smallish English computer design company has come to dominate the world market in low-power microprocessors. These are used by the tens of billions in mobile phones, tablets, routers, cars, washing machines, you name it – in fact everything but desktop and laptop computers (a stagnant market) and servers, still dominated by Intel.

    The business models are quite different. Intel is a vertically integrated monopolist. It ploughs back monopoly profits from its high-priced chips – some go for several hundred dollars – into advancing fabrication technology, so it keeps a process lead. ARM doesn’t manufacture anything. It designs computer architectures and processors, plus a collection of ancillary software tools for design and testing. It licenses both chip designs and architectures, without discrimination. The fees per chip are tiny, a few cents. So it’s ARM processors that go into the $10 mobile phones and $100 smartphones spreading across Asia and Africa.

    Customers include Apple and Qalcomm (architectural licenses under which they can design their own processors), and other giants like Samsung, Mediatek and Huawei. Many of these companies are much bigger than ARM and could swallow it in a moment – except that this would destroy an ecosystem from which all benefit. ARM has to keep its fees low enough to discourage rivals from entering its niche.

    Question to JQ. Assuming that this ecosystem is generally positive in terms of innovation and prices, how do you replace it without IP? It’s too complex for prizes to work. ARM’s income is 100% from IP; it can’t continue as a manufacturer. Apple and Samsung have the resources to hire the staff and continue – but they would become high-priced monopolists like Intel.

  39. Donald Oats
    May 28th, 2016 at 20:54 | #39

    The rise of the computer age is an interesting one for examination of the costs and benefits of protected Intellectual Property (IP) versus that of open IP. The advent of the personal computer occurred in several stages, the earliest ones involving electronics enthusiasts wondering if they could manufacture a personal computer system for other enthusiasts to assemble and use. If a single company had placed patents over the system, they could have locked it up for another 20 years or so, selling expensive boxes to government agencies and the odd large corporation, on a monopoly basis. Instead, because the idea was open, free for anyone to mimic, companies like Sinclair, Apple, IBM, etc, were able to duke it out with their different takes on the PC, mass production and cross-fertilisation of ideas seeing a rapid and sustained increase in compute power per real dollar spent. If a single company, say Xerox, had patented and locked up the mouse-driven GUI and desktop computer design, for instance, then how much slower the technological progression would have been.

    A similar thing has occurred within the software space. There are some ridiculous patents on matters so trivially obvious that they should have defied patenting, but sadly, they were awarded. On the other hand, the open-source software ecosystem is an exemplar for high tech development without the use of patent protection: in fact, it strives to do the polar opposite. Entire operating systems and GUIs, plus all the applications you could think of, and more, are available at minimal cost, rivalling—even surpassing—the private corporation offerings.

    For both hardware and software in the computing space there are so many examples, both historical and current, of amazingly complex technological products being created and taken up, at minimal cost to the end user, and low cost to the producers. Private companies also contributed significantly, on occasion, judging the benefit of a quick and large uptake of their product being more than the cost of making it available as open source, or free, or both. In other words, private companies have on occasion produced major technology which they have opted not to protect through patents or copyright, making a business judgement that that would be self-defeating.

    The point made is that companies, and private citizens, are often prepared to invest their energies into complex projects without seeking to lock up the IP through various IP “protection” mechanisms, making a presumably rationally sound decision to release the end product of their work in either a free or an open source manner (or both). The existence of IP protection methods was not a necessary pre-condition to the complex project being undertaken or not. This behoves the question of what is the essential nature of IP protection in an open economic, free market, system? The computing field has ample demonstration of successful endeavours that haven’t in any way needed the protection of IP, and in fact many such projects have succeeded precisely because of the open nature of the IP.

    I think the case can be made that IP protection simply slows down the technological progression, while benefiting a small few to the extreme. At the individual level, it might look good, but at a society level, the cost of that retardation of innovation spread over society, versus big bucks for a fortunate few, seems a hard argument to sustain, at least in the context of computing technologies.

    If I were a patent holder, I would of course be very keen on them from my context; even so, I’d say IP protection is overall counter-productive, in that it is like erecting a sea barrier to keep the sea out: it holds everyone else back to the benefit of one or a few individuals.

