We can have both innovation and equality, say Joshua Gans and Andrew Leigh
There is a growing view that technology inherently increases inequality, be it from richly compensated software developers or giant web platforms that skim economic rents from users or other firms. But it is a false dichotomy. Tech often isn’t responsible for the unfairness and where problems do exist, they are fixable. It is possible to have both scientific progress and fair societies.
This is the message of a new book aptly titled “Innovation + Equality” (MIT Press, 2019) by Joshua Gans, an economist at the University of Toronto and Andrew Leigh, an economist and member of parliament in Australia. The pair are alarmed by the winner-take-most phenomenon that characterises many parts of the tech industry. They call for a wide range of reforms, from banning non-compete clauses in work contracts and easing the process for university loans, to reducing sexual harassment in the workplace to boost the number of women in tech.
One of the book’s most powerful arguments is on intellectual property. It is a highly controversial issue that typically divides into two superficial camps, caricatured as portly capitalists who claim expansive rights to pickpocket consumers and other businesses on one side, and hippie software-developers and snowflakes on the other side, who want to open-source everything.
Messrs Gans and Leigh bring much-needed nuance and balance. Patents and copyrights are crucial for securing rights so that firms can invest, they acknowledge, but those rights need to be more limited than they are today. An excerpt from the book, on intellectual property, appears below. Following that is a short interview with the pair.
From “Innovation + Equality” by Joshua Gans and Andrew Leigh
Back in the 1960s, Bob Kearns was an engineer working and lecturing in Detroit. Due to an unfortunate wedding night accident involving a champagne cork, he was legally blind in his left eye. When driving in a Michigan rainstorm, Kearns lamented the inability of his wipers to help him see better. In those days, windshield wipers had two settings—fast and slow—and they were always moving. Kearns’s notion was that it should be possible to have a slower setting, in which the wipers paused briefly between each wipe.
Motivated by his own experience, as well as a long-standing desire to work for a big car company like Ford, Kearns spent years working out a way to make wipers pause. His solution relied on electronics—an unusual and innovative thing in those days. He fitted the mechanism to his own Ford Galaxie with most of the contraption inside a black box and drove it down to Ford to show its engineers. They pored over the car and were impressed. Kearns was then given the details of tests he would need to perform to become a Ford supplier. Those took months of work that Kearns completed in his basement. Ford, however, passed on him being a supplier, though the firm did employ Kearns for a brief period. In the meantime, Kearns filed for a patent on his invention.
It took seven years for Ford to work out Kearns’s mechanism. Kearns discovered this when he saw an intermittent wiper in a new Ford model at a trade show. It was his invention. He sued the car giant.
Today, this might have been an easier case, but in the 1970s, patents in the United States were not as strong. In addition, Ford itself was a tough litigant. Henry Ford had many years of struggles when a lawyer patented the automobile, and so his company had a culture resistant to patent litigation. Kearns became obsessed with the case, ruining his marriage, and prompting his children to become lawyers to help with his cause. It took twenty years, but Kearns eventually won a $10 million judgment from Ford. By then, every carmaker had put Kearns’s mechanism in their vehicles. Eventually, Kearns won a $30 million judgment from Chrysler, but his cases against other automakers were dismissed on legal technicalities.
You might think that it all worked out. But Kearns lost a lifetime of inventing, and society lost what his inventive genius could have brought. Unless you are Elon Musk, you are not going to be able to invent something for the car industry and become a carmaker to bring it to market. The best you might hope for, as Kearns did, is to become a supplier. Yet in doing so, you face a risk: if all you have is an idea, then you are vulnerable to expropriation. Once you give up the secret, the idea can be copied, and then the only protection you have is that afforded by patent law.
Indeed, subsequent research has shown that inventors are keenly aware of this. When inventing something that fits into a larger picture that is controlled by others, innovators are much more likely to go ahead if they have secure intellectual property protection. Moreover, those who have such protection end up doing the deals with others; something that, for most ideas, is what allows them to come to market rather than languish.
Owning Your Ideas
This illustrates the point of the patent system: it is designed to make markets for ideas safe. This is crucial in terms of freedom to innovate, especially when inventors have little power. […] Without patent protection, cheap knock-offs would quickly take over. A patent provides two decades to build and then profit from the market that is created. It makes it safe to spend time and money refining the invention before the imitators arrive.
Innovation is tricky. Before products are launched, there is much uncertainty as to their value. Afterward, however, what was initially strange can become mainstream (or not, as in the case of the Segway). From nonstick frying pans to touch screen computers, ideas that once seemed radical have become commonplace.
