Capitalisn’t: The Mickey Mouse Monopoly Club

Luigi: Last week, we discussed how the patent system works. Essentially, it’s a temporary monopoly designed to create incentives to innovate. The logic is very simple. A patent grants an inventor an exclusive right to produce. Being without any competitors for a while, an inventor can earn extra profits. These extra profits act as a reward to innovation and motivate companies to invest billions in R&D.

Kate: But the real question is, does the patent system, and our entire system of intellectual property, for that matter, accomplish these goals? There are some economists who say, not really, and a few who say that we should actually have no patent system at all.

Luigi: From the University of Chicago, I’m Luigi Zingales.

Kate: And from Georgetown University, I’m Kate Waldock. You’re listening to Capitalisn’t, a podcast about what’s working in capitalism today.

Luigi: And, more importantly, what isn’t.

Kate: On this episode, patents and our patent system. Is this a capital-is or a capitalisn’t?

Luigi: To really understand how our current system of intellectual property rights interacts with capitalism, we need to also understand copyright. So, first of all, what is copyright? It’s a form of intellectual property that grants the creator of an original work an exclusive legal right to determine whether and under what conditions this original work may be copied or used by others, usually for a limited period of time. When it comes to copyright, there is one person who is more powerful and influential than anybody else.

Kate: I think I have an idea of who this might be.

Luigi: Mickey Mouse, of course.

Kate: So, before we get into the story of Mickey Mouse, I think we owe a shout-out to one of our listeners, Francisco Higareda, who actually suggested that we do an episode on this topic. Thanks for the tip, Francisco.

I don’t know if you knew this, Luigi, Mickey Mouse came to be, in some sense, because of copyright law, but actually it was the failure of another character that Walt Disney had been working on. Unfortunately, he was working on this character under the auspices of Universal Studios and sort of ended up getting screwed out of some money, because he didn’t have the rights to this rabbit that he was putting time and energy into. So, he was like, “You know what? I’m going to create my own character. I’m going to get my own copyright, and I’m going to get all the royalties this time.” So that was the genesis of the idea for Mickey Mouse. And to this day, even though that was back in 1928, Disney still has a copyright on the Mickey Mouse universe.

Luigi: That is fascinating and shows how important these rights are in pushing people to create new characters. I think that we would be stuck with the rabbit if it wasn’t for copyright law, but the interesting fact is that this copyright law gives, generally, a time period under which you have these monopoly rights of your production. And this period has been increasing constantly since the birth of the republic. In fact, it’s interesting to know that the first copyright law was introduced by George Washington himself in 1790. And at the time, it only lasted for 14 years with an option to renew for another 14.

Kate: I think it’s also important to mention here that copyright law and intellectual property law overall are in the Constitution. It’s in Article 8, Section 1 that says Congress has the right and obligation to protect or create incentives for this sort of innovation, both in science and in art.

Luigi: And that’s the reason why they introduced it right away. But then they kept increasing the period. So, in 1831, and again in 1909, the period of monopoly was extended, eventually settling for 28 years with an option to renew for another 28. The copyright for Mickey Mouse, which was created under the 1909 law, was supposed to expire in 1984. Guess what? Shortly before its expiration in 1976, a new law was created, and the period of copyright was as long as the author’s life, plus 50 years for individual work and 75 years for all work for hire, so that the Mickey Mouse expiration extended to 2003. But shortly before it was about to expire, guess what happened?

Kate: OK. I guess it was extended.

Luigi: It was. And how long? It was extended for another 20 years, from ‘75 to ‘95. Now what is interesting is the Mickey Mouse copyright is set to expire in 2023. So, wait to see what is going to happen, because my bet is it’s going to be extended again.

