Basic Idea Economics

[note: I have been sitting on this post for a long time. I did take the opportunity to comment on software patents but still sat on it. Time to just let it go and take my beatings]

While traveling in Scotland a few years back, I had a sense of history like nowhere I’ve ever been before. It had a lot to do with the its mixture of medieval castles, grass, and sheep, dotted with a few little towns. It just had this feeling to it that many parts of life in Scotland had not changed for hundreds of years. For some reason this got me thinking about the evolution of what we think of capital and it’s new incarnation, intellectual capital. I also had the pleasure one of my many nights learning about single malt scotch to discuss this with an English industrialist. While I have may have glossed over many important details, I think my basic premise is sound. Capital is changing from buying shares in factories and other producers to buying ideas.

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I see it something like this. In feudal times, wealth was based on owning property. Property was the only capital worth anything. If you had property, the property supported agriculture, like crops and the sheep I saw every day. Agriculture produces produce, and the produce was split between the tenants and the owners. The owners sell their portion for income. As a landowner, the more land you owned the  more tenants you could have living on the that land. This led to more production and thus more product you kept for yourself. Grass grew, it was processed by animals, the animals are processed by humans and viola, produce, sales and income. There was one key idea, the production of goods in the traditional way producing the traditional results. The intellectual capital in this was minimal and traditional. I would guess that the very idea would have seemed strange to people of the time.

In the industrial age, things did change. Capital was used to own the means of production in the form of factories. While prestige may have still been associated with ownership of property, the real bang for your buck was in amassing enough capital to build a factory. The factory typically organized a combination of labor and machines into the specialization needed to mass produce a small variety of products. After the factory was built the task of the manufacturer is to try to preserve existing markets, tune the process and equipment where possible to reduce ongoing costs to maximize the investment. This is mostly because of the large expense in building the facility and training the workforce. In this era, the number of working ideas went up quite a lot, but was still somewhat small. You needed the starting idea of the factory, the skills needed to run the equipment, and then after that,  just like in the days of sheep, you would try to preserve your environment and get away with as few changes as possible because change was expensive. Intellectual capital was alive however. Patents got their start, mostly as a way to encourage the large investment in factories by protecting them from competition for awhile, a little monopoly.

The age we are in now, probably dating back to the 1950’s, has had another major shift. I don’t think many entrepreneurs think about building a factory and making it produce for 50 years. Ownership of production is still important of course, but capitalists now own many shares of many companies, all representing many different products, ideas, markets and companies. More and more companies are valued on the ideas and people they represent. The term intellectual capital has become widely used, if not widely understood.

As a person that got his start in the software field working on open source software, the traditional meaning of the term, patents on ideas enforceable by law, has always seemed pretty repugnant to me. The idea is to exercise control much the same way a factory would exercise control over it’s physical assets: don’t use my ideas without my permission. Times have changed. Raw ideas are cheap to get and cheap to copy, and the enforcement effort is rarely worth the expense. Many ideas are encoded into software but software is better served by copyright than patents. In software most of the actual bits of a program are the shared libraries, device drivers, hardware and operating systems of the underlying general computer system. There are absolutely innovative ideas in software, but these are built on the shoulders of other’s works in smaller and smaller increments. The real intellectual capital exists in the heads of people who hold, nurture and grow the ideas and is inherently not patentable.

As I wrote in my letter to the USPTO, I think rather than focus so much on the specifics of how to judge whether an idea represented in software is patentable, we should go back to the reasons the patent was created in the first place. It was to create incentive for investment. Many intelligent people will argue that today that investment is in intellectual capital and it should be protected in the same way as the machinery of a factory was protected in the past. I think the fact is that the patent was to allow for the investment in the machinery that was very expensive and deserved the short term monopoly to patent provided. Today however we are better off focusing on faster delivery of more competing ideas without restrictions. The rapid growth of the internet is a wonderful example of this approach in practice and no one can argue against its overall economic benefits.

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