  40. BilB
    May 28th, 2016 at 23:37 | #40

    Donald O,

    “I think the case can be made that IP protection simply slows down the technological progression, while benefiting a small few to the extreme. At the individual level, it might look good, but at a society level, the cost of that retardation of innovation spread over society, versus big bucks for a fortunate few, seems a hard argument to sustain, at least in the context of computing technologies.
    If I were a patent holder, I would of course be very keen on them from my context; even so, I’d say IP protection is overall counter-productive, in that it is like erecting a sea barrier to keep the sea out: it holds everyone else back to the benefit of one or a few individuals.”

    In my experience your conclusions are quite false. The notion that patents retard progress is false. Patents on the contrary provoke alternative development. For amusement some time go down to the patent office and look at the patents for ball point pens. There are thousands of them, and I don’t recall ever being short of a pen to use, or paying too much for one in my entire adult life. There are a handful of exceptions but you are overlooking the fact that the intention of a patent is to give the manufacturer some measure of command over the market that he seeks to service. The product still gets produced and the world still gets access to the product. The most common complaints against patents circulate around Pharmaceuticals and biotechnologies, and there are some unscrupulous operators who buy up patents in this field to jack up the prices. That is a moral issue that could well be resolved with legislation.

    I made the point further up that for products that require servicing an IP free open free for all would make it impossible to develop products to a quality standard. Rampant competition would render the commercial life of the product too short and the loosers would be every user as the individual manufacturers quickly disappeared one by one.

    There are many examples where mushroom development yields a product field where each and every product is incompatible with the next and result is total failure for the entire category. Consider computers where every makers USB was different from the next, it took industry maturity to prevent this from happening. Another example is in computer apps where the price for every Android app has fallen to zero dollars so every app maker needs to include advertising and virtually non of the apps ever develop to a standard of useful maturity.

  41. James Wimberley
    May 29th, 2016 at 02:20 | #41

    @James Wimberley
    Replying to myself, a thought experiment. ARM functions as a common service organisation to the semiconductor industry. (It has rivals like MIPS, but these have tiny market shares). In legal form it is a standard profit-making joint-stock corporation. But it could also work as a cooperative of semiconductor firms. They would pay fees and in return have the right to the designs. But how to protect against free riders? They would need either IP or another form of legal protection.

    Another route would be nationalization (or in this case internationalization). ARM could function like Trinity House, the Tudor-era state agency that runs British lighthouses. This is funded by fees collected coercively from shipowners using the taxing power of the state. The issue isn’t property, it’s ensuring that users pay the costs.

  42. Donald Oats
    May 29th, 2016 at 16:24 | #42

    @BilB
    The ball point pen is orders of magnitude less complex than a computing machine, or the peripherals (like printers) that it communicates with. Sure, lots of variations can be patented, but that begs the question as to the obviousness of the inventive step given the prior art, i.e. the first patents for ball point pens. That so many patents were possible is more a failure of the patents office and their patent assessors than it is an example of how patents might foster more innovation than without the said patents. In fact, it undercuts the point you are attempting to make, for if so many patents were possible for the ball point pen, that is a telling statement that the protection offered from possessing the earliest patents was remarkably small indeed, to the point of being an irrelevance.

    Once upon a time, the same invention could appear in multiple jurisdictions, simply through isolation; now, with the ubiquitous internet, physical isolation isn’t what it used to be. The internet has changed the operating environment for a vast range of activities and processes. Think of music, for example: anyone can download a music making app, and be one their way. They can learn by machine training, no human required. Or film making: access to the necessary tek is far easier now. This ubiquity of once difficult to acquire things has meant it is more difficult for an individual to be heard above the noise of so many others trying to do the same kind of thing; on the other hand, it has increased the possibilities that the most capable (and sometimes just plain lucky) people can explore, raising the bar yet again. I think this is something that is being grappled with globally now, for it reduces the necessary resources for entry level activity/production/invention, increases the size of the market, but also vastly expands the possible competitors.

    Perhaps I am entirely wrong, and IP protection is essential for future innovation to be viable for inventors. I just think that the entire landscape has shifted beneath our feet, so that the environment in which the patent system was constructed is so different to what we have now, it isn’t necessarily the best way forward.

