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Dr. Harry Hillman Chartrand, PhD

Cultural Economist & Publisher

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h.h.chartrand@compilerpress.ca

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Launched  1998

 

 

Economics 3593

SURVEY OF INTELLECTUAL PROPERTY IN THE GLOBAL VILLAGE

2.0 Economics of Knowledge

Standard Model of Market Economics

As a Public Good

As Utility

As Technological Change

Ignorance, Uncertainty & Risk

Boulding's Evolutionary Economics & the

             Incommensurability of Knowledge

Institutionalism

Legal Nature of Property

Physiocrats

American Institutionalism

New Institutionalism

Forms of Knowledge

Codified

Tooled

Personal

The economics of knowledge has at least four facets: the Standard Model of Market Economics; ignorance, uncertainty & risk; the evolutionary economics of Kenneth Boulding; and, Institutionalism, old and new.  In this lecture I will examine all four as well as the forms of knowledge that are commodified, i.e., turned into property that can be bought and sold.

Standard Model of Market Economics

There are three facets to knowledge in the standard model of market economics: as a public good, as utility and as technological change.

As a Public Good

Today one hears much about the so-called ‘knowledge-based economy’.  Yet in the standard model such an economy is a contradiction in terms - an oxymoron.  Knowledge is a public good, a good for which a natural market does not and cannot exist.  A contrast with a private good illuminates the difference. 

A private good is excludable and rivalrous in consumption.  If one owns a car one has lock and key to exclude others from using it.  And when one drives the car no one else can drive it, that is, driving is rivalrous.  A gross example is an apple.  I buy it excluding you from that particular apple and you cannot eat it after I have - rivalrous.

A public good, on the other hand, is not excludable nor is it rivalrous in consumption.  Consider knowledge.  Once something is known (especially if it is published, a term deriving from the Latin meaning ‘to make public’) it is hard to exclude others from learning it and if another does it does not thereby reduce the knowledge available to you. 

The implications can be seen in a comparison of the average cost curve of firms in manufacturing-based and knowledge-based industries.  In the standard model based on manufacturing firms have a ‘U’ shaped average cost curve.  Due to the law of diminishing marginal product cost per unit initially declines, bottoms out and then rises.  In the knowledge-based industries the average cost curve is ‘L’ shaped.  Take the hypothetical example of Windows 8.  Let us assume that the initial program cost $250 million to develop.  How much does the second, third, fourth…  unit cost?  If one has a DVD burner it is the cost of a blank disc, say 99 cents!

How can you have a market if the good being sold can be easily appropriated and its appropriation does not reduce one’s inventory?  As will be seen below it is only through Law – contract and statutory – that a market and therefore a knowledge-based economy can exist.  And this is a market only for new knowledge created by statute, e.g., copyright, patent, registered industrial design and trademark, or, protected by secrecy.  It is therefore a market born of government.  Put another way, without government there can be no knowledge-based economy.

I say a market for ‘new’ knowledge because the vast majority of knowledge resides in the public domain where it is freely available to any and all.  Thus knowledge protected by intellectual property rights eventually falls into the public domain which is a virtual space where, as in Isaac Newton’s aphorism, we all “stand on the shoulders of giants”.  Put another way, what begins as a public good is converted by Law into private property bought and sold for a limited time before again becoming a public good entering the public domain to fertilize the imagination of generation onto generation.

As Utility

The economic concept of 'utility' was innovated by Jeremy Bentham (1748—1832) founder of the last great school of philosophy to emerge from the Western Enlightenment - Utilitarianism.

Unlike the other humanities & social sciences, economic epistemology or theory of knowledge, is rooted not in Platonic or Aristotelian theism but in Epicurean atheistic sensationalism.  As noted by Alfred Marshall (1842-1924) the most influential successor of Adam Smith (1723-1790) was not an economist but rather Jeremy Bentham (1748-1832), a radical reformer who formalized Utilitarianism as a comprehensive philosophy.

His economics, as translated by John Stuart  Mill from Bentham's Latin, is based on the atomic materialism of Epicurus (341-271 B.C.E.).  He acquired this view from the De Rerum Natura (On the Nature of Things) by the Roman Epicurean poet Lucretius (99-55 B.C.E.), whose work, unlike that of Epicurus, survived the fall of the Roman Empire and the censorial fires of the Church.

Like Epicurus, Bentham believed that physical sensation was the foundation of all knowledge.  Knowledge, including preconceptions such as ‘body,’ ‘person,’ ‘usefulness’, and ‘truth’, form in the material brain as the result of repeated sense-experience of similar objects.  Ideas and therefore all forms of knowledge are formed by analogy between or compounding such basic concepts (O’Keefe 2001). 

For Bentham sense experiences involved a unit measure of pleasure and pain called the ‘utile’ from which the philosophical school of thought known as ‘Utilitarianism’ emerged.  Utiles would eventually, according to Bentham, be subject to physical measurement and he proposed a ‘felicitous calculus’ of human happiness.  One corollary of the utile, however, is that customs, traditions and taste cease to be independent variables.  Compulsory standard education would have children taken at birth from their mothers and placed in state-operated crèches   Each child was born tabula rasa - blank.  Bentham believed socializing consumption would ensure everyone’s customs, traditions and taste would eventually become identical and therefore irrelevant. 