Kate: I don’t know. I’m not sure if I would take that bet. I mean, first of all, the first set of laws that extended Disney’s copyright on Mickey Mouse until 2003, those laws were not really lobbied for by Disney. That was just part of an international harmonization effort to standardize copyright law across a bunch of countries. Because you can imagine that if one country has copyright laws that protect an inventor for 50 years, and then another country has them for only 10 years, then you might have people stealing different ideas and different ideas moving to different countries that have the better protections. And so it makes sense that these should be standardized internationally. Now, there’s the open question of whether you can actually protect international copyright, but the idea for harmonization makes sense. And so that was the impetus for the first law change. The second law change, I admit, that was fully lobbied for 1,000 percent by Disney. In fact, so much so that people often call that bill the Mickey Mouse Protection Act.

Luigi: And what is particularly obscene about that extension is that it was retroactive. There’s a discussion in economics about what is the optimal length of a patent or a copyright. On the one hand, you want to extend the length so that you create more incentives to innovate. On the other hand, you don’t want to extend this length too much, because it perpetuates a monopoly. The only reason why you might want to increase the length is because there are some incentive effects. Now, clearly this incentive effect cannot have any role for authors who are dead, like Walt Disney. So, the fact that the 1998 law extended the copyright by 20 years for Mickey Mouse was entirely designed to give more power and more money to Walt Disney. There was no incentive effect. It was purely a redistribution, and it is what I would like to call a Nottingham Sheriff Tax.

Kate: Can you explain that?

Luigi: Yes. That’s the opposite of Robin Hood. You know the Nottingham Sheriff and Robin Hood. Generally, you think about Robin Hood as redistributing from the rich to the poor. The Sheriff of Nottingham was actively redistributing from the poor to the rich. The copyright on Mickey Mouse is taxing the little kids who want a T-shirt and a balloon with Mickey Mouse on it. That balloon costs more because the only one who can produce that balloon is Walt Disney, and they will demand a fee for producing that balloon. So, think about copyright and patents as a tax on all of us. But the tax’s revenues don’t go to fund public services. They go partly to the shareholders of Disney, but partly to the managers of Disney. Michael Eisner, who was the CEO at the time, left the company with $400 million worth of stock.

Kate: Yeah. So, ironically, I am not terribly familiar with the Robin Hood story, and I think it’s because that’s a story that at one point, in the 1920s, was in the public domain. And then once Disney realized that they could turn all of these public-domain stories into cartoons and then get copyrights on those cartoons and take them out of the public domain, then Disney became the sole publisher of that sort of material. And so, I guess I’m vaguely aware of Robin Hood, but I’d forgotten about the Sheriff of Nottingham.

Luigi: So, you have not seen the Walt Disney movie Robin Hood?

Kate: I don’t think so.

Luigi: It’s this . . . It’s a very funny movie. But the point that you make is excellent, because it is true that on the one hand, Disney made a fortune by using public-domain stories. Most of the fabulous stories, from Pinocchio to Cinderella, from Snow White to Aladdin, were all stories in the public domain, and they use them without paying any copyright, but they don’t let other people do the same.

But the problem is not just Disney, in a sense. The Disney story is particularly outrageous. But I think that the problem is a more general problem. It is to what extent granting a monopoly really spurs innovation and to what extent it actually prevents innovation.

Kate: Just to recap, the issues with monopoly, once again, are that prices tend to be higher than under a pure competition, and fewer people are able to afford a good that they otherwise would have been able to afford if prices had been lower. So, there is this utility loss by these potential, or wannabe consumers, and that’s what economists call the deadweight loss associated with monopolies. It’s not just a transfer. It’s important to understand that this is a net loss for society. So, extending monopoly power either through patents or through copyright law for too long, that’s going to increase this distortion, this deadweight loss, and might only lead to minor benefits in terms of more incentives for innovation. So, ideally, the right duration for a patent or a copyright is going to be the perfect balance between the benefits you get from a boost in innovation, a boost in creativity, versus those losses, the deadweight losses associated with monopoly prices.

Luigi: There are some economists who think that patents should be abolished so that, in other words, that length should be zero. There is an entire book written by two economists, Boldrin and Levine, who argue very passionately about the abolition of all forms of intellectual monopolies.