  43. James Wimberley
    May 29th, 2016 at 18:00 | #43

    @James Wimberley
    A final wrinkle on ARM. Its processors run on Linux, the open-source operating system maintained by a community of volunteers across the world – many of them employees of profit-making IT companies who encourage the moonlighting for reasons of prestige and human capital.

  44. BilB
    May 29th, 2016 at 20:36 | #44

    To say this ” it isn’t necessarily the best way forward”, Donald O, suggests you have an alternative in mind.

    Please share.

  45. Ernestine Gross
    May 29th, 2016 at 21:04 | #45

    @Donald Oats

    “Perhaps I am entirely wrong, and IP protection is essential for future innovation to be viable for inventors. I just think that the entire landscape has shifted beneath our feet, so that the environment in which the patent system was constructed is so different to what we have now, it isn’t necessarily the best way forward.”

    No, I don’t think you are wrong at all. Under the heading of ‘IP’ the landscape has changed from patents on innovation of new private goods (or the production process of such goods), with quite well researched and understood costs and benefits to society(ies), to categories of ‘ideas’ and biological matter such that the distinction between the economic notion of private good vs public good (as well as the distinction between invention and innovation) needs to be re-examined with the aim of discussion where the lines should be drawn for practical purposes. This line is important for discussing funding (private vs public) as well as non-monetary recognition, IMHO.

  46. Ikonoclast
    May 30th, 2016 at 06:53 | #46

    “The law hangs the man and flogs the woman
    Who steal the goose from off the common,
    But leaves the greater villain loose,
    Who steals the common from the goose.” – Anon. 17th C.

  47. Blissex
    May 30th, 2016 at 18:00 | #47

    «Patents were originally monopolies over common goods such as playing cards, used by the Tudor and Stuart monarchs in England to reward favorites or sold off to raise money to fund wars and other expenditure.»

    @James Wimberley
    «Longitude Prize, a fine example of an incentive to innovation not relying on IP.»

    As D baker argues, there are indeed many ways for innovation to be subsidized by the government, like grants, prizes, national laboratories, etc.

    These all share a big issue: they must be funded *explicitly*, by raising the deficit or taxes.

    Instead like so many other things patent have the big political advantage of being unfunded mandates (like paid sick leave, paid maternity leave, etc.), and the USA Congress and other parliaments are very fond of them. Even wore, in another common trick used often by the USA Congress (FDIC, unemployment insurance, .etc.) the USA patent system is user-funded, that is patent fees fund the whole budget of the USA Patent Office.

    Unfunded mandates as a rule create perverse incentives, and so do user-funded systems where the interests of the public and those of users can diverge.

    But Real Americans voters just don’t want to pay for group purchases with taxes, whether the group purchases be of new technology or roads or pensions or sick days off or maternity leave, even if these group purchases are proven to be much cheaper than individual purchases.

    So their political representatives constantly invent new ways to create unfunded mandates and user-fee funded public services.

  48. Blissex
    May 30th, 2016 at 18:28 | #48

    @BilB

    «as students pay an ever greater proportion of the costs of their education there is a very real case to be made that innovative work performed by post graduate students should actually be owned in part or whole by them.»

    Often IP arrangements in universities are like this baseline:

    * The IP produced by private students. that is student that fund their studies entirely with their own money, is owned entirely by the university as if “work for hire”.
    * The IP produced by grant-funded students is owned in part by the grant agency and the university, and the student is given a percentage.
    * The IP produced by professors is owned entirely by the professors, even if they used extensive university resources to produce it, and even if it is “work for hire”.

    The rationale for the above is negotiating power: private students have zero negotiating power and the university therefore can put in the postgrad contract what they want, grant agencies have significant power as they provided a large part of the funds to the university, and professors control the university and can write any self-serving terms they want in their contracts.

    There are variations on the above theme, but as always the outcome depends on negotiating power: universities controlled by administrators can impose co-ownership or even full university ownership on professors, etc.