In simple terms, Bentham believed that human existence was simply the search for pleasure and the avoidance of pain.  This he expressed as 'pleasure and pain are the sovereign rulers of the State'.  Thus utilitarianism is radically materialistic at root.  In many ways, Bentham makes even the supposedly materialistic Marx look like a softy.  Marx at least admired John Lennon's working class hero.  Bentham, on the other hand, wanted to socialize not just the means of production but also of consumption.  For Bentham the Mao suit or 'GI' issue - one size fits all - was the style of the future.  It was only the terrors of the French Revolution that drew Bentham back from edge of perfect communism (Marshall 1920, 628-9).  For Marx, of course, the Revolution was the instrument of change.  In a sense Marx was the son that Bentham never had.

In the hands of Francis Ysidro Edgeworth (1845-1926) Bentham’s felicitous calculus of human happiness was married to Newtonian calculus of motion and reduced to geometric expression subject to mathematical proof in his Mathematical Psychics (Edgeworth 1881).  This geometry and its related calculus permitted erection of what became the Standard Model of Market Economics.  It is important to note that use of calculus defines the Standard Model as mechanical rather than biological in nature, i.e., the calculus of motion, in this case, of human happiness. 

As Technological Change

In 1962, economist Robert Solow published “Technical Progress, Capital Formation and Economic Growth” in the American Economic Review.  In it he presented what is known as the Solow Residual.  It begins with a symbolic equation for the production function: Y = f (K, L, T) which reads: national income (Y) is some function (f) of capital (K), labour (L) and technological change (T). 

Technological change in the Standard Model of Market Economics refers to the impact of new knowledge on the production function of a firm or nation.  The content and source of that knowledge is not a theoretical concern, e.g., from which knowledge domain; what matters is its mathematical impact on the production function. 

Over the last hundred years, depending on the study, something like 25% of growth in national income is measurably attributable to changes in the quantity and quality of capital and labour while 75% is the residual Solow attributed to technological change.  Yet we have no idea of why some things are invented and others not; and, why some things are successfully innovated and brought to market and other are not.  The Solow Residual is known in the profession as ‘the measure of our economic ignorance’.  It is why I became an economist.  In what follows I consider the manifold economic meanings of technology.

The effects of technological change in the orthodox model can be broken out into two dichotomous but complimentary categories: disembodied & embodied and endogenous & exogenous technological change.  And at the very edge of orthodoxy are two neologisms not yet integrated into the disciplinary lexicon: enabling and disruptive technological change.  I will examine each in turn.

Implicitly disembodied technological change dominated economic thought since the beginning of the discipline.  It refers to generalized improvements in methods and processes as well as enhancement of systemic or facilitating factors such as communications, energy, information and transportation networks.  Such change is disembodied in that it is assumed to spread out evenly across all existing plant and equipment in all industries and all sectors of the economy.  It is what Victorians called ‘Progress’.

Also implicitly the concept of embodied technological change traces back to Adam Smith’s treatment of invention as the result of the division and specialization of labour (1776).  It refers to new knowledge as a primary ingredient in new or improved capital goods.  The concept was refined and extended by Marx and Engels (1848) in the 19th and by Joseph Schumpeter in the 20th century with his concept of creative destruction (1942).  No attempt was made, however, to measure it until the 1950s (Kaldor 1957; Johansen 1959).  And it was not until 1962 that Solow introduced the term ‘embodied technological change’ into the economic lexicon, and by default, disembodied change was recognized (Solow May1962).

Formalization of embodied technological change arguably emerged out of ‘scientific’ research and development (R&D) during the Second World War followed by the post-war spread of organized industrial R&D.  This demonstrated that new scientific knowledge could be embodied in specific products and processes, e.g., the transistor in the transistor radio.  Conceptual development of embodied technological change has, however, “lost its momentum” (Romer 1996, 204).  Many theorists, according to Romer, have returned to disembodied technological change as the force locomotif of the economy meaning: “Technological change causes economic growth” (Romer 1996, 204).

While embodied/disembodied refers to form, endogenous and exogenous refers to the source of technological change.  The source of exogenous technological change is outside the economic process.  New knowledge emerges, for example, in response to the curiosity of inventors and pursuit of ‘knowledge-for-knowledge-sake’.  Exogenous change, with respect to a firm or nation, falls from heaven like manna (Scherer 1971, 347).

By contrast, endogenous technological change emerges from the economic process itself - in response to profit and loss.  For Marx and Engel, all technological change, including that emanating from the natural sciences, is endogenous.  Purity of purpose such as ‘knowledge-for-knowledge-sake’, like religion, was so much opium for the masses cloaking the inexorable teleological forces of capitalist economic development.  The term itself, however, was not introduced until 1966 (Lucas 1966) as was the related term ‘endogenous technical change’ (Shell 1966).

