Douglas Clement does an outstanding job of providing background on the way that economists have dealt with the issue of copyright in the context of economic growth. (An earlier version of Clement’s article first appeared here.)

Clement’s article revolves around a controversial proposition articulated by Michele Boldrin and David K. Levine. They argue that copyright is unnecessary to reward innovation. According to their theory, if people are allowed to copy freely, then this will raise the value of the first few copies (which presumably are made by the creator) to the same point that would be reached if the initial creator were given the right to restrict copying.

When I sell a book to a publisher, the publisher makes a guess as to what it will be worth to print copies of my book, and pays me accordingly. Boldrin and Levine argue that this mechanism also could work if other publishers could freely copy the book–because those publishers would pay my publisher a lot in order to get their hands on early copies.

Clement describes some real-world cases in which innovation takes place in spite of a lack of copy protection.

The fashion world — highly competitive, with designs largely unprotected — innovates constantly and profitably. A Gucci is a Gucci; knock-offs are mere imitations and worth less than the original, so Gucci — for better or worse — still has an incentive to create. The financial securities industry makes millions by developing and selling complex securities and options without benefit of intellectual property protection. Competitors are free to copy a firm’s security package, but doing so takes time. The initial developer’s first-mover advantage secures enough profit to justify “inventing” the security.

Note, however, that the people who pay high prices for a Gucci or for a new type of security are not the people who make the copies. The profit mechanism differs from the one given by Boldrin and Levine.

In fact, the Boldrin-Levine proposition has the feel of an intellectual swindle, in which the conclusion follows from some unrealistic assumptions that are well hidden. Clement describes the skepticism of many prominent economists.

For example, few economists believe that pharmaceuticals would be developed without patent protection. I think that what differs from the Boldrin-Levine model in the case of a new drug is that the formula for a new drug can be known by competitors before the developer has even obtained permission to market the drug. Without patent protection, the first copy could be sold by a competitor, which leaves the company that developed and tested the drug with nothing.

In general, I think that in the real world there is a long time between when the first copy can be made and when the market value of the intellectual property can be determined. By the time that my publisher knows whether or not my book will be popular, it will have been easy to copy. Without copyright, publishing becomes a game in which it pays to wait and “cherry-pick” the successful works, rather than bear the risk of publishing a dog. But if everyone waits and no one bears the risk, then no publication takes place. Publishers need copyright protection between the time they choose to publish and the time that the uncertainty of the value of the work gets resolved.

For Discussion. Economists tend to believe intuitively that music receives too much copy protection, but that pharmaceuticals do not. How might this intuition be justified on the basis of the characeristics of the two industries?