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Home Publications Blogs Beat the Press Krugman Discovers Intellectual Property: The 1 Percent are the Takers

Krugman Discovers Intellectual Property: The 1 Percent are the Takers

Wednesday, 19 June 2013 04:21

While meandering the streets of Paris, Paul Krugman apparently awakened to the fact that the assignment of claims to wealth through patents, copyrights, and other forms of intellectual property is a really big deal. This is good news for those who have been jumping up and down yelling about this issue for the last 15 years or so.

There is really big money in this area. Just to take my favorite one, we spend $340 billion a year on drugs, more than 2 percent of GDP ($295 billion on prescription drugs, $45 billion on non-prescription drugs). We would probably spend about one-tenth this amount in the absence of patent protection. The difference is equal to about 20 percent of after-tax corporate profits. 

And this huge gap between price and marginal cost gives drug companies enormous incentive to push their drugs as much as possible. This means concealing evidence that they are ineffective or even harmful. We routinely see stories about the drug companies responding exactly as economic theory predicts.

Of course the huge gap between price and marginal cost leads to all the predicted distortions on the consumer side as well. People have to struggle to find the money to pay for drugs that cost hundreds or even thousands of dollars a prescription when the price would be largely a non-issue if they sold for the generic price.

In the case of the tech sector, Google, Apple, Microsoft, and Samsung compete at least as much in their legal departments as in the quality of the products they develop. Patents are more often used to harass competitors than to protect innovation -- and that is what the business press says.

In the realm of copyright, we have the efforts by the entertainment industry to turn us all into junior copyright cops through measures like SOPA or PIPA.

So intellectual property is a really big deal in the modern economy. And what is neat about it is that these property relations are almost infinitely malleable. (Okay, all property relations are malleable, but IP seems to offer much more room.) That's the key point that we all have to understand because the bad guys want to convince us that patents and copyrights came to us from on high and that it is our obligation to enforce them in their current or strengthened form, otherwise we are dirty communists.

It's great to see that Krugman may now be on the case. Perhaps he will be able to teach the economists a bit of economics. (Hint: an intro textbook goes far here. Large gaps between price and marginal cost are bad in trade, much larger gaps between price and marginal cost are really bad when it comes to intellectual property.)

Comments (31)Add Comment
written by Scott Dunn, June 19, 2013 6:07
Love your article, Dean. I thought you might like this piece.


I like to think of intellectual property as a very determined attempt to ignore nature's wisdom of ecology. Create, recycle, reuse.
written by JSeydl, June 19, 2013 6:13
I knew you would rightly jump on this one, Dean. After reading everything Krugman has written for at least the past 5 years, I must say that this blognote has a very different tone. It's nice to see that BTP is finally beginning to influence his thinking.
Damned If We Do Regulate and Damned If We Don't Regulate
written by Last Mover, June 19, 2013 6:23

Krugman says:
There are a couple of obvious implications from this change in the nature of corporate success. One is that profits are no longer anything remotely resembling a “natural” aspect of the economy; they’re very much an artifact of antitrust policy or the lack thereof, intellectual property policy, etc. Another is that a lot of what we consider output is “produced” at low or zero marginal cost.

Exactly. It's everywhere you look, high fixed cost, low marginal cost. No matter how it's sliced economically, it can't be forced to fit the traditional competitive model.

Entry costs are high. Operating costs are low. The market requires substantial volume to justify it. Multiple competitors not allowed because they will drive up average cost and make it inefficient.

In an ideal unregulated world consumers would benefit from the low marginal costs from a type of competition that both allows recovery of high fixed costs and low marginal cost, but no more.

But that never happens. The private sector figured out how to exploit these conditions long ago. Left unregulated consumers pay way more in economic rent necessary to recover these costs, especially at prices far above the marginal cost.

On the flip side, the same thing now happens even if it is regulated.

So the private market can't fix the problem and government can't fix the problem. The moronic ideologues on both sides of the issue keep getting it wrong.