Endogenous change is evidenced by formal industrial research and development or R&D programs.  It therefore includes what are usually minor modifications and improvements – tinkering - to existing capital plant and products called ‘development’ (Rosenberg & Steinmueller 1988, 230).  In this way industry continues the late medieval craft tradition of experimentation.  R&D varies significantly between firms and industries.  At one extreme, a change may be significant for an individual firm but trivial to the economy as a whole.  On the other hand, ‘enabling technologies’ such as computers or biotechnology may radically transform both the growth path and the potential of an entire economy.  How to sum up the impact on the economy of endogenous activities of individual firms remains, however, problematic.

With respect to the Nation-State, endogenous and exogenous technological change has a different meaning.  They refer to whether the source is internal, i.e., produced by domestic private or public enterprise, or external to the nation, i.e., originating with foreign sources.

In Economics, two additional terms are slowly entering the lexicon migrating from business and technology literatures: disruptive/enabling technologies.  The term disruptive technology was, according to Adner & Zemsky (2005), introduced by Christensen in 1997.  In turn, the Adner & Zemsky article was the first and only one to include the term ‘disruptive technology’ in its title according to a JSTOR search of 173 economic journals published between the 1880s and 2008.  A disruptive technology is one that disrupts existing markets displacing earlier technologies, e.g., the automobile displacing the horse and buggy. 

On the other hand, the term ‘enabling technology’ has, according to a similar JSTOR search, not yet been the titled subject of any economics article.  An enabling technology is one that dramatically increases the capabilities of consumers and/or producers.  They are often characterized by rapid development of derivative or complimentary technologies, e.g., the IPod and complimentary goods such as docking stations.  Another example is convergence of telecommunication, the internet and software permitting creation of JSTOR itself that dramatically enhances the capabilities of scholarly researchers. 

It is important to note that a new technology may be both disruptive and enabling at the same time.  The internet or worldwide web is an example.  On the one hand it has enabled creation of ‘social media’ such a Facebook; on the other hand, it has been extremely disruptive of pre-existing business models in the entertainment industry.  Similarly an emerging enabling technology, 3D printing, threatens to upset traditional mass production manufacturing by enabling small firms to produce cost-efficient small runs.

 

Ignorance, Uncertainty & Risk

Ignorance is defined as the absence of knowledge and four economists have highlighted its role in Economics: Frank Knight,  John Maynard Keynes, Fredrick von Hayek & Paul Romer. 

Frank Knight (1882-1975) in his 1921 classic Risk Uncertainty and Profit distinguished between the insurable and uninsurable risk faced by the entrepreneur.  Insurable risks are those subject to actuarial calculation of probability and damage.  Uninsurable risks are those that cannot be subjected to such calculation.  They are a reflection of ignorance of future events.  For Knight the profits earned by the entrepreneur reflect his or her assumption of unisurable risk.

John Maynard Keynes in Chapter 12 of his classic 1936 The General Theory of Employment, Interest and Money highlights the difference between uncertainty defined as risk of an event occurring and ignorance about the future for which a risk calculation is simply not possible, e.g., the future cost of inputs.  Instead of trying to account for such long-run ignorance Keynes notes:

In practice we have tacitly agreed, as a rule, to fall back on what is, in truth, a convention.  The essence of this convention - though it does not, of course, work out quite so simply - lies in assuming that the existing state of affairs will continue indefinitely, except in so far as we have specific reasons to expect a change.  This does not mean that we really believe that the existing state of affairs will continue indefinitely.  We know from extensive experience that this is most unlikely.  The actual results of an investment over a long term of years very seldom agree with the initial expectation.  Nor can we rationalise our behaviour by arguing that to a man in a state of ignorance errors in either direction are equally probable, so that there remains a mean actuarial expectation based on equi-probabilities.  For it can easily be shown that the assumption of arithmetically equal probabilities based on a state of ignorance leads to absurdities.  We are assuming, in effect, that the existing market valuation, however arrived at, is uniquely correct in relation to our existing knowledge of the facts which will influence the yield of the investment, and that it will only change in proportion to changes in this knowledge; though, philosophically speaking, it cannot be uniquely correct, since our existing knowledge does not provide a sufficient basis for a calculated mathematical expectation.  In point of fact, all sorts of considerations enter into the market valuation which are in no way relevant to the prospective yield. (Keynes, 1936, 152)

In his 1979 Nobel Prize address, published in the American Economic Review in 1989, Fredrick von Hayek noted how Economics has attempted to mirror itself on the techniques of the natural and engineering sciences and how this has led the discipline into a mess.  He notes:

Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones.  While in the physical sciences it is generally assumed, probably with good reason, that any important factor which determines the observed events will itself be directly observable and measurable, in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process, for reasons which I shall explain later, will hardly ever be fully known or measurable.  And while in the physical sciences the investigator will be able to measure what, on the basis of a prima facie theory, he thinks important, in the social sciences often that is treated as important which happens to be accessible to measurement.  This is sometimes carried to the point where it is demanded that our theories must be formulated in such terms that they refer only to measurable magnitudes.

