The dramatic shift during the past half century toward the less tangible
and more conceptual—the amount of weight the economy has lost, as it
were—stems from several causes. The challenge of accumulating physical
goods in an ever more crowded geographical environment has clearly resulted
in pressures to economize on size and space. Similarly, the prospect
of increasing costs of discovering, developing, and processing ever-larger
quantities of physical resources in less amenable terrain has raised marginal
costs and shifted producers toward downsized alternatives. Moreover, as
the technological frontier has moved forward and pressed for information
processing to speed up, the laws of physics have required microchips to become
ever more compact.
The new downsized economy operates differently from its predecessors.
In the typical case of a manufactured good, the incremental cost of increasing
output by one unit ultimately rises as production expands. In the
realm of conceptual output, however, production is often characterized by
constant, and often negligible, marginal cost. Though the setup cost of creating
an online medical dictionary, for instance, may be huge, the cost of reproduction
and distribution may be near zero if the means of distribution is
the Internet. The emergence of an electronic platform for the transmission
of ideas at negligible marginal cost is doubtless an important factor explaining
the most recent increased conceptualization of the GDP. The demand
for conceptual products is clearly impeded to a much lesser degree by rising
marginal cost and, hence, price, than is the demand for physical products.
The high cost of developing software and the negligible production and,
if online, distribution costs tend to suggest a natural monopoly—a good
or service that is supplied most efficiently by one firm. A stock exchange is
an obvious example. It is most efficient to have all the trading of a stock
concentrated in one market. Bid-asked spreads narrow and transaction
costs decline. In the 1930s, Alcoa was the sole U.S. producer of raw aluminum.
It kept its monopoly by passing on, in ever-lower prices, almost all its
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increases in efficiency. Potential competitors could not envision an acceptable
rate of return if they had to match Alcoa's low prices.*
Today's version of that aspiring natural monopoly is Microsoft, with its
remarkable dominance in personal computer operating systems. Getting
into a market early with the capability to define a new industry's template
fends off potential competitors. Creating and cultivating this lock-in effect
is thus a prime business strategy in our new digital world. Despite this advantage,
Microsoft's natural monopoly has proved far from absolute. The
dominance of its Windows operating system has been eroded by competition
from Apple and open-source Linux. Natural monopolies, in the end,
are displaced by technological breakthroughs and new paradigms.
Strategies come and go, but the ultimate competitive goal remains:
gaining the maximum rate of return, adjusted for risk. Competition effectively
works, whatever the strategy, provided free and open markets prevail.
Antitrust policy, never in my judgment an effective procompetition tool, is
going to find its twentieth-century standards far out of date for the new
digital age, in which an innovation can turn an eight-hundred-pound gorilla
into a baby chimpanzee overnight.1
The trend toward conceptual products is irreversibly increasing the
emphasis on intellectual property and its protection—a second area of
the law that is likely to be challenged. The president's Council of Economic
Advisors in early 2006 cited output by industries "highly dependent on
patent.. . and copyright protection," such as pharmaceuticals, informa
nt is often said that many companies do lower prices in an attempt to drive competitors out
of business. But unless their costs are persistently lower than competitors', this is a losing strategy.
To raise prices after potential competitors retire from the market is decidedly short-sighted.
Despite claims that it is a common practice, I have seen very little of it in my six decades observing
business. It is an effective way to lose customers.
tAntitrust policy in the United States was born in the nineteenth century and evolved in
twentieth-century law in reaction to allegations of price fixing and other transgressions contrary
to then current views of how markets should work. I have always thought the competitive
model employed by the courts to judge infractions was not one that maximized economic efficiency.
I fear that applying that twentieth-century model to markets of the twenty-first century
will be even more counterproductive. Freeing up markets by withdrawing subsidies and anti-
competition regulation, in my judgment, has always been the most effective antimonopoly
policy
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TH E DE LPH IC FUTU RE
tion technology, software, and communications, as accounting for almost a
fifth of U.S. economic activity in 2003. The council also estimated that a
third of market value of publicly traded U.S. corporations in September
2005 ($15 trillion) was attributable to intellectual property; of that third,
software and other copyright-protected materials represented nearly two-
fifths, patents a third, and trade secrets the remainder. It is almost certainly
the case that intellectual property's share of stock-market value is much
larger than its share of economic activity. Industries with disproportionately
large shares of intellectual property are also the most rapidly growing
industries in the U.S. economy. I see no obstacle to intellectual property's
share of GDP rising into 2030.*
Before World War I, markets in the United States were essentially
uninhibited by government regulations, but were supported by rights to
property, which in those years largely meant physical property. Intellectual
property—patents, copyrights, and trademarks—represented a far less important
aspect of the economy. One of the most significant inventions of
the nineteenth century was the cotton gin: perhaps it was a sign of the
times that the cotton gin design was never effectively protected.
Only in recent decades, as the economic product of the United States
has become so predominantly conceptual, have issues related to the protection
of intellectual property rights come to be seen as significant sources
of legal and business uncertainty. In part, this uncertainty derives from the
fact that intellectual property is importantly different from physical property.
Because physical assets have a material existence, they are more capable
of being defended by police or private security forces. By contrast,
intellectual property can be stolen by an act as simple as publishing an idea
without the permission of the originator. Significantly, one individual's use
of an idea does not make that idea unavailable to others for their own simultaneous
use.