  49. Donald Oats
    May 30th, 2016 at 22:58 | #49

    @BilB
    I have noted that what constitutes IP worthy of protection by patent has in some very real sense changed over time. I may as well also note the relentless exponential rise in material submitted for patenting, and the attendant issues of dealing with the deluge. That doesn’t mean I have the foggiest on a better mousetrap for balancing IP protection against innovation and public interest. If I did, I’d patent it 🙂

  50. Blissex
    May 31st, 2016 at 02:14 | #50

    «Patents were originally monopolies over common goods such as playing cards, used by the Tudor and Stuart monarchs in England to reward favorites or sold off to raise money to fund wars and other expenditure. »

    The point I was making in my previous comment is that they are still used as such, to provide private interests with extra profits without having to spend it overtly from the government budget. Instead of giving overtly a dozen billions of cash to Disney, Congress just extended their copyright by a few decades, which has exactly the same effect but not the same appearance.

    BTW there are other “patents” in the USA system that are used in this way. The most beautiful example I know are the “patents” granting hereditary peanut growing monopolies given to a small number of politically connected farmers: it is IIRC still illegal to grow peanuts in the USA without one of those “patents”.

    Those “patents” were created in order to ensure a steady stream of campaign funding for segregationist members of Congress, via the following mechanism:

    * They were given to white wealthy peanut plantation owners in the darkest south, farmers who benefit from low farm wages for dark skinned farm workers.

    * The therefore give a strong incentive to those wealthy plantation owners to donate generously to the election campaigns of segregationist/discriminationist politicians in their area.

    The Confederacy lives, it just has just gone underground.

    BTW terminology: “patent” actually means “public”, and the full term is “letter patent”, that means in current terminology “public act” or “public license”. An IP “letter patent” is a public statement by the government that for the matter described in the letter someone has the right to exclude others from using it. Zoning changes, casino permits, etc. are also all “letters patent”, that given permissions to same people to do something would be illegal.

  51. BilB
    May 31st, 2016 at 07:56 | #51

    DonaldO,

    Thd fundamental central element of a patent is a novel idea or combination of novel ideas.

    No Change

    An 8 fold increasd in th global population coupled with greater participation in those populations has increased the number of lodgements though I doubt exponentually.

    One vital featurd of patents that all here fail to observe is that the patent register is a rich source of marketable products in the out of time patents which is a huge body of creative thinking. You are all here concentrating on the leading edge when the trailing tail is so much larger.

    Another feature of that is if there was no patent register at all then all of that creative thinking would be lost as peoples ideas would never be recorded or preserved.

  52. Ernestine Gross
    May 31st, 2016 at 12:30 | #52

    BilB,
    “You are all here concentrating on the leading edge when the trailing tail is so much larger.”

    This looks to me to be a convincing argument in an international context. I am familiar with evidence (papers) on how information on patents provides an incentive for others to work around it and, as a consequence something new is created.

    Still, it seems to me your point is limited to innovations of private goods or the processing of such. Furthermore, there is the difficult to answer question whether the ‘new’ innovation changes the satisfaction level of buyers. Related, does this competition among innovating enterprises put downward pressure on some workers wages? No simple answers, IMHO.

  53. BilB
    May 31st, 2016 at 15:03 | #53

    Thanks Ernestine,

    The thing the should be understood is that 99% of the products we buy throughout our lives either never had patent or were beyond their patent period, so the economic impact of patents on our lives is negligible.

    There are some things that are bought, such as a car, which might have a number of patented components there to either make the vehicle work better or be more appealing to us the buyer. The impact on the price of the production cost of the overall vehicle will be quite small but the increased cost of the vehicle will either be nothing or some significant amount depending upon the appeal of the innovative feature.

    As the buyer we will generally have the option to chose the enhanced vehicle or the regular vehicle. That is a choice. Many people will by the enhanced product simply because it is more expensive and therefore to a degree exclusive. When I was working for Metters Ltd decades ago, there was a complete product range that the company sold at cost. This range was available to everybody but was mainly sold for housing commission homes. The company made its profit from the perceived higher quality product with a progressive list of enhanced features (heated butter conditioner…who really needs one) and with a progressively higher price tag. This is business and how it works.

    Patents in manufactured goods do not in anyway cause hardship or economic distress. I’m actually quite annoyed by these arguments that suggest that everything should be available to everyone for the absolutely lowest possible price and that patents are somehow a barrier to that.

    The fact is that by far the largest component in the retail price of a product is distributor’s profit, which is generally a factor of 5 or higher over the production cost, which I hasten to add includes the costs of any IP.

