The Unity Of Economics
evidence for
More than ten years ago I came across an article by Lou Kaplow, a law and economics scholar at Harvard. He had published it in 1984.
I had published it in 1981.
Neither Lou nor I engaged in plagiarism, with or without the aid of a time machine. He had probably never seen my article when he wrote his, may not have seen it yet. I first saw his article more than thirty years after I wrote mine. The two versions of the article differed in detail; mine was on criminal law, his on patent law. But each article was about a single simple idea and it was the same idea in both.
I start with his.
The Patent-Antitrust Intersection: A Reappraisal
The conventional economist’s view of patent law is that it exists to reward inventors with a temporary monopoly in order to give them an incentive to make and reveal inventions. The question Lou was looking at was of how long the term of the monopoly should be.
There is an obvious answer to that question, obvious at least to an economist: Set the patent term just long enough so that the reward received by the inventor is equal to the social value of the invention. That way it will be in the interest of an inventor to make any invention that costs him less than it is worth to us. Applying that rule in practice faces a host of difficulties but the theoretical answer, what you are trying to do, seems straightforward.
It is also, as Lou pointed out, wrong. The reason it is wrong is that giving the reward is costly. For reasons familiar in economic theory, the benefit a monopoly provides to the monopolist is less than the cost it imposes on his customers, the difference being what economists refer to as deadweight cost.
To see how that affects the optimal term of protection imagine that there is an invention whose social value we can somehow measure as ten million dollars. Further imagine that we have calculated that ten years of monopoly will give the inventor a reward of exactly that sum. Should we give it to him?
Suppose we reduce the term of patent protection from ten years to nine, reducing his reward from ten million dollars to nine million. If the cost of making the invention is less than nine million dollars he will still make it, we will still get the benefit, and we will have a year less of deadweight cost. If it happens that the cost of making the invention is between nine million and ten million the invention won’t get made. That is a cost, but it is a cost of less than a million dollars, since we (consumers and inventor together) will lose a ten million dollar benefit but save a cost of between nine and ten million. To figure out what the optimal length of protection is we would need more information — a probability distribution for the cost, telling us how likely it is that any reduction in the reward will result in the invention being made, and a way of calculating how large the deadweight cost is for any length of protection. But it is easy to see that the optimal term of protection can be less than ten years and only a little harder to see that it has to be.
If the term of protection is 10 years - X, both the chance that the shorter term will result in not getting the invention and the net cost of doing so scale with X, making the combined effect proportional to X squared, what an older generation of scientists referred to as of the second order of smalls. The savings in deadweight loss is proportional to X, since that is how much less time we bear it. If X is small enough, the gain has to be larger than the loss.
Lou’s conclusion was that the conventional answer, optimal reward equal to value of invention, was wrong. As long as giving a reward costs something, the optimal reward is less than that, at the point where any further extension of term costs as much in increased deadweight loss as it gains in increased chance of invention. That was the central point of Lou’s article, obviously correct once stated.
Reflections On Optimal Punishment, or: Should The Rich Pay Higher Fines?
My article was on the optimal criminal penalty. There was an obvious answer to that question too, obvious at least to an economist: Set the expected value of the penalty, penalty times probability, equal to the damage done by the offense. That way the only offenses it is worth committing are those where the gain to the offender is greater than the loss to the victim, in which case deterring the offense would make us, offender and victim together, on net worse off.
That obvious answer is also wrong for the same reason as the other one was. Catching and punishing criminals, like rewarding inventors, is costly. If an offense costs the victim $100 and benefits the criminal by $99, it imposes a net cost of $1. But if raising the punishment by enough to deter that offense costs $10 in extra enforcement and punishment costs, costs of paying cops and running prisons, we are better off not doing it. The level of punishment that minimizes net costs is the level at which any further increase would cost as much in extra enforcement and punishment costs as it would gain in deterring offenses that do net damage.
There are differences in detail between my case and his, such as the fact that the cost of deterrence is sometimes negative; if you deter an offense you don’t have to punish it. Anyone sufficiently interested can find the details in the relevant chapter of my Law’s Order and, in a more mathematical form, in a virtual footnote to that chapter. But the logic of the two articles is identical, as is the logic of the errors they critique, one in the economics of patent theory law, one in the economics of criminal law.
Which is evidence that economics is not a set of questions to be answered but a way of answering questions applicable to a variety of subjects and issues.
Why Non-economists Think Economists are Crazy
If you are not an economist, it may have occurred to you that both articles are based on assumptions that are obviously false. We don’t know what inventions not yet made will be worth or how much it will cost to make them. We don’t know how much damage crimes not yet committed will do or how much punishment it would take to deter them. The legal rules we make today are intended to affect future behavior by people some of whom have not yet been born.
Figuring out what you would do if you had all of the relevant information is a first step towards figuring out what to do with the very limited information you have.
My web page, with the full text of multiple books and articles and much else
Past posts, sorted by topic
A search bar for past posts and much of my other writing
A draft of my next book, Consequences of Climate Change, webbed for comments.
Love it, of course!
However, I disagree with "Why Non-economists Think Economists are Crazy". You are much too kind, attributing disagreements to intellectual misunderstanding. No, non-economists know that economists are after them! Human individuals, and other species' individuals, are self-interested. If I explain that "free trade is good for the collective", but sorry, it's bad for you, our citizen will always be against free trade. If I repeat arguments for competition in education to educators, but some will lose their jobs, we needn't guess what side the educators will take on average.
Actually, it's worse than that. People can live in their own socially constructed realities if there is no cost to them involved. As Alan Sokal famously pointed out, if you don't like physical laws you are welcome to jump from my 25th story balcony. Of course you can only do that once. If you don't like supply and demand it won't kill you in day to day life. It might in the long run, though. Reminds me of frogs, who don't see or feel the water level declining in ponds, and then die.
Bon voyage!
I detest even the concept of "intellectual property", and I detest all one-size-fits-nobody schemes, patents or otherwise. I tried once coming up with a patent scheme which was vaguely self-enforcing and self-defining. I'm not going to dig through old notes, but here is what I can remember now, in general.
A patent application has to specify four things:
* The patent itself, clear enough to make a copy.
* The royalty schedule, as simple or complex as desired, but it lasts for the lifetime of the patent.
* The deadline to make a copy and activate the patent protection period.
* The multiplier which determines the expiration date.
If no one begins production of copies by the deadline, the patent expires. If someone does begin producing copies, multiple the time it took by the multiplier to determine when the patent expires.
Legislative policy sets some maximum deadline, say one year.
* The inventor's incentive is to describe the invention so well that copies can be made and royalties collected.
* Copycats' incentives are to either produce a copy as fast as possible to limit how long they pay royalties, or to hold back actual production and let the patent expire.
* This in turn incentivizes inventors to keep royalties low enough to encourage copycats.
* Copycats face a choice: produce a copy as soon as possible to be first to market and keep the royalty period as short as possible, or hold off and be ready to produce the instant the patent expires and hope that no one else produces copies sooner.
Inventors can also decide that the product is too easy to copy and not worth patenting. But if that's the case, others will also come up with the same idea, and someone is going to start producing and selling it, so there's little point in delaying production just for lack of patentability.
ETA: There's no need to have a legislative maximum multiplier, since if it's too high, no one will make a copy and the patent will expire. But there does have to be a fairly low maximum deadline, because that limits the natural greed of every inventor to extend the natural monopoly of every invention. I think one year is fine; any invention which takes longer than that to copy sounds like too big a leap in innovation to be kept secret for so long.