Only the entrenched, broken down corrupt political system rotten to the core can fix the problem and it will take a tsunami of an economic event to do it.
Krugman also support minimum income, apparently
written by Alex Bollinger, June 19, 2013 7:21
How apropos. This morning I was looking to download "Mrs Dalloway" on Project Gutenberg, when I saw that it's still protected. "Mrs. Dalloway," published in 1925, written by Virginia Woolf who died in 1941.

Can a reasonable case be made that this copyright protection was necessary for this work to be produced? Would Ms. Woolf have said, "Fuck a room of my own, I'm going into medicine," if she were certain her heirs would lose the rights to her novels almost a century later?
written by Ryan, June 19, 2013 7:49
I commented on that post. If you're ever hung over, you need to think through an economic problem, and Krugman isn't 100%, you have to channel your inner Dean Baker. IP protection isn't the only factor, but it's pretty straightforward that it is one major factor. Many thanks to you over the years.
written by liberal, June 19, 2013 8:17
There is really big money in this area. Just to take my favorite one, we spend $340 billion a year on drugs, more than 2 percent of GDP ($295 billion on prescription drugs, $45 billion on non-prescription drugs).

Yawn. We spend 10-20% of GDP on land rent.
written by liberal, June 19, 2013 8:24
Alex Bollinger wrote,
Can a reasonable case be made that this copyright protection was necessary for this work to be produced?

My guess is that 10 years total is more than enough.
written by liberal, June 19, 2013 8:44
Ryan wrote,
Many thanks to you over the years.

The best part about reading Dean's column is getting out of the stock market near the peak in 1999/whatever, and knowing not to buy a house in the mid-00s. Saved me tens of thousands of dollars.
A Growth Industry
written by Not My Real Fake Name, June 19, 2013 8:52
I used to work in Palo Alto CA in the mid-90s. After I was replace at my tech job by the indentured visa holder I trained I spent a lot of time driving around the SF Bay Area looking for work. Palo Alto was unrecognizable from the 101 freeway. Several new and very tall buildings had sprung up. All had the names of giant law firms on their sides. My guess is this is part of the reason for the spike in home prices in Silicon Valley. It's all the IP and immigration lawyers.
written by Brett, June 19, 2013 9:26
"That's the key point that we all have to understand because the bad guys want to convince us that patents and copyrights came to us from on high and that it is our obligation to enforce them in their current or strengthened form, otherwise we are dirty communists."

They might have an argument here, in that the Constitution, Article I, Section 8, Clause 8 is considered the copyright clause -- empowers the Congress:

"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."

Hence any real change, though extremely necessary, might require altering this in some way.
Question of evaluation
written by nassim sabba, June 19, 2013 9:45
Rent seeking from real property and intellectual property is something that has to be allowed. The question is proportionality of value.

Lets say a person spends a year writing a book. If he is a great mind and is in demand for $250K a year for lectures and so on, and he spends his time each day full time for a year, then his investment is $250K.

What is the rent on a $250K property?

Of course, one can argue that his past goes into writing the book or making the software. But so does the past of a real estate investor. If he can't pass on his past to his offsprings, then it has no value, just as the experience of real property developer can't be passed on. So, his past has no value as it expires with him.

Thus, if wishes not to write the book or create the product, medicine or software, then he is free to spend his time doing his lecture visits and get $250K which he will spend. If we agree to pay him for his $250K for the year as a mortgage for the next 15 years, it will be maybe total $750K over that period at a reasonable interest rate.

If he makes $500k the first year in royalties, then the return for the next 15 years will be adjusted through additional taxes on his royalty income and at some point the property becomes the property of the State. At the expiration of the period, his heirs or anyone else should be allowed to purchase that intellectual property at an auctioned price, and up to the initial value or it ($250K in this case) and be controlled by the same rules, that determine how much they can profit from their investment.

This is an off-the-cuff suggestion. I am sure better minds can evaluate the situation better for persona returns and returns for society and come up with a simple solution to the issue.

There is no question that a creative person should benefit from his luck of being born creative, but up to a point. Just because someone is creative doesn't mean they should be allowed to hold the society hostage.