Not all innovation requires intellectual property protection. […] Secrecy rather than patents protects some of the world’s most famous creations. The ingredients in Coca-Cola and formula for WD-40 are tightly held. The recipe for Colonel Sanders’s “11 secret herbs and spices” is locked in a vault in KFC’s Louisville headquarters. Google’s algorithm is kept confidential to prevent unscrupulous people from manipulating search rankings. If firms used patents to protect all their innovations, devious rivals would have little need to engage in cyberhacking; instead, they would simply go to the patent office.
Some inventions are not protected from copying at all. The open-source approach has helped create one of the world’s most widely used computer operating systems (Linux), the largest-ever genetic maps (the Genographic Project), breakthroughs in astronomy (via NASA’s photo-organizing project), and the world’s largest encyclopedia (Wikipedia). In some sense, open source—which aims to increase take-up by offering services at a zero price—is the opposite of a monopoly—which charges a higher price and ends up serving fewer customers.
Something So Right, It’s Wrong
As with anything like this, however, it can go too far. […] The dark side of intellectual property protection is when its reach is extended beyond what was intended. A patent is intended to be an exclusionary right that is temporary. In most countries, it lasts about 20 years from the date you file for a patent. Its sibling, copyright, has a much longer life, extending up to seventy years after the death of its creator. This means that if Beyoncé Knowles-Carter lives until age ninety, then her song “Bootylicious,” which she cowrote in 2001 at age twenty, would be in copyright protection until 2141. A right that lasts for 140 years can hardly be called temporary.
The temporary nature of patent protection is important. First, it creates an incentive for the innovator to do something quickly to get the product out to market. The longer they wait, the less time they will have the market to themselves. Remember, the goal is to get the innovation out there— by publishing its technical details, and putting it onto the shelves for sale. The second reason for temporariness is that once the patent runs out, people who want to use it in the market, or critically, innovate and build on top of it, no longer need to ask for the permission of the original inventor.
It is worth exploring this second notion more carefully. When Thomas Edison patented the incandescent light bulb, he succeeded in blocking competitors who offered products that in fact improved on his original design. The Wright brothers patented their aircraft design and became so litigious that one of their rivals joked that a person jumping in the air and waving their arms would get sued. Not surprisingly, the Wrights were more successful in blocking follow-on innovation in US courts than in France or Germany.
The Wrights’ focus on litigation over innovation has been cited as the reason why European aviation was far in advance of US aviation innovation by the time World War I started. Only when the US government intervened were the patent issues resolved with US manufacturers pooling their patents and licensing to each other. But had the standoff persisted, it would have resolved itself with the expiration of both sets of patents (which at the time lasted for seventeen years).
Because invention is inherently uncertain, society wants to minimize the roadblocks that we put in the way of innovators. Intellectual property law aside, some new innovations face problems due to outdated bylaws, risk-averse company cultures, and regulatory processes that focus only on the potential downsides. The more people you have to persuade, the more forms you have to fill out, the harder innovation becomes. As rear admiral Grace Hopper famously put it, “It’s easier to ask forgiveness than it is to get permission.” In his book Permissionless Innovation, George Mason University’s Adam Thierer refers to this as “Hopper’s law.” The notion of permissionless innovation has become one of the core ideas that economists use to think about promoting innovation.
Underpinning the notion of permissionless innovation is the principle that innovation should be judged innocent until proven guilty. Since encouraging experimentation has significant social value, the regulation of new ideas should move carefully. Laws that stymie new innovation should be based on evidence of concrete harm, not speculation about the worst-case scenario. Rules that create frictions can have large effects. Researchers found that when Norway created a friction on innovation—abandoning the “professor’s privilege” that allowed university researchers to commercialize ideas without permission from their institution—commercialization rates fell by 50 percent. Permissionless innovation bolsters the idea of a “regulatory sandbox” in which new financial technology innovations are given temporary permission to operate on a small scale.
A favorite question we ask students is: when do you think the answering machine was invented? Most remember that 1990s sitcoms such as Seinfeld had answering machines as part of the plot so they think it was in the 1970s or 1980s. In fact, it was 1934. The answering machine was invented by AT&T, which at the time had a monopoly over US telephone services.
It was under AT&T’s research arm that Clarence Hickman showed how to use magnetic recording technology to record a phone call. The technology operated just like the answering machines that appeared half a century later. It answered the call with a message and then allowed the caller to leave their own message to be played back later. When the caller hung up, the machine would disconnect.
Despite all this, AT&T did not produce anything like an answering machine until the 1950s. This was despite continual customer requests for the product. This seems surprising. The missed call is as old as the call itself. For several decades, though, AT&T executives not only suppressed their own use of magnetic recordings with regard to telephones but also actively blocked others from trying to do the same. They did not want calls recorded.
