Technology, Patents, and Inequality: An Explanation that Even Economists Can Understand

January 29, 2020

It is popular for people, especially economist-type people, to claim that technology has been a major driver of the increase in inequality over the last four decades. This view is very convenient for those on the winning side of the inequality divide, since it implies that the growth in inequality was largely an organic process independent of government policy. Inequality might be an unfortunate outcome, but who would be opposed to the advance of technology?

However convenient the technology driving inequality story might be, it falls down on even the most simple examination of its logic. To take an example that has often been used, there is a concern that displacing workers with robots will lead to a transfer of income from workers to the people who own the robots.

While this comment is often treated as presenting the basic problem created by technology, in fact it does the exact opposite. “Owning” the robot is not a technical relationship, it is a legal one, and therefore one that depends on our laws. 

To be more concrete, the income from owning a robot is not the result of owning the physical robot. Robots will generally be relatively cheap to manufacture. So people will not be deriving large incomes from owning the steel and other components of the robot. The reason some people might get very rich from owning robots is because they own patents and copyrights that are needed for the making of the robots. Without these patent and copyright monopolies, robots would be cheap, like washing machines, and there would be no large-scale upward redistribution associated with them.

 

A World Without Patent and Copyright Monopolies

If it is not already obvious, patent and copyright monopolies are instruments of public policy, not acts of god. We can make them stronger and longer if we want, or shorter and weaker, or not have them at all. The treatment of these monopolies in the constitution is a very good starting point for a clear understanding of the issues. 

Patents and copyrights appear as one of the specific powers granted to Congress (Article I, Section 8, Clause 8). The clause states that Congress has the power:

“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.”

Note that this is explicitly a power granted to Congress that it can either use or not use, like the power to tax or the power to declare war. Patents and copyrights are not guaranteed as individual rights, like the right to free speech or religion. 

Patents and copyrights are also explicitly tied to the public purpose of promoting “the progress of science and the useful arts.” There is 180 degrees at odds with the idea that a person has an inherent right to get a patent or copyright.

Anyhow, let’s imagine that Congress chooses to eliminate patent and copyright monopolies tomorrow. But, we still have all the technologies that exist today, such as computers, smartphones, artificial intelligence and the rest. In this world, there would likely be little demand for people with skills as software engineers, bio-technicians, or skills in other STEM-related areas that are highly valued in the current economy. (We’ll assume no government funded research at the moment.)  

After all, why would a drug company pay large amounts of money to people to develop new drugs if the drugs can be copied and sold by competitors from the day they enter the market? The same would be true of software developers, makers of medical equipment, computer manufacturers, smartphone companies, and any other product where the cost of research and development was a substantial portion of the price of the product. 

The ending of patent and copyright protections would unambiguously send demand for these highly-skilled people through the floor. If we believe in markets, then the plunge in demand should also send the wages of people with college and advanced degrees in science, engineering, and other STEM areas through the floor.

In the same vein, the real wages for people not employed in these sectors should jump. If there are no patents or related protections on prescription drugs, instead of spending close to $500 billion this year, we would likely be spending less than $100 billion. Even the most expensive drugs would likely only sell for hundreds of dollars for a year’s prescription. The savings of $400 billion annually, would come to close to $3,000 per family. We would likely save another $100 to $150 billion a year (roughly, another $1,000 per family) on medical equipment, such as kidney dialysis machines, MRIs, and all sorts of other medical equipment which would now be cheap.

There would be a similar story with items like smart phones and computers. The newest iPhone may sell for $100 or less. The same would be true of high end computers that might sell for well over $1,000 today, due to patent and copyright protections. And, of course all of the television shows, movies, video games, and other copyrighted material, for which people now pay considerable sums, would be available at no cost. 

These savings would hugely increase the real wage of workers without highly specialized skills in the STEM-related areas. We would likely be seeing a story in which typical workers were seeing the benefits of the economy’s gains in productivity, as had been true up until 1979. In this world, we would not have to worry about income going from workers to the people who owned the robots, since there would not be especially large returns to the people who owned the robots, just as the makers of washing machines are not making especially large profits. 

The complete elimination of patents and copyrights is of course an extreme scenario, but it is a possible policy option. If we did choose this policy option, we would have a much more equal distribution of income, in spite of having the same technology. In short, the fact that there was a huge increase in inequality associated with the development of technology over the last four decades was the result of policy choices, not the technology.

Policy Choices on Promoting Innovation and Creative Work

If we acknowledge the extreme case, where we literally have no patent or copyright protection, then we have to recognize that there is nothing inherent in our technology that would cause inequality. It is entirely our rules on technology that can cause inequality to increase. 

Basically, the strength and length of patent and copyright protections, and other forms of support for innovation and creative work can be thought of as being like a faucet, that we can turn higher or lower. As a practical matter, we have chosen to turn the faucet much higher in the last four decades. 

We have extended the length of both patent and copyright protection repeatedly during this period. Incredibly, we have even extended the length of copyright protection retroactively, as though it makes sense to give someone incentives for actions long in the past. 

We have also expanded the scope for both patents and copyrights. In the case of patents, we have allowed these monopolies to apply to new areas, such as life forms, software, and business methods. Copyrights were also applied to the Internet. 

In addition, we attached very harsh punitive damages to copyright violations that can exceed the actual damages by many orders of magnitude. This is hugely important for their enforcement. For example, the royalties for an individual song run well under 1 cent per play. This means that even someone who was engaged in fairly large-scale copying, say transferring 10,000 copies, would be liable for actual damages of less than $100. No one would bother to pursue a lawsuit where they stand to gain less than $100, if they win.

However, the law allows for punitive damages that could reach into the tens of thousands of dollars in such cases. Whether or not this is good policy can be debated, but the fact that the harsh punitive damages associated with copyright violations is policy, is not debatable. This policy provides support for a wide range of industries, including movies and television, newspapers, and video games, in addition to recorded music.

Technology Policy, not Technology Creates Inequality

It will be a huge step forward when we can get economists and others involved in debates on inequality that it is our policy on technology that drives inequality, not the technology itself.  That would both get rid of the strawman argument, that the losers in the modern economy somehow failed to adjust to technology, and also open the door to a more serious discussion of technology policy.

As it is, the changes in technology policy have largely taken place in dark corners far out of view of the public, even though the amount of money at stake swamps the amount at issue with contentious programs like food stamps and TANF. There should be serious public debate about both how strong we want patent and copyright protections to be and also whether they are always the best way to promote innovation and creative work, as opposed to alternatives like direct public funding (see Rigged, chapter 5 [it’s free].)

And, an important part of that debate should be the impact of these protections on inequality. It is not clear that we do have to make any sacrifices in the rate of progress of technology to lessen inequality, but it would be reasonable to ask if such sacrifices are worth making. However, raising such questions is not even possible until we talk about intellectual property in an honest way, something that has not happened to date in public policy debates.

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