Kate: Well, I don’t think that they’re anti-economic theory, but they do raise an important point, which is that there is another sort of hidden cost that we don’t think of. Let’s say you want to innovate on top of an innovation that’s already been made. So, let’s say there’s some piece of software. Software is actually a pretty bad example, because now a lot of software is open source. And so, the whole idea is that everyone can build on top of it. But let’s say there’s an important piece of software that a company has a patent on. If you want to innovate on top of that software, then you might have to pay royalty fees or licensing fees every time you use that software or sell any product associated with the original patent. And so, that might actually discourage follow-on innovation.

Luigi: But actually, you brought up an excellent point. I don’t think that software is a bad example. Software is a fantastic example, because, in a sense, the innovation brought by open source is giving up on monopoly rights, and it is done precisely because you want to build on the existing code. And if you had to contract for licensing every time you want to build on a piece of code, the cost would be enormous, and innovation in software would be much lower. And, in fact, people tell me that since the diffusion of open source, the speed of innovation in software has increased tremendously. So, in a sense, that is a strong argument for the abolition of intellectual monopolies, because open source has done that.

Kate: Yeah, so you bring up a good point, which is kind of a tough question to answer. What fundamentally spurs innovation? Is it the profit motive? Is it the desire for fame and glory in exchange for having invented something really cool? Or is it just intellectual curiosity? Is it benevolence on the part of people who are the natural inventor type? And this open question, I think, is actually really difficult for economists to answer, and yet it’s so crucial to understanding how to incentivize innovation.

Luigi: At the end of the day, it’s an empirical question. Do we see that, in the presence of patents, there is more R&D as there is more innovation, or do we not see that? What is kind of shocking, to me at least, is that the vast majority of empirical evidence seems to suggest that there is very little positive impact of patents, except maybe in the pharmaceutical sector.

Kate: Why do you think it is that people care so much about patenting in that particular industry?

Luigi: I think there are different theories. One is that it’s easier to define a patent in the biochemical world, in the sense that if I invent a new molecule, what I invented is really defined, and it’s not that easy for somebody to copy me. If I invent new software, for example, or I invent a new machine, people can find a way around the patent more easily. So, that’s one interpretation of the result. The second is, to be fair, the amount of money that needs to be paid to introduce a new drug, especially in the United States, is enormous. And very few companies will pay that cost without some monopoly rights ex post.

Kate: Yeah. I think another point is also that it’s relatively, maybe not easy, but it’s possible to measure your market and to measure how many potential consumers you have to get a sense of what the pricing of this drug should be before it’s invented. Whereas if you’re trying to invent flying cars, there’s so much more uncertainty involved, and it’s harder to project out those future earnings.

Luigi: In one study done by an MIT researcher, Heidi Williams, and a colleague of mine, Eric Budish, they actually look at the innovation in cancer drugs as a function of how easy it is to obtain patents. The ability to obtain a patent depends crucially on your ability to prove in experimental trials that there is an improvement. When it comes to terminally ill people, it’s much easier to see improvements in life expectancy than when it comes to people whose lives are much less at risk. And what they show is that there’s more innovation in drugs that are catered to people in a terminally ill phase than the rest.

But more importantly, they show that in drugs that have to do with blood cancer, leukemia and other forms, it’s much easier to have an intermediate way to see whether the drug works, which is whether it changes the composition of your blood. And they show that the progress on these drugs has been phenomenally larger in the last 20 or 30 years, vis-à-vis any type of other form of cancer. So, you can argue that we just got lucky with that particular disease, or you can argue that this is the benefit of patenting, that where you can patent and where it’s easier to patent, people invest more money in research, and the outcome is better.

Kate: At the same time, though, taking a step back from the pharmaceutical industry and looking at some other industries, such as defense and aerospace, in some sense the opposite conclusions have been found. So, there have been empirical studies, too many for me to really cite specifically, but there have been periods in time, particularly during war, when governments have intervened and said, “All right, we understand that you, company A, you have this patent on this aerospace technology, but we really need it right now, so we’re just going to force you to license it to us for free.”

