2012-04-06

Balancing Economic Benefits

The Australian Government agency CSIRO has recently won a court battle in the US to protect wi-fi technology patents it set up in 1996. The case was very clear - the CSIRO made the patents and the technology industry failed to compensate the agency for their work. As a result, the CSIRO will gain a lot of money which it will presumably use to invest in more technology.

One of the problems that Americans have with this ruling is that the agency is owned by the Australian government. As a citizen of Australia, therefore, I am a shareholder in this organisation and I am proud of its achievements throughout the decades in developing high technology. Yet at the same time I also realise that I will not see any financial benefit from this court case - despite being a part owner of the CSIRO I will not see a penny of this financial windfall.

But then a part of me is also concerned that such a windfall may end up benefiting the world less than if the technology was made free. The enforcing of this patent will ensure that the cost of wi-fi services around the world will increase - though obviously at a level not noticeable by the average consumer.

The idea that an economic entity (a business or individual) should reap financial reward for its work (whether in the form of labour or in innovation) is not in question here. Instead I am questioning two related issues:
  1. Whether the amount of of financial reward is appropriate.
  2. Whether the financial reward should be factored directly in to the price of the labour or technology in question.
Within the free market system these two issues are moot. An entity's financial compensation for its work is determined by market forces and is a result of the price the market is willing to pay for it. This is economics 101.

Now while I'm not advocating a communist system here, whereby supply, demand and price for all goods and services are determined by bureaucrats, what I am pointing out is that maybe some parts of the economy are better off and more efficient if some level of planning and government intervention exists.

It is a well known fact amongst economists that the supply and sale of certain goods and services does not  have a zero sum effect upon the economy, but can vary. A few years ago a UK think tank determined that hospital cleaners created ten times more wealth than it cost to employ them while waste recycling workers were twelve times more valuable than their wages. This was determined by how much an economic effect such workers had upon the broader economy, with cleaners and waste recycling workers providing a service that, if forsaken by modern society, would result in greater costs overall. The study also concluded that certain workers in the financial industry actually destroyed value in the economy (this was measured after a recession so the numbers are a bit skewed).

In the same way, think of the CSIRO and their wi-fi patent. The money that was spent developing this technology was paid for by the Australian taxpayer rather than by market forces. But as a result of their discovery, millions of people around the world have easier access to the internet - something which ends up having a positive economic effect far greater than either the amount of money spent by taxpayers like me and even by the increased cost of wi-fi brought about by the patent lawsuit.

Nevertheless I ask the question again - what would be the eventual economic benefit to the world if the CSIRO forgoes the money due to it via this patent lawsuit? The CSIRO may lose $200 million per year in funds but what if the net effect of making it free was greater than the CSIRO's windfall? If the patent was open and free, low cost tech companies the world over could provide cheaply manufactured wi-fi hardware and software that ends up lowering the cost of wi-fi throughout the world. If this is the case then perhaps the CSIRO should rethink its actions.

Now let's extend this idea beyond the CSIRO and the idea is not so radical. Roads, obviously, provide huge amounts of economic benefits beyond what it costs to make them but there is no direct method of paying for them to be built and maintained (apart from the occasional tollway) - instead they are reliant upon tax revenue and government decisions. The police and legal system are funded by the state too and the effect they have in maintaining a peaceful society brings about huge economic benefits.

But let's extend this further. Think of the pharmaceutical industry and the profits they reap on patents. Having a patent for a successful drug allows Big Pharma to sell the drug at a premium price because they control the drug's production. But what would happen if the patents they hold were free? Would the financial loss incurred by the pharmaceutical company in no longer having a patent be more than made up for by the financial benefits of cheap supply of the drug to the market by generic pharmaceutical manufacturers? Of course one criticism of this approach would be the survivability of big pharma in making better and better drugs if there is no funding for them to do it - and to which I respond by pointing out that maybe, just maybe, the funds for research and development could come from taxpayers. In the real world this would result in pharmaceutical companies getting government funding to develop patent-free drugs, or else the government could purchase the patent (either through agreement or by eminent domain) and open it up for the generic industry to produce.

Of course I'm only using Big Pharma here as an example and I'm in no way going down the route of demonizing them as others have done (I think there are huge problems with Big Pharma, but I recognise the benefits as well). Think about the effect of open agricultural patents, with companies like Monsanto forgoing their litigation campaign and getting on with developing new strands of vegetation without having to worry about how the consumers are using or misusing their product (since, of course, they receive their funding from the state).

Or even think about JK Rowling. What if Rowling made the Harry Potter series public domain? Sure she would lose all of her income but the effect would be very cheap Harry Potter books available from every conceivable book publishing company, thus lowering the price of reading her books for families and schools. Would the resultant economic effect of cheap Potter books be greater than the economic benefits Rowling receives? (She does, after all, have more than enough money to live off).

There are plenty of other examples I could use here. I'm certainly not saying that every conceivable example would work or should even be initiated even if they did work - the long term certainly needs to be taken into account and economic entities need revenue to survive and continue providing goods and services and labour to the economy. Slavery, whether hoisted upon the individual or upon companies, is not what is being described here, though some level of constraint is being presented.

By way of closing let me just say that much of capitalism's history has proven right in that the price the market is willing to pay labour and innovation has pushed society forward. I'm not saying that communism should be reintroduced. Nevertheless I am questioning whether the market-only attitude is the sole paradigm we should operate in. Maybe it would be better for all if government diverts tax revenue to certain areas of the economy because the overall economic benefit outweighs the market/price benefit to the producer.

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