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The Economics of Intellectual Property in a World without Frontiers: A Study of Computer Software.

Intellectual property is a proprietary idea that once marketed through a physical embodiment such as a book, computer code, Musical Score, or software package becomes a public good unless there is effective property rights enforce' nt. The principal methods for intellectual property protection are patents, copyrights, trademarks, and trade secrets [p. 17]. The copyright approach is the subject of this book. "The principal objective of this work is to explore the problems arising from dynamic information technology ( . . . IT) in its application to intellectual' property rights" [p. 11 in a globally integrated economy functioning without effective legal boundaries. The book examines the economic, legal, and international aspects of these problems. IT proliferates intangible commodities [p. 103] in the form of readily accessed algorithms and software. There are no effective international guidelines regulating piracy of information.

The author, who has published three previous books concerning global information technology and telecommunications, concludes that free flow of information in "a global marketplace of ideas" [p. 1] will yield strong benefits to a world without frontiers. The book argues for economic efficiency and economic growth through competitive markets. Copyright monopolies tend to stifle both competition and technological progress. "The economic welfare aspects of copyright legislation, enforcement, and monitoring do not justify the heavy costs, especially for the application of copyright laws across national borders" [p. 113]. The author suggests the use of lump-sum fees (licensing and/or government payments) to intellectual property owners as a replacement for poorly functioning market, copyright, and civil suit arrangements. ". . . IT is making it impossible to monitor and restrict the flow of information because the information eludes the regular channels of control. This is particularly true of computer software" [p. 114]. The current situation is one of "near futility of monitoring and enforcing protection of intellectual property" [p. 2]. Low-cost access creates a "free rider" problem of joint consumption and nonexcludability that "render the markets for intellectual property less efficient than markets for private goods" [p. 22]. Intellectual property is a public good, but for market distribution it is embodied in a physical from conveying private property rights but readily pirated with the increasingly widespread availability of modern IT.

"The hypothesis here is that the product cycle should be the determinant for protection of intellectual property. As the product cycle shortens, there is less justification for protection in terms of social welfare" [p. 92]. Over the long term, copyright has little value due to rapidity of technological change [p. 27]. Firms must be able to absorb low-cost access; collective licensing agreements are most likely to fulfill this requirement [pp. 108-109].

"Deficiencies in the protection of intellectual property rights create trade distortions and loss of export sales" [p. 3]. U.s.,data [p. 41 suggest that in 1986 the U.S. economy lost about $23.8 billion or some 2.5% of worldwide sales of intellectual property. Firms bore an enforcement cost of some $271 million. About 2% of U.S. jobs and 5% of U.S. GNP may be linked to international trade in intellectual property.

"It is obvious that technological change is moving faster than the legal structure that governs it" [p. 92]. A table in Chapter I summarizes legal protection for computer software by country. National laws are lagging behind in their treatment of intellectual property" [p. 40]. Copyright protection is based on mechanical printing press technology. "If transmission of materials covered by copyright are merged with desktop publishing, it will be even more difficult to prevent misuse of copyrights" [pp. 42-43]. Encryption of information technology is increasingly required for private property rights protection; such encryption is however incompatible with market distribution and low-cost access.

While there is a World Intellectual Property Organization (WIPO) based on the Berne Convention of 1886, reliance is presently placed on individual and national enforcement. "At the Montreal meeting of GATT in 1988, the developing countries argued against the protection of intellectual property rights" [p. 57]. Moreover, "The GATT' framework is geared to trade in raw materials, manufactured goods, and merchandise" [p. 42]. Such property rights are created largely in the advanced industrial countries and are greatly desired, and cheaply, by the developing countries. "Dynamic innovations in Its have made them a strategic resource in the intense competition to control global markets" [p. 89].

The book is well organized and lucidly written. Chapter 1, "Introduction," lays out the basic arguments. Chapter 2 reviews the application of economic theory and trade theory to intellectual property rights. Chapter 3 looks at the GATT framework for international coordination. Chapter 4 examines the legal framework in specific important countries (U.S., Japan, Canada, U.K., France, Netherlands, Singapore, Hong Kong, Thailand, Indonesia, Malaysia, South Korea, PRC). Important U.S. court cases are reviewed. Chapter 5 considers the impact of rapid technological change on intellectual property. Chapter 6, "Conclusion," is followed by a mathematical appendix (authored by Hajime Oniki), which provides an econometric model for identifying factors affecting definition of a socially optimal institution for protecting the ownership of new information. This model is an essentially formalistic treatment of relative benefits and costs to various involved actors. The basic concepts in the model are a compiled information set, its creator, the copier or imitator, and the users. The book has a useful and up-to-date reference list.

The critical argument of the book is that global economic welfare will be improved by low-cost access to IT advances. Copyright monopolies, together with policing costs, restrict technological progress but are virtually impossible to enforce. This argument has strong merit. The policy problem lies in design of a social institution that will induce supply of IT advances without inefficient policing costs. Government fees imply design of an acceptable tax scheme for distribution of the burden, presumably in accordance with benefits obtained. Lump-sum licensing fees maintain a market regime while minimizing governmental action. The book does not work out the mechanics and details of these two policy proposals. It may be profitably read by anyone interested in this increasingly important topic, and should prove to be a valuable addition to the literature.
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Author:Windsor, Duane
Publication:Southern Economic Journal
Article Type:Book Review
Date:Jul 1, 1993
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