Even more to the point, new ideas—the building blocks of intellectual
Th e major loser of GDP share by 2030 is likely to be U.S. manufacturing (excluding high
tech). Moreover, continued productivity growth will further shrink the number of jobs in
manufacturing
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THE AGE OF TURBULENCE
property—almost invariably build on old ideas in ways that are difficult or
impossible to trace. From an economic perspective, this provides a rationale
for making calculus, developed initially by Newton and Leibniz, freely
available, despite the fact that the insights of calculus have immeasurably
increased wealth over the generations. Should the law have protected
Newton's and Leibniz's claims in the same way that we do those of owners
of land? Or should the law allow their insights to be more freely available
to those who would build on them, with the aim of maximizing the wealth
of the society as a whole? Are all property rights inalienable, or must they
conform to the reality that conditions them?
These questions bedevil economists and jurists, for they touch on fundamental
principles governing the organization of a modern economy and,
hence, its society. Whether we protect intellectual property as an inalienable
right or as a privilege vouchsafed by the sovereign state, such protection
inevitably entails making choices that have crucial implications for the
balance we strike between the interests of those who innovate and those
who would benefit from innovation.
My libertarianism draws me to the initial conclusion that if somebody
creates an idea, he or she has the right of ownership. Yet the creator of an idea
automatically has its use. So the question is: should others be restricted from
using the idea? It is at least conceivable that if the right to exclusive use of
ideas cumulated through enough generations, some far future newly born
generation would find all ideas necessary for survival already legally spoken
for, and off-limits without the permission of those holding the rights to the
ideas. Clearly the protection of one person's right cannot be at the expense
of another's right to life (as it would be in such an instance), or the magnificent
edifice of individual rights would harbor an internal contradiction. While
far-fetched, this scenario nonetheless demonstrates that if state protection of
some intellectual creations possibly violates others' rights and hence should
be invalid, then some intellectual creations cannot be protected. Once a general
principle is breached, where does it end? In practice, of course, only a
very small segment of intellectual creation has been chosen for protection
tinder the legal constructs of patents, copyrights, and trademarks.
In the case of physical property, we take it for granted that the owner
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TH E DE LPH IC FUTU RE
ship right should have the potential of persisting as long as the physical
object itself.* In the case of an idea, however, we have chosen to strike
a different balance in recognition of the chaos that could follow from having
to trace back all the insights implicit in one's current undertaking and
pay a royalty to the originator of each one. Rather than adopting that
obviously unworkable approach, Americans have chosen instead to follow
the lead of British common law and place time limits on intellectual property
rights.
But are we striking the right balance? Most participants in the intellectual
property debate apply a pragmatic standard: Are the protections sufficiently
broad to encourage innovation but not so broad as to shut down
follow-on innovations? Are such protections so vague that they produce
uncertainties that raise risk premiums and the cost of capital?
Almost four decades ago, a young Stephen Breyer summed up the dilemma
by quoting Hamlet. Writing in the Harvard Law Review, the future
Supreme Court justice noted,
It is difficult to do other than take an ambivalent position on the
question of whether current copyright protection—considered as a
whole—is justified. One might compare this position with that of
Professor Machlup, who, after studying the patent system, concluded,
"None of the empirical evidence at our disposal and none of the
theoretical arguments presented either confirms or confutes the
belief that the patent system has promoted the progress of the
technical arts and the productivity of the economy." The position
suggests that the case for copyright in books rests not upon proven
need, but rather upon uncertainty as to what would happen if protection
were removed. One may suspect that the risk of harm is
small, but the world without copyright is nonetheless an "undiscover'd
country" which "puzzles the will, /And makes us rather
bear those ills we have /Than fly to others that we know not of."
*In practice, British common law allows the bestowing of property to living people but not to
future generations, which could in effect tie up property in perpetuity.
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THE AGE OF TURBULENCE
How appropriate is our current system—developed for a world in which
physical assets predominated—for an economy in which value increasingly
is embodied in ideas rather than tangible capital? Arguably, the single most
important economic decision our lawmakers and courts will face in the
next twenty-five years is to clarify the rules of intellectual property.
I
I
n summary, what can we glean from this attempt to peer into the future?
Setting aside the wild cards on which no one has much of a handle—a
nuclear detonation on U.S. soil, a flu pandemic, a dramatic revival of protectionism,
or a failure to agree on a noninflationary solution to Medicare's
fiscal imbalance are just some examples—the United States in 2030 is
likely to be characterized by:
1. A real GDP three-fourths higher than that of 2006
2. A continuation of the conceptualization of U.S.
GDP and the
increased prominence of intellectual property rights legislation
and litigation
3. A Federal Reserve System that will be confronted with the challenge
of inflation pressures and populist politics that have been
relatively quiescent in recent years
If the Fed is prevented from constraining inflationary forces, we could
be faced with:
4. A core inflation rate markedly above the 2.2 percent of 2006
5. A ten-year treasury note flirting with a double-digit yield
sometime before 2030, compared with under 5 percent in 2006
6. Risk spreads and equity premiums significantly larger than in
2006, and
7. Therefore, yields on stocks greater than in 2006 (the result of
a projected quarter century of subdued asset price increases
through 2030), and, consonant with that, lower ratios of real
estate capitalization
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TH E DE LPH IC FUTU RE
Turning to the outlook for the rest of the world, the United Kingdom has
had a remarkable renaissance since Margaret Thatcher's decisive freeing up of