It can hardly be denied that such a demand quite arbitrarily limits the facts which are to be admitted as possible causes of the events which occur in the real world.  This view, which is often quite naively accepted as required by scientific procedure, has some rather paradoxical consequences.  We know, of course, with regard to the market and similar social structures, a great many facts which we cannot measure and on which indeed we have only some very imprecise and general information.  And because the effects of these facts in any particular instance cannot be confirmed by quantitative evidence, they are simply disregarded by those sworn to admit only what they regard as scientific evidence: they thereupon happily proceed on the fiction that the factors which they can measure are the only ones that are relevant.  (Hayek 1979, 3)

Out of the decades’ long debate over embodied vs. disembodied and endogenous vs. exogenous technological change, a new theory emerged in the 1980s called the New Growth Theory.  Initiated by Paul Romer (1986), it is explicitly endogenous and implicitly embodied.

Like other ‘new’ forms of economics such as the New Institutionalism (Coase 1992), New Economic History (North & Thomas 1970), New Economic Geography (Krugman 1983; Martin & Sunley 1996) and the New Economics of Science (Dasgupta & David 1994), New Growth Theory appears, at least to this observer, as an exercise in re-calibrating the Standard Model to include descriptive, empirical, institutional and historical evidence previously excluded because of its qualitative rather than quantitative nature. 

While welcomed, the professional urge remains to fabricate such new evidence into quantitative proxy indicators to be plugged into mathematical models.  Romer thus calls for more sophisticated mathematical modeling without expectation of testing because “these kinds of facts tend to be neglected in discussions that focus too narrowly on testing and rejecting models” (Romer 1994, 19-20).  So much for Positivism in econometrics!

Beyond admitting additional sources of evidence, new growth theory introduces the concept that technological change involves non-rival ‘ideas’ that can “be stored in a bit string” (Romer 1996, 204), implicitly referring to computer programs, a form of soft-tooled knowledge.  His concept, however, presents, to my mind, a confusion between information (measurable) and knowledge (immeasurable) and a failure to acknowledge the distinction between the short-run and long-run with respect to intellectual property, i.e., between knowledge residing in the private domain in the short-run but entering the public domain in the long-run.

With respect to information and knowledge, the ‘bit’ abstracts from content and fails to provide a homogenous unit measure of knowledge, or, as we will see below, what Kenneth Boulding called ‘the wit’ (Boulding 1966, 2).  With respect to intellectual property, in the short-run technical knowledge is rivalrous and excludable to the degree that copyrights, patents and other state-sponsored intellectual property rights provide protection.  In the long-run, however, all intellectual property rights expire and knowledge enters the public domain.  Given new technical knowledge is continually being copyrighted and patented, one faces an ever moving horizon between rivalrousness and non-rivalrousness, a horizon that can never be reached.  Or, put in terms of Lord Keynes’ famous aphorism: “In the long run we are all dead” (Keynes 1924).

Boulding’s Evolutionary Economics & the Incommensurability of Knowledge

Kenneth Boulding (1910-1993) was arguably one of the most fertile economic thinkers of the mid- to late 20th century.  While his early work in mainstream economics established his professional bona fides his later work expanded the field into what is called heterodox economics including cultural, evolutionary and grant economics.  In all cases, however, Boulding considers economics as exchange.  In some cases this is the exchange of money for goods and services in the market system.  In other cases it involves the exchange of money for philanthropic purposes, e.g., money given to the Red Cross.  In yet other cases it involves exchange as in a friend helping friend.  The last two he includes in what he calls the grant economy. 

In his Richard T. Ely Presidential Address to the American Economics Association in 1966 Boulding opened a new window onto the economics of knowledge.  It highlights, among other things, the essentially qualitative rather than quantitative nature of knowledge.  This extended insights in his 1955 lecture: The Limitations of Mathematics: An Epistemological Critique in which he distinguished economic questions to which mathematical methods were appropriate and those to which they were not.  He used the metaphor of the scalpel for the detailed questions in which mathematics was the right tool and the chainsaw for broadly grained qualitative issues.

In 1966 he noted that we tend to confuse the word ‘knowledge’ with ‘truth’ noting “We really have no convenient word to describe the content of the human mind without regard to the question as to whether this content corresponds to anything outside it.”  This internal content he characterized as an ‘image’.

I shall assume simply that knowledge, that is, images, exist; they can be observed or at least deduced through the instrument of language, combined with introspection; and that some images get us into more trouble than others; and that we tend to revise those images which get us into trouble… At its most sophisticated and orderly, this is the method of science.

As previously noted, Boulding drew a contrast between the unit measure in information theory – the bit and byte – and the lack of a corresponding unit for knowledge which he whimsically called ‘a wit’.  Among other things:

These difficulties may have led to a certain neglect of the commodity aspects of knowledge, even in economic theory itself.  One notices this in at least three areas of economic thought: in the theory of the market, in the theory of development, and in the theory of decision making, both public and private.