    It may be a very different situation in the pharmaceutical and biotech industries, but I suggest there that the problem is that the bulk of the research is being done in the corporate US of A, aka Libertaria, and if the world wants cheaper pharma then they can do the research and development themselves in their own country and sell it into the global market at more reasonable prices.

  54. BilB
    May 31st, 2016 at 15:13 | #54

    For your perusal pleasure

    http://www.libertaria.com/

  55. BilB
    May 31st, 2016 at 20:43 | #55

    Oops, that wasn’t what I thought it would be, but it does rise to the level of wacky that I anticipated.

  56. Blissex
    June 1st, 2016 at 05:50 | #56

    @BilB

    «if there was no patent register at all then all of that creative thinking»

    The vast majority of patents are useless in practice and are never used or enforced. Many companies patent stuff just to have a box of trading chips when doing anti-competitive cross-licensing deals.

    «would be lost as peoples ideas would never be recorded or preserved.»

    That is not a side effect, that is the most aspect of the patent system.

    The patent system is not designed to foster progress by rewarding *inventions*, that’s a complete and malicious fabrication, but by rewarding the *publication of the technical details of inventions*, and by *confiscating the private property of inventors*.

    Because inventors have always the option of using the protection of *trade secrets*: by keeping an invention secret they can enjoy the profits of their monopoly.

    But trade secrets are bad for the development of technology, so the patent system has been designed not to remedy the lack of inventions, but the lack of publication of the technical details of inventions.

    In order to provide an incentive to publish the technical details of inventions, and the sooner the better, the patent system rewards the *publication* of those technical details, and in order to offer more than the trade secret system, it offers exclusivity: the first inventor to publish an invention (or to invent and publish in the USA) gets the right to prevent other inventors of the same invention from using it.

    That is the essence of the patent system is that it rewards publication of the technical details of inventions by confiscating the proprietary rights of other inventors of the same inventions who have kept it a trade secret.

    That’s why in the USA constitution the granting of patents is an enumerated power of Congress: if it were not, the takings clause would prevent Congress from confiscating the right of inventors to practice their own invention keeping it a trade secret.

    A lot of effort by the agents of big IP rentier interests has gone into obscuring that the goal of the patent system is to reward publication, because IP rentiers would like to combine the worst aspects of patents and trade secrets: getting a patent for having merely made an invention, confiscating the right of competitors who have made, as it usually happens, the same invention, without having to publish its technical details.

  57. Blissex
    June 1st, 2016 at 06:05 | #57

    «Patents in manufactured goods do not in anyway cause hardship or economic distress.»

    I guess then that all those patent litigations suits or actions before the federal trade commission to block the import of “patented” goods are completely pointless… 🙂

    One interesting variant to the patent system that would make it a lot less objectionable would be automatic licensing, where publication of an invention gives an exclusive right to the patent owner, but anybody can license the invention (for a fair and non discriminatory royalty) for manufacturing. This would mean that the best producers could compete at manufacturing, while at the same time rewarding the patent owner.

    But strangely IP rentiers are ferociously opposed to automatic licensing :-).

    «The fact is that by far the largest component in the retail price of a product is distributor’s profit, which is generally a factor of 5 or higher over the production cost, which I hasten to add includes the costs of any IP.»

    That’s irrelevant — what matters is the factory price, and even a few percent of difference to the factory price are a big deal. Companies fight ferociously against their workers to hold down their wages even if the effect on price is a few percent too.

    The fact is that often net profits on factory price are a few percent, and patent royalties of even 1-2% can cut net profit by a large proportion.

    In practice patents are used to create monopolies, usually not hugely exploitative ones, but invention monopolies reduce the progress of science and technology, because they restrict the learning and diffusion of skills related to the invention.

  58. Blissex
    June 1st, 2016 at 06:30 | #58

    I often ask patent system supporters that claim that patents have a large obvious positive net effect on the economy to demonstrate this quantitatively, because if it is large and obvious it must be easily demonstrated with statistics as to impact, but I have never seen such a study.

    Years ago I had similar discussions about the merits of the patent system, and found a number of studies that showed that on balance at best the benefits match the costs, or the costs are bigger than the benefits; net benefits have been found only in a few countries in a few cases.

    One of these studies was Asutralian, and an earlier one Canadian, both official government white paper, both concluded that patent system costs be larger than benefits.