Medicine and medical devices are no different. In fact, we probably would weed out the charlatans who are in the field just because it is lucrative and not because it reduces human agonies. We would keep truly good minds who truly want to help reduce human agony and suffering and compensate them for their luck of being born with such capabilities and the luck of being bred by the society in the right way to help fellow humans.
may not must
written by Ethan, June 19, 2013 10:01
Article I Section 8 says "Congress shall have Power ..."
It does not say Congress must exercise that power. So if Congress wanted to do it, they could eliminate all intellectual property without constitutional change. Couldn't they?
the Constitution and copyright
written by Jennifer, June 19, 2013 11:00
In "Copyright Unbalanced" Jerry Brito notes an important distinction between traditional property rights. Traditional property rights-real property, personal property were already though of as part of common law and only recognized by the Constitution. Copyright law was created by the Constitution and " . . . does not recognize an inalienable right to copyright, but instead merely grants to Congress the power to establish copyrights." In addition the constitution copyright clause states copyright to be established for limited times" only. Of course "limited times" now means 95 years (thanks Disney!).
Joyce Carol Oates tweeted just the other day that
"while living authors may be underpaid. long-dead writers reap astonishing permissions fees for publishing houses. $40,000 for reprinting". She pointed out in later tweets that
"poets rarely demand outrageously high fees for their poems but publishing houses routinely do, after their deaths. No way to control this?" and that
"Fees are controlled by permissions departments in publishing houses. Sub-editors with no interest in the actual work".
It's pretty clear Congress has been granted the power to whatever it wants-that's why they are lobbied so hard on this issue. I think most people want to see artists compensated for their work but IP law is just completely out-of-control, and needs to be dialed back.
Why writers write
written by Thomas Beck, June 19, 2013 11:47
While it's true that writers wish ideally to earn lots of money for their work, it's highly unlikely that anyone would create a great work (such as "Mrs. Dalloway") solely for the money. Writers write for the same reason that all artists create - to express something in their minds that they have to express. If they can get paid for it, so much the better, but to suggest that nobody would ever create great literature if there were no copyright law is to completely fail to understand the nature of artists. The only people who care so much about copyright that they wouldn't create without it are the uncreative types who run the big media conglomerates.
Huge difference between "successful" monopolists and "successful" capitalists!
written by Perplexed, June 19, 2013 11:58
Is it possible that after all of the carnage we may be getting around to asking the right questions? http://krugman.blogs.nytimes.c...different/

Maybe the best question to ask at this point is why, with the exception of Dean Baker, is this so "mysterious" to professional economists? What "assumptions" are they making that are preventing them from seeing this and how sound are these assumptions? Or is it something more "personal" than that? Why is something that was so obvious to economists in the 1900's & 1910's so mystifying today? Why does Alan Krueger give a speech about the music industry calling it a "a microcosm of what is happening in the U.S. economy at large" without ever addressing the fact that it is almost entirely driven by monopoly profits? He rightly points out that: "We are increasingly becoming a 'winner-take-all economy,' a phenomenon that the music industry has long experienced" without ever addressing the fact that monopoly profits are the key factor in allowing the "winner" to "take" it all? He goes on to say that: "While we rightly celebrate the achievements of those who have been able to scale new heights of success in our economy, the shift toward becoming more of a winner-take-all economy has also had a number of adverse consequences for the U.S. economy that merit great concern." "Success" in a capitalist economy used to be equated with factors like "efficiency" and "innovation." Now "success" is driven by the ability to avoid competition and extract monopoly profits and we "rightly celebrate" this success? Our .87 wealth Gini is clear evidence that we "celebrate" what is going on but when an economist as prominent as Krueger makes the "judgement" that it is "right" to celebrate this kind of success it raises serious concerns about what his motivations are. So now we're supposed to believe that "Price and wage controls" and "the patriotic spirit" that “we’re all in it together during World War II" caused inequality to fall and implementation of the Sherman and Clayton acts of 1890 & 1914 played such a "minor" role that they don't even deserve to be mentioned? Krueger finds it "Interesting" that "the compression in income gaps brought about by World War II persisted through the 1950s, 1960s and 1970s" but never connects the dots to anti-trust policies? He doesn't seem to find interesting though that it was about this time that we began to disable, undermine, and cease to enforce our anti-trust protections? It kind of makes one wonder just who's "interests" are "interesting" to Alan Krueger.