In the microeconomic theory of perfect competition perfect knowledge is assumed on the part of consumers and producers, i.e., of prices and quality.  This assumption can only be justified:

by supposing that the knowledge problem in perfect markets is taken care of by specialized arbitrageurs, who by devoting themselves full time to the problem of knowing what prices there are in different parts of the market and by taking advantage themselves of the price differentials thereby revealed, reduce these price differentials to so small a quantity that all the rest of the people in the market are justified in assuming that the price which they happen to observe at one point is characteristic of all transactions all over the market.  From a social point of view, the income of the arbitrageurs might be regarded as the cost of acquiring the knowledge which is necessary to operate the market, and the other people in the market are evidently willing to pay this rather than become arbitrageurs themselves.

Under imperfect competition, however, “the problem of knowing what are the sales or purchase functions becomes not only acute but almost insoluble, simply because in order to know a function we must have experience with a system beyond its present point.”  Put another way, imperfect competition involves a dynamic not a static system.  We need to know not just what the current situation is but also what it is becoming.

Similarly with respect to the theory of economic development we are dealing with the general problem of evolutionary change yet we are “still really more at home with equilibrium systems than we are with dynamic systems”.  In such systems Boulding hypothesizes two distinct processes.  The first he calls ‘printing’ by which:

a structure is able to reproduce itself by making a copy of itself out of the incoherent matter around it.  The gene evidently operates in this way; the mass production of commodities is largely three-dimensional printing; and even the transmission of a good deal of knowledge by rote learning in the educational process falls into this category.  Printing by itself, however, would never organize an evolutionary or developmental process.  It would merely fill the whole universe with copies of an initial structure. 

The second process he calls “organizing”.  This is the process by which coded information, e.g., that contained in the gene organizes a phenotype such as a man or a blueprint that directs construction of a building or an idea that creates an organization or an image of the future that guides an individual’s life.  This process Boulding suggests involves ‘learning’ both formal and informal.  He notes that Adam Smith

… saw very clearly that the learning process was the key to development, for if we examine his causes of the increase in the productive powers of labor, which is what we mean by economic development, we see that they all involve the knowledge process.  The first of these, the development of skill and dexterity through the division of labor, is a learning process mainly in the lower nervous system.  The second, the gains due to constant application at a single task and the elimination of “sauntering,” involve the problem of forgetting and re-learning as we take up tasks intermittently; and the third, and by far the most important, is the development of machines (frozen knowledge, as I would call them) as a result of the work not only of specialists in the production of such things, but also as the result of the work of “philosophers” who augment knowledge in general.  Thus even before 1776 Adam Smith had perceived the enormous importance of what today we would call research and development in the processes by which everybody gets richer.

With respect to decision making in the private sector - households and businesses - and in government; Boulding notes that images of the future are derived from information inputs of the past: “That is, we have to think of our images of the future as essentially learned out of our inputs from the past, and the nature of this learning process is therefore of overwhelming importance”.  He also observed that Thorstein Veblen convincingly argued that if we want to have a dynamic economics, we cannot take preferences for granted but rather regard them as “learned” but how we learn our preferences remains mysterious.  In this regard Boulding observes that, knowledge about a system changes the system itself which he characterizes as a generalized Heisenberg Uncertainty Principle which is particularly troublesome in the social sciences.  This means that while knowledge may be attainable it is not sufficient to simply acquire knowledge about a static system but rather of a whole dynamic process in which acquisition of knowledge is part of the process.

While Boulding distinguished between information that is measurable using bits & bytes from immeasurable knowledge, philosophers of science Michael Polanyi and Thomas Kuhn went further in highlighting the incommensurability of knowledge, i.e., the non-comparability of knowledge in different fields of thought.  Polanyi, for example, in 1961 highlighted the incommensurability of scientific knowledge and belief, a.k.a., religion.  The first is derived from experience while the second is based on dogma without the requirement of proof, i,e., faith or ideology.  This distinction is raised in the OED where it is noted that a group of scholars proposes that the only proper object of knowing is a fact or facts derived by reason (OED Signification 2003) in contrast with ‘to believe’ with its sense of emotional rather than intellectual certainty (OED, know, v, III,10a).  Thomas Kuhn in his 1962 The Structure of Scientific Revolutions uses the concept of incommensurability to distinguish between knowledge gained in different scientific disiciplines and sub-disciplines.  Thus an organic chemist in the office next door to a physical chemist cannot communicate because the evolution of their parent science has created such a distance between the paradigm used in each sub-discipline.  Thus there may be only one hundred people in the world who truly understand each other (are peers) within a given research front.  Price calls this 'the invisible college'.

 

Institutionalism

The relationship between economics and property rights begins at the very beginning of modern economics with the pre-French Revolution school called the Physiocrats.  It was continued by the school of American Institutionalism especially in the work of J. R. Commons and then by what is called the New Institutionalism.  Before examining this relationship it is first necessary to define the legal nature of property

Legal Nature of Property

Property is the right to the possession, use, or disposal of a thing.  This implies ownership or ‘proprietorship’.  In feudal times it referred to a piece of land under one owner, i.e., a landed estate.  Such estates were initially associated with a Title such as the Duchy of Cornwall.  With Title came Property.  Title was granted by the Sovereign and consisted of a bundle of rights & obligations, e.g., fealty, which was often qualified by the Sovereign.  Some could be inherited; some could not; some rights were included, some were not.  All Property and Persons, however, were ultimately subject to the Sovereign.

