Against Intellectual Monopoly

especially pernicious
form.
    Economists and decent citizens alike are suspicious of monopoly. There
are many good reasons for this. The traditional economic analysis of
monopoly emphasizes the welfare triangle - the loss of efficiency due to
the fact that monopolies create artificial scarcity to garner a higher price.
More recent economic analysis emphasizes x-inefficiency - that monopolies
use inefficient and excessively costly methods of production. The political economy literature emphasizes the rent-seeking nature of monopoly, especially of government-mandated monopoly: monopolies distort the
political system by purchasing favorite treatment at the expense of everyone
else, thereby wasting away a substantial fraction of the social surplus.

    There is yet another reason to be wary of monopolies: to transfer wealth
away from the rest of society and toward themselves they must prevent
entry. The easiest way to achieve this is to stifle innovation. This blocks
productivity growth, thereby reducing overall prosperity. It is a different
and arguably more pernicious source of social inefficiency than the previous three, as it operates invisibly: how much innovation and productivity
growth could have taken place in the software industry if Microsoft had not
succeeded in stifling innovation is very hard to imagine, let alone quantify.
This form of inefficiency is specific to the kind of monopoly power that
patents and copyrights bring about. Being its "discoverers," we will christen
it "IP-inefficiency" and illustrate its working by means of a few significant
examples. The theory of why IP-efficiency comes about is rather simple:
like every profit maximizing entrepreneur, monopolists are willing and able
to do anything legally and technically feasible to retain their monopoly
profits.
    Later in the book, we talk about the Schumpeterian model of dynamic
efficiency via creative destruction. This model dreams of a continuous flow
of innovation due to new entrants overtaking incumbents and becoming
monopolists until new innovators quickly take their place. In this theory,
new entrants work like mad to innovate, drawn by the enormous monopoly
profits they will make. Our simple observation is that, by the same token,
monopolists will also work like mad to retain their enormous monopoly
profits. There is one small difference between incumbents and outsiders:
the former are bigger, richer, stronger, and much better connected. David
may have won once in the far past, but Goliath tends to win a lot more
frequently these days. Hence, IP-inefficiency.
    Although the current tendency in economics is to argue that the welfare
triangle is not large, in the case of innovation this is not always true. The
example of AIDS drugs illustrates both the theory and the potential losses.
Drugs for AIDS are relatively inexpensive to produce. They are sufficiently
inexpensive to produce that the benefits to Africa in lives saved exceed
the costs of producing the drugs by orders of magnitude. But the large
pharmaceutical companies charge such a large premium over the cost of
producing the drugs - to reap profits from sales in Western countries where
those drugs are affordable - that African nations and individuals cannot
afford them. They create artificial scarcity - excluding Africa from AIDS
drugs - to garner a higher price for their product in the United States and Europe. Through "intellectual property" and international "free" trade
agreements, they also prevent potential competitors (read: imitators) from
entering the African or Latin American markets for such drugs. The welfare
triangle - the net loss to society - from this policy is real and enormous.
That is IP-inefficiency at work on a global scale.

    We understand that the careful reader will react to this argument by
thinking, "Well, the AIDS drugs may be cheap to produce now that they
have been invented, but their invention did cost a substantial amount of
money that drug companies should recover. If they do not sell at a high
enough price, they will make losses, and stop doing research to fight AIDS."
This argument is correct, theoretically, but not so tight as a matter of
fact. To avoid deviating from the main line of argument in this chapter,
we simply acknowledge the theoretical relevance of this counterargument
and postpone a careful discussion until our penultimate chapter, which is
all about pharmaceutical research. For the