And these studies have looked at these interventions on the part of the government and have found that, actually, after the patents are forcibly invalidated or nullified, this has actually led to an explosion of innovation in these areas. So, to be fair, I think, again, these are industry-specific, so aerospace and defense. I think it happened also with the US when it came to Xerox technology. But this is evidence in favor of the idea that intellectual property rights or patents or copyrights can actually discourage innovation, or follow-on innovation, because follow-on inventors can’t afford to pay those licensing fees.

Luigi: You’re absolutely right, Kate. And it’s not just in those industries. The most famous example, at least as far as I understand, is the transistor example and AT&T. AT&T invented transistors in the late ‘40s, early ‘50s. At the time, it was a highly regulated company. As a result of that regulation, it was forced by the US government to share its license with everybody. Very many people claim that the explosion of Silicon Valley and computers, et cetera, is a result of that sharing of that patent on a broader basis. There is no doubt that patents have that effect of reducing innovation after the fact, after they’ve been invented. Again, the question is when you sum up with the benefit on an ex ante basis, people do patent stuff because they expect a reward.

People go back to history and they see that, for example, Watt, when he invented his better steam engine, he was running out of money, and it was only the prospect of getting a patent that some other external financier came to his rescue and lent him money in order for him to continue and finalize the creation of the new steam engine. And otherwise, this would have taken much, much longer. So, I think that the debate is still unresolved. But there is another aspect that we need to discuss. So far, we have assumed that the optimal length of a patent is designed to trade off, in a socially optimal way, the costs and benefits. But do you really think that this is what goes on?

Kate: No, I don’t really think that that’s what goes on, you’ll be shocked to hear. I think it’s just difficult for the public to really keep up with innovations in the law, in particular innovations with the optimal timing of how long patents should be granted, because this is relatively difficult stuff. It’s hard for anyone to know what the optimal period of time is, and I think that what’s interesting is that around the 1998 law, the one that Disney had lobbied really hard for in order to get this 20-year extension on their copyright on Mickey Mouse, this law actually passed both the Senate and the House unanimously. There just wasn’t that much talk about it, and it sort of even languished a year before. It was really just Disney that was lobbying pretty hard for it. And they lobbied successfully, they were able to talk to the right people, and they got everyone to sign on for it. It wasn’t until after the law was passed that the public woke up, and they were like, “Wait, what just happened? That’s totally unfair. This is Disney just getting a handout.” And I think that it’s likely that that sort of dynamic will continue to persist, which is that companies can secretly lobby for things. Disney made a point of not releasing how much they were spending on the lobbying, not mentioning it in any of their financial reports or their public statements. And all of a sudden, the public might wake up, but at that point it’s too late.

Luigi: Yes. As Kate explained, this is public choice 101. On the one hand, we have a very concentrated interest, in one case, Disney, but in other cases, the pharmaceutical industry. On the other hand, there are very diffused beneficiaries of a shorter patent, like the consumers, the consumers of Disney products, or the consumers of every kind of drug. Not surprisingly, in the political arena, the concentrated interests tend to have the upper hand. And what they are going to do is they’re going to continuously extend the length of patent rights. Certainly this is what happened with copyright. We don’t see the same level of extension with patents, but this is an argument to say that we want no patents at all, because once we put them in place, it is very hard to resist the pressure to extend the period of time. The only defensible line is zero.

Kate: Yeah. You actually raise an interesting point, which is that there is a pretty big difference in the amount of time you get for a patent versus the amount of time you get for a copyright. If anything, I would expect those to be the opposite. We discussed on the last episode that a patent is 20 years. That 20 years is fixed, it’s pretty standardized across a lot of countries, and it’s virtually impossible to get an extension. Even if you do, it’s only going to be for a couple of years. Whereas in copyright law, originally, at least, the idea was that you could double your time by getting an extension, that was the norm. And now that they’ve done away with that, it’s still the norm for every time a powerful company is bumping up against its copyright on valuable assets, it just appeals to Congress, and then they just sign a new law that it extends it even further. So, why is it the case that now, in copyright law, it’s almost 100 years of protection that you get, whereas in patents it’s only 20?