Under Common Law, all Property (and, in constitutional monarchies, all Persons) remain ultimately subject to the Sovereign whether Crown or State, a.k.a., the ‘People’.  Sovereignty is the supreme controlling power ultimately exercised through a monopoly of coercive force.  The territory over which Sovereignty is asserted is established by continuing occupancy and/or by conquest.

Today, Title to Property usually takes the form of a document, deed or certificate establishing the legal right to possession.  The coercive power of the State may be invoked to protect and defend it.  There are three contemporary forms.  There is immovable or ‘real’ Property such as land, buildings and fixtures which together with moveable Property or ‘chattel’ (derived from the Anglo-Saxon for cattle) constitute tangible Property.  Then there is intangible Property such as business ‘good will’ and intellectual property such as copyrights, patents, registered industrial designs and trademarks.  Each of these rights & obligations are granted by and subject to the pleasure of the Sovereign whether Crown or State.  In Law each consists of different bundles of rights & obligations, e.g., the term of a patent vs. copyright.

With respect to ‘real’ Property there are two principal forms of Title.  First, allodial Title refers to absolute ownership without service or acknowledgement of or to any superior.  This was the practice among the early Teutonic peoples before feudalism.  It is important to note the political and economic as well as legal implications of such myth.  For example, leading up to the English Civil War of the 1640s Parliament needed an argument to counter the ‘Divine Right of Kings’ claimed by the Tudors and the Stuarts.  They found it in Anglo-Saxon Myth.  Among the ancient Anglo-Saxons the chief was chosen by members of the tribe based on throneworthiness, i.e., the candidate who could provide the most loot, pillage, plunder and rape.  Ancient Anglo-Saxon kings were thus invested with authority by the people and hence Parliament is supreme (MacDougall 1982).  Allodial ownership is, however, virtually unknown in Common Law countries because ultimately all Property is subject to the Sovereign – Crown or State.  In this sense there is no such thing as absolute private property. 

Second, fee simple or ‘freehold’ is the most common form of Title and the most complete short of allodial.  It should be noted that the ‘fee’ refers not to a payment but to the estate or Property itself as in the feudal ‘fief’.  Fee simple is, however, subject to four basic government powers - taxation, eminent domain, police and escheat (derived from the feudal practice of an estate returning to a superior Lord on the death of an inferior without heir).  In addition, fee simple can be limited by encumbrances or conditions.  These may include limitations on exclusive possession, exclusive use and enclosure, acquisition, conveyance, easement, mortgage and partition.  In addition it may or may not include water rights, mineral rights, timber rights, farming rights, grazing rights, hunting rights, air rights, development rights and appearance rights.

Proprietors – allodial or fee simple – may, subject to limitations in their Title, lease, let and/or rent their real Property   In the Civil Code tradition the legal right to use and derive profit or benefit from Property belonging to another person (so long as it is not damaged) is called usufruct from the Latin meaning ‘use of the fruit’, not ownership of the tree.  In Common Law, one might call it ‘tenant title’.  It does not constitute legal Title but does entitle the holder to use the Property and to have that right enforced by the State against the legal Titleholder and others.

Finally, there is occupancy or possession-based Title.  In effect, this involves ‘squatter’s rights’.  It does not represent legal Title.  Nonetheless, if possession by occupancy is not disputed it may, in time, become legal Title.  Having established the legal definition of property I now turn to the economics of property.

There has, however, been a lack of interest in common or public property in Anglosphere legal evolution.  In effect Common Law has been dominated by questions of private not public property (C. Rose 2003).  This includes intellectual property rights which has required introduction of concepts such as the public domain, national patrimony and cultural property from the Civil Code drawing, in turn, from Roman law.   Thus there are five categories of public property under Roman law: res nullius, res communes, res publicae, res universatitis and res divini juris.  To begin, the Latin word res means ‘thing’.  Res nullius refers to things that are unowned or have simply not yet been appropriated by anyone such as an unexplored wilderness.  Res communes refers to things that are open to all by their nature, such as oceans and the fish in them or what under Common Law is called ‘the commons’.  Res publicae refers to things that are publicly owned and made open to the public by law.  Res universitatis refers to things that are owned by a body corporate, i.e., within the group such things may be shared but not necessarily outside the group.  Finally, res divini juris (divine jurisdiction) refers to things ‘unownable’ because of their divine or sacred status (Kneen 2004).

The Physiocrats

The pre-revolutionary French Physiocrats were contemporaries of Adam Smith.  They gave us such terms as ‘economist’ which initially meant ‘manager of the household’ as well as laissez faire (let them make what they want) and laissez passer (let workers work where they want).

Behind the Gallic façade of laissez faire there were deeper policy implications not realized because of the French Revolution.  First, unlike classical economists such as Smith and Ricardo, the Physiocrats accepted government as an active and productive agent in the economy.  For them markets became self-regulating only after laws were carefully designed by government to direct self-interest towards attainment of national objectives (Samuels 1962, 159).