As usual, the wrong diagnosis leads to ineffective treatments: "To rebuild the economy from the middle out, the private sector will have to step up and reinvigorate the norms and institutions that have supported inclusive growth in the past. The government has an important role to play as well, but with severe budget constraints and limited political will, the government can only set the conditions for the private sector to grow, and provide more jobs and opportunities for middle class families. It is, to a considerable extent, up to private sector businesses, organizations and communities to ensure that economic growth leads to widely shared prosperity and a decent living for the vast majority of our people." - Alan Krueger. So our Government is so "weakened" now that "we" need to rely the "private sector" to "ensure that economic growth leads to widely shared prosperity and a decent living wage for the vast majority of our people." You know, just like the serfs of old were "forced" to rely on their lords and monarchs to provide sustenance in exchange for a life of hard labor. Now there's a revolutionary concept! http://www.ted.com/talks/ lawrence_lessig_we_the_people_and_the_republic_we_must_
written by Dax, June 19, 2013 12:08
If $295 billion is spent on prescription drugs, and 84 percent of all prescriptions were dispensed as generics - http://www.nytimes.com/2013/03...d=all&_r=0 - it would be useful to know how the projected savings of 90% of that amount (which is what claimed could be saved "in the absence of patent protection") were derived.
written by skeptonomist, June 19, 2013 1:19
Gutenberg Australia has somewhat different copyright laws, so if you're an Ozzie you can download some books that are not available on the main Gutenberg site (if you're not an Ozzie you can still download them, but you might be a criminal)
Should be obvious
written by Robert Weiler, June 19, 2013 1:22
You don't have to look very hard to figure out that patent and copyright protection in the US isn't promoting the useful arts and science but rather are primarily promoting monopoly profits and litigation. Where is the innovation happening in software? Not at Apple, or Microsoft, or Oracle, primarily it is happening in the open source world. Where are new authors finding their audience? Not through traditional publishers but rather through self publishing for Kindle. Unfortunately all the money is on the side of perpetuating monopolies which in turn creates a 'virtuous' circle providing a lot of money to lobby in favor of perpetuating the monopolies. This isn't going to change any time soon.
written by Gavin, June 19, 2013 2:35
Dean Baker: the only economist that will criticise you for agreeing with him.

To be fair to PK he did say it wasn't an original insight, and it's a little harsh to hammer him for a trivial blog post as if he was looking for another Nobel.

I know this column is meant to be adversarial, but wouldn't your point be made a little more effectively if it was delivered with an ounce of magnanimity rather than an "I told you so"?
Not Critical of Krugman
written by Dean, June 19, 2013 3:50

I didn't take the comment as being at all critical of Krugman. I described his "awakening" almost exactly as he described it in his post. I am genuinely very happy to have Krugman start writing on this topic. He has enormous stature and a great platform. I would be quite surprised if he would be offended by my comments here.

written by Gavin, June 19, 2013 4:46
Dean, I take your point, and I am sure it will be taken in good jest. Lord knows it's hardly the worst thing that's been written about him.

I just thought the "discovers" was perhaps a little patronising.

But don't get me wrong, I love the column and I suppose I can't really begrudge the incivility just when it is directed at people I happen to admire.

Incidentally, I'd like to echo the sentiments of others in this thread to say thanks for the years of insight you have given us.

Dean Baker: One of the few economists worth reading.
written by skeptonomist, June 19, 2013 6:43
Krugman continues to brush off the effects of globalization, maybe because he was one of those who thought it would be such a big boon. I would say, though, that for many people globalization is the most important difference between now and the GM era - it's been good for the Chinese (and others) and for US capitalists, and bad for US workers; their jobs have been exported. The patent and copyright situation continues to get worse (and is especially important because of globalization), but this has not had as great an effect as the flight of jobs, not to mention the trade deficit. Dean's blog is where you can learn about these things as well.
Astrology 101 (Reich's reference)
written by John Parks, June 19, 2013 6:59
"Large gaps between price and marginal cost are bad in trade, much larger gaps between price and marginal cost are really bad when it comes to intellectual property."

