IP As Intellectual Laziness, Skewed Business Models

We have heard it said that IP causes people to “rest on their laurels.” What this means is that intellectual property causes entrepreneurial laziness in at least two ways. The first, and the one that is often mentioned in IP abolitionist circles is that there is less pressure for the original innovator to continue to innovate–IP legislation artificially generates profits above market rates, and there are fewer competitors willing to enter the market. The second way in which intellectual property fosters entrepreneurial laziness has to do with the business model that is required to produce such a good or service.

IP legislation also has a potentially devastating effect. Because in some heavily controlled areas–specifically medicine–it takes endless years of R&D and trials before a drug or medical device is approved, resources are therefore shifted to satisfy the demands of the state rather than the demands of the market. It has become almost unimaginable to even consider that a company (or even a small independent group of scientists and inventors) could develop, test and market drugs quickly; the norm is that things must take a decade.

There are two main consequences of IP-caused distortion of what could otherwise have been a traditional entrepreneurial plan. The first is that fewer and fewer companies can adopt the “fail fast” approach that is often seen in high tech startups. Instead of devoting time and money to building prototypes and openly testing on the market, even if only on a limited, private/restricted basis, the feasibility of a product, they must invest resources away from “fail fast” and into “succeed huge.” IP destroys, at least in some industries, the ability to have agile business models that attempt to quickly test what works and what doesn’t work. Instead, we see companies spending billions of dollars and taking a decade passing government tests. Big Pharma, thus, requires Big R&D and Big Litigation, which are required because of (prior) government interventions. As can be expected, the ones hurt the most are consumers, who often have to pay huge sums of money to get their hands on a few pills.

The second consequence, which is possibly as important as the first, is that IP has a chilling effect on the possibility of adopting incremental models. There are fewer incentives to make a product better, faster, cheaper, when such a product is given a monopoly. You don’t have to improve on it (the “rest on your laurels” I mentioned above) but neither can others. Imagine a car company that decided to stop innovating their own product one day, never to receive any modification in the future. How long would it take before it goes broke? Also imagine if nobody else could improve on the idea behind such a product. The market for new cars would cease to exist. Incremental models also benefit from not having to reinvent the wheel; personnel, knowledge, production lines, distribution, etc. are already in place for specific products. It takes a small amount of resources, especially if coupled with a “fail fast” business model, to improve on something that exists, rather than having to come up with something entirely new that needs IP protection.

In a society without IP legislation, inventors would either have to become entrepreneurial themselves (as a small individual operation), partner with an already established company to bring the product to market, or form a new company around the invention, perhaps by raising venture capital or other methods. Though the same happens today, there is a big key difference–monopoly protection rights, especially patents and copyright–distort the capital and production structure of goods and services that make it to market under intellectual property protection. Resources are diverted towards litigation and “Big R&D”–both of which are the inevitable result of corporatism and other state interventions. Normally, submarginal products on the market do not tend to last long. Moreover, submarginal business models, because of their prohibitive cost, do not tend to last long in the free market. Thanks to IP, however, they do–profits are received when losses should have been incurred. Economic inefficiency, and the perpetuation of wealth-destroying business models, are the norm, at least when IP is present.