The nature of Physiocratic public intervention is radically different from Marxist ownership of the means of production and Keynesian management of aggregate demand.  Accepting that private property and self-interest were the drivers of economic growth and development, the Physiocrats reached beneath the surface of the laissez faire, laissez passer marketplace.  They reached down to the legal foundations of capitalism (Commons 1924) to manipulate the nature of property rights themselves.  For the Physiocrats, “the public interest is manifest in the continuing modification or reconstitution of the bundle of rights that comprise private property at any given time” (Samuels 1962, 161).

In effect, the Physiocrats wanted to load the dice to raise the commanding heights of the national economy.  They wanted to consciously manipulate capitalist self-interest – accumulation of marketable property – to foster and promote the economic growth and development of the nation.  The Physiocrats thus viewed property rights as instruments of economic policy.  They also saw them as providing the foundation of the economy itself defining what is bought and sold, how and where.  Accordingly, the Physiocrats:

implicitly recognize that the basic economic institutions (the organization of economy) are legal in character; that law is an instrument for the attainment of economic objectives and that economy is an object of legal control (Samuels 1962, 162).

In summary, the Physiocratic policy paradigm (1961) is made up of an objective, strategy, tactics and logistics including:

(a) the objective being the competitiveness of the nation, absolutely and relatively, to rival states;

(b) the strategic choice of a core sector which contributes most to attainment of that objective;

(c) development of tactical instruments in the form of property rights and manipulation of the legal structure to direct individual and collective action in favour of the core sector; and,

(d) logistical deployment of these instruments into a free-wheeling, private property, laissez faire, laissez passer marketplace.

As we will see given the degrees of freedom under national treatment of intellectual property right, this Physiocratic policy paradigm offers a succinct national competitiveness strategy for a global knowledge-based economy.  It begins with the strategic choice of knowledge then tactical development of an IPR regime that directs individual and collective action to favour development of the national knowledge-base and finally logistical deployment of the resulting legal regime into a laissez faire, laissez passer marketplace.  This policy paradigm accommodates:

(i) coherent development of a national IPR regime rather than the piecemeal process that has characterized copyright and patent reform in most Nation-States over the last twenty years; and,

(ii) the institution-building and networking required by a National Innovation System. 

American Institutionalism

I am what Mark Blaug calls in Economic Theory in Retrospect, one of the “few economists today who would consider themselves disciples of Veblen, Commons and Mitchell’ that is of American Institutionalism, the dominant school of economics in North America until the 1960s.  Blaug calls the school “that greatest of all efforts to persuade economists to base their theories not on analogies from mechanics, but on analogies from biology and jurisprudence”.  In effect American Institutionalism asserts that constrained maximizing behaviour of the consumer and producer is subject to the evolving definition of property under the Law.

John R. Commons (1924) observed in his classic Legal Foundations of Capitalism that the history of Property is its ever increasing intangibility.  Under English law this process began with ‘good will’ in a 1620 court case Jollyfe v. Brode.  Good will is the largest asset on the balance sheet of most firms.  It refers to the firm as a ‘going concern’ meaning customers coming back again and again.  Good will is intangible yet is now Property that is bought and sold.  The process continued Commons argues with the emergence of copyright and patents as business assets.

In this sense, Property is not so much the thing in-and-of-itself but rather an evolving set of rights & obligations associated with it, e.g., a warranty.  Thus Property today includes intangibles like artistic & literary works, inventions, futures options, equity shares, software and investment certificates in land and buildings, e.g., ‘CDOs’ or Collateralized Debt Obligations. Such intangible Property is arguably the legal foundation of the knowledge-based economy (Chartrand 2007).

New Institutionalism

New Institutionalism emerged in the 1960s in response to the problems presented to the Standard Model by externalities, i.e., costs and benefits external to market price.  The founding father was Harold Demsetz with his 1967 American Economic Review article “Towards a Theory of Property Rights”.  This approach was formalized by Ronald Coase in his 1998 AER article "The New Institutional Economics".  This includes, of course, the famous ‘Coase Theorem’ that argues if property rights exist and transaction costs are low then private transactions can efficiently reduce externalities.

This school of thought argues externalities result from a lack of property rights, i.e., arrangements that govern ownership, use and disposal of factors of production and consumer goods and services.  It has been extended to natural resource commons like the oceans and atmosphere, e.g., the Law of the Seas and Kyoto Conventions, granting Nation States (and through them their corporate citizens) ownership of associated externalities so that self-interest will ensure appropriate resource management. 

As we will see this argument has been extended to the encouragement of new knowledge through intellectual property rights that, in effect, privatize new knowledge.  The economic rationale is that given the public goods nature of knowledge, a producer cannot capture revenues to cover costs, let alone earn profit, in the absence of such rights.  The resulting monopoly, e.g., copyright and patents, are justified only by full public disclosure of the new knowledge, e.g., through full patent application disclosure or publication and eventual absorption into the public domain.  Society benefits because expansion of the public domain contributes to economic growth by enriching the knowledge base of everyone who wants to know.