Luigi: Because you know who writes for newspapers and who makes public opinion? They are people who generally benefit from the copyright laws, because they write books. And so, they are very much in favor of extending the copyright law, and they care less about patents.

Kate: Right. But there’s also people on the patent side that are pretty powerful. There’s the pharmaceutical industry, there’s big tech. I mean, there’s everybody. Even though big tech has its qualms with patenting, it’s not like there aren’t powerful interest groups that care about preserving patents.

Luigi: You’re absolutely right. If you look purely from a monetary point of view, I think that we have very strong groups in favor of copyrights or patents in both camps or in both fields. But I think that if we were to extend or try to extend the cost of drugs, you would have a general uproar, and this uproar would probably be led by a lot of intellectuals in the newspapers. You don’t see the same kind of uproar when it comes to extending copyright law, partly because the very people who should lead this revolt benefit from the copyright law.

Kate: Yeah. Part of me also feels like it has something to do with just the nature of the difference in the two forms of intellectual property. There’s the sense that if you’re a scientist and you happen upon a new molecule, and you turn that molecule into some important drug, yeah, you should get some protections on that drug. But I think the public would get angry if you had that protection for a century. Whereas if you are an artist, I think that there’s something about the spirit of being an artist that makes people feel like it’s more fair to get protections on art, because it’s a different spirit of innovation, and it’s something that really appeals to people’s sense of aesthetics. And there’s this idea that if I drew a picture, if I told an original story, then I should get that protection for my entire life.

Luigi: But actually, today, it’s much longer than your entire life. I wish you a long life, but I don’t think that you’ll live 95 years past the production of your thing. Unless you start producing at age five, I think it’s hard to imagine.

Kate: OK, fine. But the point is that I think that there’s something about the sense of fairness that has led to these differences as well.

Kate: OK, so let’s take this relatively extreme stance that these two economic theorists, Boldrin and Levine, take, which is that the whole intellectual property system, it’s not worth it. It doesn’t give us enough innovation. There’s too many potential costs. Do you actually think, Luigi, that we should just get rid of patents and copyrights altogether?

Luigi: If I were king for a day, what I would certainly do is eliminate patents in all the areas outside of pharmaceuticals and maybe chemistry. Because I’m an empiricist, we have no evidence that they are useful. We have plenty of evidence that they create frictions and we should get rid of them. Then, probably either we’ll put a very limited cap on the period of your copyright for intellectual work, or we’ll eliminate that altogether. I would keep in place the patent for pharmaceuticals, because I’m afraid that without it we would not get the same level of innovation that we have today, which has been crucial in extending our life expectancy. So, it’s not a minor contribution.

Kate: But their point is that we can have the government step in and fill that role. All of the expensive R&D that needs to take place in order for pharmaceutical advances to be made, the government can foot that bill, and then any additional changes can be done by the private sector. And then, once they come up with a new drug, that will just be available to everyone for much less than they currently are.

Luigi: It’s funny that you mention this, because it seems like a very socialistic attitude.

Kate: Absolutely.

Luigi: I do think that the government plays an important role through NIH to innovate and promote innovation. I don’t think it’s perfect. The private sector does create an important complement, so I wouldn’t want to rely 100 percent on the government to decide what to invest money and research in, and for what drugs. A mixed system like we have today, where there is part of the money coming from the government, part is coming from donations, like the Gates Foundation, and part is coming from profit motives, I think that’s probably a more balanced system than one in which the government does 100 percent of the effort.

Kate: Yeah, I agree. Even though I like to pretend sometimes that I’m a democratic socialist, I think that this is one of those areas in which too much government control can lead to inefficient outcomes. I’m just imagining a system in which there’s a president, or maybe even a dictator, who’s obsessed with the reputational value of curing cancer. And so, all of the government’s funds go into this one disease, and there’s incentives for scientists to fabricate results or publish the wrong thing so that the dictator can have a plaque that said that they cured cancer.

