Greenspan Addresses Intellectual Property Laws

April 4, 2003. Federal Reserve Board (FRB) Chairman Alan Greenspan gave a speech titled "Market Economies and Rule of Law". He spoke primarily about developing a legal regime for intellectual property that maximizes economic growth. He offered some insights into how to analyze the problem, and asked some rhetorical questions, but offered no specific policy recommendations.

He said that the "more general challenge is to develop a framework that fosters the growth of an economy increasingly dominated by conceptual products."

Greenspan spoke via satellite to a conference titled "2003 Financial Markets Conference -- Business Method Patents and Financial Services". See, conference agenda, with hyperlinks to some of the papers presented at the conference. The conference was hosted by the Federal Reserve Bank of Atlanta, the Center for Banking and Finance, and the University of North Carolina School of Law. The conference was held on April 3-5 in Sea Island, Georgia.

He began with the observation that "Market economies require a rule of law. A society without state protection of individual rights, especially the right to own property, would not build private long term assets, a key ingredient of a growing modern economy. Yet an excess of rules -- in the extreme case, central planning -- has also been shown to stifle initiative and produce economic stagnation."

Greenspan (at right) then identified the growing importance of intellectual property, which he usually referred to as "conceptual property". He said that "In recent decades, for example, the fraction of the total output of our economy that is essentially conceptual rather than physical has been rising. This trend has, of necessity, shifted the emphasis in asset valuation from physical property to intellectual property and to the legal rights that inhere in the latter. Though the shift may appear glacial, its impact on legal and economic risk is only beginning to be felt."

"Technological advance is continually altering the shape and nature of our economic processes and, in particular, is promoting the trend toward increasing conceptualization of U.S. GDP."

He next analyzed differences between physical and intellectual property. He said that "in the physical world, the usual situation is that each additional unit of output is more costly to produce than the previous one; that is, production, at least eventually, is characterized by increasing marginal cost. By contrast, in the conceptual world, much of production is characterized by constant, and perhaps even zero, marginal cost."

He continued, "For example, though the set up cost of creating an on-line encyclopedia may be enormous, the cost of reproduction and distribution may be near zero if the means of distribution is the Internet. The emergence of an electronic platform for the transmission of ideas at negligible marginal cost may therefore be an important factor explaining the recent increased conceptualization of the GDP."

He added that "conceptualization is irreversibly increasing the emphasis on the protection of intellectual, relative to physical, property rights. Before World War I, markets in this country were essentially uninhibited by government regulations, but they were supported by rights to property, which in those years meant largely physical property."

"Only in recent decades, as the economic product of the United States has become so predominantly conceptual, have issues related to the protection of intellectual property rights come to be seen as significant sources of legal and business uncertainty. Intellectual property is clearly more difficult to define and, hence, to protect. The physical property of one owner cannot occupy the same space as that of another. Ownership of physical property is capable of being defended by police, the militia, or private mercenaries. Ownership of ideas is far less easily protected."

"Indeed, the nature of intellectual property is importantly different from physical property. In particular, one individual's use of an idea does not make that idea unavailable to others for their own, simultaneous use. Furthermore, new ideas almost invariably build on old ideas in ways that are difficult or impossible to delineate", said Greenspan.

He also stated that "Of particular current relevance to our economy overall is the application of property right protection to information technology. A noticeable component of the surge in the trend growth of the economy in recent years arguably reflects the synergy of laser and fiber optic technologies in the 1960s and 1970s. This synergy has produced very little that is tangible in information technology. Yet the information flow that it facilitates has allowed the creation of vast amounts of wealth."

"The dramatic gains in information technology have markedly improved the ability of businesses to identify and address incipient economic imbalances before they inflict significant damage. These gains reflect new advances in both the physical and the conceptual realms. It is imperative to find the appropriate intellectual property regime for each."

Finally, Greenspan addressed how to develop an appropriate intellectual property rights regime. He said that "If our objective is to maximize economic growth, are we striking the right balance in our protection of intellectual property rights? Are the protections sufficiently broad to encourage innovation but not so broad as to shut down follow-on innovation? Are such protections so vague that they produce uncertainties that raise risk premiums and the cost of capital? How appropriate is our current system -- developed for a world in which physical assets predominated -- for an economy in which value increasingly is embodied in ideas rather than tangible capital?" However, he did not provide answers to his questions.

However, he did state that "If the form of protection afforded to intellectual property rights affects economic growth, it must do so by increasing the underlying pace of productivity growth. The bulk of this increase should show up as multifactor productivity, that is, the segment of labor productivity that reflects the impact of conceptualization -- ideas generally -- on economic growth and standards of living. Finding a way to isolate the effect of, say, the length of patents on overall economic growth poses a formidable challenge."