While I certainly grasp the last half of the statement, which my mind registers as "predatory capitalism", also referred to as "National Interests" when our government wants to bludgeon the rest of the world into submission, I don't see the universality of the first half of the concept.

Large gaps (a totally subjective figure) between cost and retail price is one of the primary creators of small business start-ups where a niche is seen and exploited. In our current economic climate of high underemployment and unemployment I see this as a positive.

If we could eliminate the latter, predatory capitalism, I suspect we would see an explosion in new businesses, small to large in scope, to fill some very large niches. There would be winners and losers, but at least it would be a level playing field.

I never took Econ 101 so I apologize for my ignorance. Having created a niche business, primarily because of price differential, my mind can't easily get out the rut I created.

I am certainly open to criticism and correction.
formerly of Ann Arbor
written by Gregory Scott, June 19, 2013 8:59
Mrs. Galloway is indeed available at Australia Gutenberg.
written by Luke, June 20, 2013 6:35
Where do brands fit into this? Coca Cola, Phillip Morris, Budweiser, Chanel etc.
written by jeff fisher, June 20, 2013 8:55
Re: "$295 billion is spent on prescription drugs, and 84 percent of all prescriptions were dispensed as generics...how...projected savings of 90%"

If all three numbers are roughly correct generic drugs would have to be vastly cheaper per prescription than brand name drugs.

I guess I'd be a bit surprised that they are that much cheaper (roughly 100x on average, right?).
Here's the algebra
written by bob, June 20, 2013 10:18
C = current cost
N = new cost (all generic)
P = average prescription cost
G = average generic cost

C = 0.16(P) + 0.84(G)
N = 0.1(C)
N = 0.1(0.16(P) + 0.84(G))
1.0(G) = 0.1(0.16(P) + 0.84(G))
G = 0.016(P) + 0.084(G)
0.916(G) = 0.016(P)
G = (0.016 / 0.916)P
G x 57.25 = P
Generic prices
written by Dean, June 20, 2013 10:24
There is one problem with looking at average generic drug prices. For 6 months after it comes on the market, the first generic has exclusive rights to the market. This gives them a duopoly with the brand drug and allows them to charge much more than the free market price. For this reason and a few others related to intricacies of IP rules, some generics also sell for prices that are well above the free market price.

Nonetheless, every chain drug store will have many hundreds of generics selling for $5-$10 per prescription. These drugs are not chemical distinct as a group from more expensive drugs. The difference is their legal protection.
Patents and Investment
written by 4runner, June 20, 2013 11:28
Complaining about the way that they big boys use their patents is low hanging fruit.

Patents not only protect sunk costs of R&D (i.e., the pharmaceutical industry model) but they also encourage investment. In many industries, the R&D costs are relatively small (e.g., someone comes up with a better mousetrap). The real costs (manufacturing, distribution, sales) come when trying to bring that mousetrap to market.

When a patent defines a property right and increases the likelihood that the costs of bringing a product to market can be covered, people are more likely to invest.

Now-- this benefit is most relevant to "old-school" technologies, i.e., where people actually make things. For example, the distribution costs of software are pretty close to nil and social media is a mediocre way to sidestep marketing and sales.

Even so, there are other ways that patents benefit the economy and a quick and dirty complaint about excess rents is too simplistic.
Fear of what the compnaies would do to hide there IP
written by Floccina, June 20, 2013 2:25
I agree with Dean and would like to try greatly reducing Copyright and Patent but I do have a fear that absent Patent individuals and companies might do some bad stuff to hide their IP.
written by prostratedragon, June 21, 2013 12:57
Is Krugman talking about distribution, or about distributional channels?

I guess we'll find out soon.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.