Why not? The answer was a fear and a theory. They feared that if people knew calls could be recorded, they would be reluctant to make them. And what is better evidence that calls can be recorded than an answering machine? As one manager wrote, “If at any time there was a reasonable probability that such a device [i.e., a magnetic recorder] was connected at one end or the other, it would change the whole nature of telephone conversations and would in our opinion render the telephone much less satisfactory and useful in the vast majority of cases in which it is employed. It would greatly restrict the use of the telephone.”
This is an age-old fear: privacy. If people are worried that their conversations will not be private, they might not talk at all. The AT&T executives had no proof that their concerns were founded; that is part of the uncertainty that can surround innovations. But they were happy enough with their monopoly, which endured until antitrust regulators split the company into seven “Baby Bells” in 1982. When you’re the dominant player in a multibillion-dollar market, why experiment with a new invention that might undermine people’s comfort with telephones?
We know now that these fears were overstated. When answering machines became available, people adopted them without losing confidence in the telephone system. But because AT&T worried about the recording of calls, it moved to suppress its own extensive innovations in magnetic sound recording. The applications of that technology extended well beyond answering machines. Ultimately, German researchers commercialized magnetic recording and came to dominate the industry. The intrepid AT&T research team that built magnetic recording did not have permission to take its invention beyond the company’s walls. Concentration has its downsides.
The Economist: In your book, you both praise and condemn the patent system. How would you reform it, to fuel innovation while fostering equality?
Joshua Gans and Andrew Leigh: Our concern is the prevalence of monopolies and particularly situations that make it hard for innovators to compete. Of course, granting someone a monopoly is just the sort of thing that increases inequality. While it would be easy to resolve the inequality part by just making patents less powerful (for example, by shortening the duration of the patent), we believe that it is more important to ensure that patents do not get in the way of innovators. If a patent is too broad, those who build on innovations will be deterred from doing that. So if we make those patents more limited in their scope, we can unlock opportunities for others to create innovations that combine and build on the work of others while, at the same time, distributing the opportunities for innovation more widely. That won’t get us to full equality but it will get us to a better balance.
The Economist: Isn’t it inherent with innovation that the gains go disproportionately to a few, fuelling inequality?
Messrs Gans and Leigh: It’s easy to see how people might feel that way, given the events of recent decades. But only a small share of the wealthy is responsible for innovation. So rewarding innovators does not require broader inequality across society. Indeed, there are plenty of periods in history when growth and equality went hand in hand. The 1950s and 1960s saw huge advances in transportation technologies, household technologies and space innovation. And yet, wages grew faster on the factory floor than in the corner office.
The Economist: To rid inequality, is there a risk that we will remove some of the incentives that encourage innovation, thus holding it back?
Messrs Gans and Leigh: There are definitely dumb ways of attempting to achieve equality—ways that would potentially impede growth. As economists, we are no fans of putting up the tariff walls, reinstating rent controls, or giving Bill Gates and Warren Buffett a universal basic income. But there is plenty of smart solutions that are both efficient and equitable. Banning non-compete clauses in employment contracts. Using prizes to encourage unconventional innovators. Stamping out sexual harassment in the workplace. We also show that moving American tax rates to the levels in Canada and Europe would not reduce innovation. Taxation is the last thing that any innovator thinks about.
The Economist: Your book has a “Hollywood ending” feel, that we can have both innovation and equality—our cake and eat it too. How do you respond to the criticism that you are letting your optimism cloud your judgement; that the chances of this happening are nil—and we risk quashing innovation?
Messrs Gans and Leigh: Sometimes there is an equity-efficiency trade-off. Yet there are plenty of “sweet spot” policies that are efficient and equitable—especially once we recognise that uncertainty is inevitable and the key is to approach the problem by looking for ways to provide social insurance. While our overall message is one of optimism, we recognize that it will require more careful attention to policy than has been done in America these days. Our goal is to show what is possible.
The Economist: Many of your solutions seem sensible and have been floated before yet have not been implemented. What’s preventing them from being adopted and how do you overcome it?
Messrs Gans and Leigh: It is, of course, a complex issue as to why seemingly sensible and evidence-based policies are not implemented. However there is some movement on some of these things. For instance, we emphasise policies that will allow for “permissionless innovation”. Just recently, three senators in the US proposed the ACCESS Act that would allow entrants in social media networks to come in and be interoperable with networks such as Facebook. This is precisely one of the things we advocated for in the book. The fact that it is a bipartisan proposal suggests that sometimes you just have to wait until the time is right for good policies.