    Understanding this well, both the Australian and Canadian governments however expanded the patent system in a deal with the USA, because they regarded the costs of the patent system as a kind of tribute that had to paid to USA IP rentier interests to bribe them to lobby the USA government to sign some treaties with Australia and Canada that had compensating advantages.

    Both are mentioned for example in “Intellectual Property”, by WR Cornish (Sweet and Maxwell), page 73:

    «in Canada, the patent system came under careful, but sceptical scrutiny from a team of economists.To them it seemed to operate largely as a shield for the imported products of foreign owners (mainly from the United States), while doing very little to encourage the development of home-based industry. [ … ] [54] Economic Council of Canada, “Report on intellectual industrial property” (1971) (with additional background studies); Firestone, “Economic implications of patents” (1972). For a similar appraisal in Australia see Manderville et. al. (below, n.88).»

    The Australian study:
    http://trove.nla.gov.au/work/13459723?q
    «Economic effects of the Australian patent system»

    The Canadian study:
    https://books.google.co.uk/books/about/Report_on_Intellectual_and_Industrial_Pr.html?id=Mr0DAAAAMAAJ
    «Report on Intellectual and Industrial Property»

  59. BilB
    June 1st, 2016 at 08:14 | #59

    Blissex, I disagree with everyone of your points, from experience, but this one..

    ” but invention monopolies reduce the progress of science and technology, because they restrict the learning and diffusion of skills related to the invention”

    ….is just plain wrong. I challenge you to prove this to be true. Demonstrate how patents reduce the progress of science and technology particularly where you claim that the majority of patents are useless.

    Blissex at #56, What the ?? Trade secrets? If I can manufacture without divulging the substance of my product I am going to do so. The patent system is not going to make me come out from under the covers. Most micro controllers have code burnt into their ROM which cannot be read, that is the best form of IP protection there is, patents are not forcing developers to divulge their code.

    The failure to the USSR could well be put down to the fact that where there is no return for personal effort or thinking there is no technological growth. The USSR needed to plunder the West for technological ideas, which they were very good at on-developing inside specially purposed units (there is nothing lacking in Russian’s ability to think), but economy wide the country was an ideas desert simply because there was no method by which people could have an idea and put it use for others and get a return for the effort.

    Your trade secret argument is a crock. But it is true that ideas that cannot be commercialised are unlikely to ever be known. One of my best inventions is locked away in my computer simply because I cannot see a path to get it commercialised yet. It is a very compact gearbox for push bikes which I thought out for a folding bike I want to build for myself. This gearbox makes it possible to have 13 speeds built into a tiny volume to make a bike with small wheels feel like a conventional bike. But my locked away idea is in no way holding up the development of push bikes. It is a raging ideas storm out there on the bicycle front as any regular reader of Gizmag will know. With 7 billion brains out there my idea could well turn up tomorrow thought out by someone else.

    As an inventor I know only too well that…

    NO ONE HOLDS A MONOPOLY ON GOOD IDEAS.

    Patents give a business a very short window to commercialise ideas, that is all the patent register does.

  60. BilB
    June 1st, 2016 at 11:24 | #60

    One form of information deprivation that I don’t think has been mentioned in this discussion so far, forgive me if it has, is paywalling.

    What do the absolute freedom of information proponents have to say about that?

    I think I am safe in saying that be far my most commonly experienced deprivation of information occurs when I research an information stream but the information is owned by one organisation or another and can on be acquired via payment after obtaining an “account”.

    Is this crippling my life? No. Is it annoying? Yes. How do I get around the problem? I ask a different question.

  61. MartinW
    June 1st, 2016 at 11:50 | #61

    Prob a wrong thread for this, but anyhoo a little reported speech with some excellent economic analysis.
    http://www.andrewleigh.com/markets_monopolies_moguls_speech

  62. BilB
    June 1st, 2016 at 11:51 | #62

    Blissex, You can’t be serious saying this

    “The fact is that often net profits on factory price are a few percent, and patent royalties of even 1-2% can cut net profit by a large proportion”

    So every business downstream of a retailer should work for nothing so the distribution chain can support a bloated bunch of executives in New York and their billion dollar lifestyle from profits of hundreds to thousands of percent, and you have the gall to suggest “IP rentiers”?????