I mean, I’m worried about that sort of scenario. So, yeah, I agree. Even though I think that . . . I mean, it’s hard for me to say, but I think that as you mentioned, a lot of important research in pharmaceuticals comes out of nonprivate institutions, i.e. the government or foundations. I still think that it’s good for those three different groups to exist to put checks on one another.

All right, so let’s assume that partially because these intellectual property protections are in the Constitution, it is unfortunately going to be a little bit difficult to get rid of copyright protections altogether, to get rid of patents and the USPTO. So, assuming that it’s too much for us to change, and maybe there’s not the political will, what are the tweaks that need to be made to make the system better?

Luigi: The first one is what we’re doing in this podcast, to make people appreciate the cost of patents. I think that most people don’t realize that a Mickey Mouse copyright is a tax on people and a very expensive one. So, I think that by creating the awareness that patents have costs, you will create the political demand to shorten their length and potentially to actually change the patent system.

Kate: Yeah, I think that when it comes to patents, there are some specific things that we talked about on the last episode. People who review patents are only given, in some cases, a matter of hours to do this. It’s really hard and complicated to know whether that patent’s building on other technology. You have to do a lot of historical searches and then understand the technology. And so, we need to have the funding to give them the time to make the right decisions. We shouldn’t just rely ex post on the courts to figure everything out. And that means that maybe we should also change the funding structure of the patent and trademark office.

We shouldn’t just have them be deciding everything on their own and maybe subjecting themselves to these perverse incentives to grant too many patents, because that can lead to some of the practical issues that we’ve seen, like these patent trolls, which actually inhibit innovation. So, I think that there are some practical changes that need to take place on the patent side. On the copyright side, can we just amend the Constitution to say that we’ve reached the upper bound of how much you can be protected in terms of copyrights and just save all the lobbying, save all the money? Let’s stop this ridiculous charade of trying to push it back and make sure that it doesn’t happen again.

Luigi: I think that 95 years is too long. I would actually go back to 15, 20 years or something like that.

Kate: Yeah. Originally it was 14.

Luigi: Yeah. Why don’t you write a shorter term in the Constitution, because then it’s difficult to change? But your idea of being more picky in approving patents is very clever, because potentially it’s a way to go around the constitutional limits. So, you’re saying, “OK, we have a law that allows patents, but you need to be granted one. And we make it so difficult to grant any that de facto we have no patents.”

Kate: Boom. See, there you go. Who’s the one thinking like a lawyer now?

Luigi: Yes, like a perverse lawyer. But maybe all lawyers are perverse.

Kate: Wait, but in the name of consumer welfare, right?

Luigi: Absolutely. But, you know, the biggest tragedies in humankind have been made with good intentions.

Kate: That’s true. OK. So, capital-is, or capitalisn’t?

Luigi: I think this is capital-was.

Kate: Oh, snap.

Luigi: In a sense, I think historically, when it was very difficult to get the system started, probably patents did play a role to get the system started. And today, I think that the world has changed. There is so much money investing in innovation, and the competition is so intense, that maybe we don’t need those patents as much as we did in the past.

Kate: Yeah, I agree. I like your framing of capital-was. Certainly, we wouldn’t have wanted to do away with the Thomas Edisons of the past, but it’s hard to imagine that that same sort of model of invention still exists today. I think that what we do know is that there is a growing body of evidence that our current patent, as well as our copyright, system has overreached. It’s provided too many protections to incumbents or to people who already have monopoly power. So, if there’s any way to rein it in, that would be great, but we just need the political will.

Luigi: So, are you running for office, Kate?

Kate: On the anti-patent platform? I’m not sure that’s going to bring me very far.

Luigi: Actually, there was a party in Europe called the Pirate Party, and one of the key elements of the platform was the total abolition of patents and copyrights.

Kate: I’m not going to lie. There’s something very appealing to me about the idea of a Pirate Party.

Luigi: OK, Captain Kate, let’s launch the party.