Forms of Knowledge

Form, according to Francis Bacon, is “the real or objective conditions on which a sensible quality or body depends for its existence” (OED, form, n, 4 c).  There are three material forms or matrixes into which knowledge is fixed.  These include:

Codified with meaning fixed in matter/energy;

Tooled with function fixed in matter/energy; and,

Personal with thought, memory and reflexes fixed in neurons and the reflexes of nerves and muscles making up the flesh and blood Natural Person.

Codified Knowledge

Codified knowledge is fixed in an extra-somatic (Sagan 1977), i.e., out-of-body, matrix as meaning.  Sender and receiver must share the code if the message is to convey meaning from one human mind to another.  Furthermore, the communications media into which codified knowledge is fixed generally has no function other than to communicate meaning, i.e., the matrix is non-utilitarian.  For example, a book may be a good read but makes a poor door jam, or similarly, a CD may yield beautiful music but serves as a second-rate coaster for a coffee cup.

Tooled Knowledge

Tooled knowledge, on the other hand, is also fixed in an extra-somatic matrix but as function.  Unlike a work of art that is appreciated for what it is, a device or process is valued for what it can do, i.e., the matrix into which knowledge is fixed has utilitarian function. 

Tooled knowledge takes two forms – hard and soft.  Hard tooled knowledge is the physical instrument or process that manipulates matter/energy.  As a scientific instrument tooled knowledge extends the human reach and grasp far beyond the mesoscopic level of daily life to the micro- and macroscopic worlds of electrons, quarks, galaxies, the genomic blueprint of life, et al.  To see and manipulate matter/energy in such unseen, unreachable spaces and places our tools must go where no human can.  They generally report back in numbers (digital) converted into graphics (analogue) to be red by the human eye.  Modern scientific observation thus involves a cyborg-like relationship between a Natural Person and an instrument.  This constitutes ‘Instrumental Realism’ (Idhe 1991).  It provides what Galileo called ‘artificial revelation’ (Price 1984).

Soft tooled knowledge, on the other hand, refers to standards, e.g., 110 vs. 220 volt, as well as programming software, operating instructions and ‘manual’ techniques to optimize performance.  In effect, tooled knowledge is the physical technology by which humanity enframes and enables Nature to serve its purpose.

Personal Knowledge

Personal knowledge is fixed in a Natural Person as neuronal bundles of memory and reflexes of nerve and muscle, e.g., of the athlete, brain surgeon, carpenter, dancer, sculptor or technician.  In this case, the matrix is a Natural Person.  Some personal knowledge can be codified; some tooled; but some inevitably remains ‘tacit’, i.e. inexpressible yet sometimes visible in performance (Polanyi Oct 1962).  Ultimately, however, all knowledge is personal (Polanyi 1962).  Without a Natural Person to decode a work or push the right button codified and tooled knowledge remain sterile artefacts without meaning or function.  And, of course, books, computers and corporations can’t ‘know’ - only the Natural Person.

As will subsequently be demonstrated, with respect to Law, codified knowledge is protected by copyright, registered industrial design and trademark.  As cultural property, codified knowledge is protected as original literary and artistic works including monuments and antiquities.  Tooled knowledge is protected by patent and as cultural property in the form of historically important artefacts such as scientific instruments, machines, tools and other physical artefacts.  Personal knowledge is protected as the know-how of a Natural or, by legal fiction, a Legal Person under Common Law.  With respect to CPRs, personal knowledge is recognized in ‘Living Treasures’ in many Asian nations and under the 2005 UNESCO Convention on Intangible Cultural Property (Chartrand 2009).

Traditional and intangible cultural property together with Living Treasurers constitutes a Nation’s ‘patrimony’ to which some contemporary work and workers are added with the test of Time.  These three forms of cultural property taken together with private intellectual property and the public domain constitute the national knowledge-base. 

With respect to all three forms of knowledge, according to Michael Polanyi, we ‘indwell’‘.  For example, with respect to personal knowledge the ultimate in tacit knowledge is the human body.  Everything we do in, and know of the world is through our bodies – seeing, hearing, touching, tasting, smelling.  The body, however, is normally transparent to the mind in its doing and knowing. 

Tacit knowing … appears as an act of indwelling by which we gain access to a new meaning.  When exercising a skill we literally dwell in the innumerable muscular acts which contribute to its purpose, a purpose which constitutes their joint meaning.  Therefore, since all understanding is tacit knowing, all understanding is achieved by indwelling.  (Polanyi Oct. 1962, 606)

With respect to tooled knowledge Polanyi uses the concept of displacement.  A characteristic of human being is displacement of sensation from point of contact to distant source.  Thus, in the use of a hand tool such as a hammer: “the impact that their handle makes on our hands and fingers is not felt in itself at the place where it happens, but as an impact of our instrument where it hits its object” (Polanyi Oct. 1962, 607).  This displacement allows humans to indwell in their tools and technology.  Similarly with respect to codified knowledge like a book or movie and especially computer games one’s sense of being is extended into an artificial realm in which we dwell for a time.

To 3.0 Intellectual Property Rights

 

 

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