  63. Ernestine Gross
    June 1st, 2016 at 12:07 | #63

    BilB, you forgot the money man who introduce themselves at every link of the chain, chipping away at the coin. IMHO, or should I say out of professional habit, I don’t subscribe to looking at an economic topic only from the perspective of ‘society’ (‘in aggregate’, ‘on average’ or some other stat measure) or only from the perspective of an individual. For example, a patent on a technical innovation associated with a private good, held be a person, say an engineer, also signals technical competency of the patent holder, irrespective of the system wide consequences. This signal is in turn valuable in the so-called ‘labour market’, and I would imagine, it feels good to have achieved something.

  64. BilB
    June 1st, 2016 at 12:15 | #64

    That is a very good read, MartinW.

    It highlights to point I was making to Blissex’s comment about profits. Andrew Leigh is talking about market concentration and I have a lot to say about that, particularly where concentrated market operators use their buying power to distort or even cripple economies.

    This is experienced daily, I believe, where the buyers of large chains prefer to buy offshore, not because the local product is not competitive, but because the buyers themselves who wield buying power in the millions of dollars can personally profit invisibly, I believe, when all transactions are done in economies with less than transparent practices.

    I have personally attempted to take this up with government (under Howard’s stewardship) to experience absolute denial, disinterest, even lack of knowledge on the legal status of trade inducements and zero intention to examine the subsequent taxation losses. The downstream of this practice is that innovation and investment in the local economy falls away simply because one cannot manufacture successfully if the product does not reach the buying public.

  65. BilB
    June 1st, 2016 at 12:51 | #65

    Ernestine,

    A good example of your thinking would be Dyson with his vacuum cleaners.

    Dyson’s first invention was the ball wheeled wheel barrow which was successful not because it was a better wheel barrow but because the notion was novel in a way that captured people’s imagination. As a consequence, I recall, Dyson captured for a time two thirds of the UK wheel barrow market at twice the product price. There were plenty of better cheaper wheel barrows, but people bought his because they liked the idea of it.

    Dyson, reportedly, now commands a team of several hundred designers and engineers developing new products for global markets. Without the patent protected success of his earlier product there would never have been a Dyson vacuum cleaner, and the losers would be the millions of satisfied Dyson product users around the world.

    A classic case of abuse of market position would be WallMart who buy custom made product direct from the Asian or Indian manufacturing floor and ship directly to their US stores. They would claim to have a multi level distribution structure as product needs a degree of warehousing simply to break container loads down for smaller own store holdings, but the profit is all in the hands of one operation.

  66. Ernestine Gross
    June 1st, 2016 at 14:03 | #66

    Re: public vs private financing of research:

    The Sueddeutsche Zeitung published on 31 May 2016: EU ministers have agreed that by 2020 all scientific publications, which have been publicly funded (‘tax payers’ in my reading), will be made publicly available.

    (“EU-Minister haben sich darauf geeinigt, bis 2020 öffentlich finanzierte wissenschaftliche Publikationen frei zugänglich zu machen.”)

    Further: This would be a heavy blow against journals because the publishers of these journals currently charge high prices for the publication of research results.

    (“Es wäre ein schwerer Schlag gegen Fachjournale: Derzeit verlangen deren Verleger oft hohe Gebühren für eine Veröffentlichung von Forschungsergebnissen.”
    Source: Sueddeutsche Zeitung, 31 May 2016.

    And:
    While the ministers’ decision is not binding on EU countries, it is nevertheless seen as a milestone.

    (“Die Entscheidung der Minister ist zwar für EU-Staaten nicht bindend, wird jedoch als Meilenstein gesehen.”)

    Readers, please feel free to improve my translation.

  67. Ernestine Gross
    June 1st, 2016 at 14:56 | #67

    Further to the EU ministerial decision mentioned @65:

    Suppose the ‘milestone’ would be so big that it could be seen in Australia and the relevant ministers would adopt the associated decision. What would happen to economic research currently carried out by say KPMG, EY, Deloitte, pwc and paid for with tax payers’ money via governments?

    Well, to begin with, local councils, residents, and everybody else couldn’t be prevented from getting free access to the research, not a summary of the conclusions only. This in turn would save taxpayer (or rate payers) money and time because they wouldn’t have to go to court (and possibly lose because ‘commercial in confidence’ could overrule). This in turn could possibly reduce the popularity of spending tax money on the big accounting firms and thereby reduce income and wealth inequality (a little bit to begin with). And, and, …, and it might reduce demonstrations in front of one parliament house or another, and, … reduce expenditure on riot police, and, and, …., ?

  68. BilB
    June 1st, 2016 at 15:42 | #68

    Perhaps the good professor might like to comment on your findings there, Ernestine.

    I’m reading this http://www.economist.com/node/21660559 article by way of finding out what the basis of

    “Economists have examined the trade off between the costs and benefits of intellectual property protection and have concluded, in general, that the costs of strong forms of intellectual property protection outweigh the benefits”

    might be.

    So far it appears to me to be a very shallow series of “evaluations” heavily influenced by personal beliefs. Stiglitz for instance,

    “Joseph Stiglitz, an economist at Columbia University, and others have suggested encouraging teams of autonomous scientists to develop new breakthrough drugs by offering those that succeed big prizes.”

    ….imagines that prizes might induce innovation in place of patents, but completely overlooks the consequence of human health product failure which routinely involves massive law suits. If IP protect profits are removed then the consequences of drug failures will fall on the state, and we know how popular that is in the US. A “US National Accident Compensation Policy” would go down like a lead balloon.

    The US military operates such programmes but all participants are paid for their stage one research into now military and air force hardware development programmes. I can’t see that becoming a viable platform in the US either.

    But where a journal that claims an interest in the subject of patents going back to the 1850’s makes a closing comment such as

    ” Experiments with other forms of financing innovation could be run alongside the patent system.”

    tells me that economic writers haven’t the foggiest idea why and how invention occurs, and will ultimately have zero significant input into the nature of Intellectual Property in the future other than Copyright. Considering their platform on the subject their policy of

    “The Economist grants one-off permission for the republication of articles, … are available in both print and electronic format, and are subject to a copyright fee”

    …shows a lack of conviction. Their cheque is in the mail, I think.

  69. Ernestine Gross
    June 1st, 2016 at 17:31 | #69

    BilB, what do you think of the IP (various forms) associated with the financial innovations since the 1980s?

  70. James Wimberley
    June 1st, 2016 at 17:43 | #70

    @BilB
    You really should look at the Longitude Prize. Incidentally, the implementing committee did not just reward Harrison for his T3 schrinometer, a full solution. It made interim awards to him and others, including the Swiss mathematician Leonhard Euler, for a contribution to the rival astronomical method.

  71. James Wimberley
    June 1st, 2016 at 17:44 | #71

    @James Wimberley
    Chronometer.

  72. BilB
    June 1st, 2016 at 17:51 | #72

    If we are we talking here about creative accounting, Ernestine, my financial controller won’t let me participate. But if we are talking about all things EFTPOS and the like, let me think about it.

  73. June 1st, 2016 at 23:51 | #73

    I have a friend who works for IBM as a programmer. They are all encouraged to file patents. He doesn’t do it, because he quite rightly thinks that nothing he does is terribly novel. But clearly IBM is trying to game the system.

    So is the basic system fine, and its just not quite as good because of patent trolls like IBM? Of have patent trolls and the Disney’s of the world made it a net negative?

  74. Blissex
    June 3rd, 2016 at 06:43 | #74

    @BilB

    «“The fact is that often net profits on factory price are a few percent, and patent royalties of even 1-2% can cut net profit by a large proportion”

    So every business downstream of a retailer should work for nothing»

    The manufacturing does a few percent net profit on the factory price, but that can be a large return on capital invested.

    «so the distribution chain can support a bloated bunch of executives in New York and their billion dollar lifestyle from profits of hundreds to thousands of percent, and you have the gall to suggest “IP rentiers”?????»

    That’s exactly the business model of most “tech” companies, for example Apple: they are marketing and sales operations that spend a quite small proportion of their turnover on registering patents (in a some tech companies the expense budget for salespeople is bigger than the the R&D budget); thanks to those patent they can have product manufactured by very cheap contract companies and then resell those products for many times the factory price, with the government confiscating without compensation the right of every other inventor of the same invention to sell it if they had kept it a trade secret.

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