Transatlantic Issue 3

ISSUE # 3 ONLINE

education & innovation

11/ 12

THE TRANSATLANTIC — EDUCATION AND INNOVATION

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the transatlantic team Editorial Board: Jakob Schaefer (University of Leipzig), Editor and Review Simon Fuchs (Toulouse School of Economics), Web Editor Leoni Linek (Humboldt University of Berlin), Editor and Review Felix Holler (Academy of Visual Arts Leipzig), Editorial Design Hans Martin Hermann (European Parliament: Political Assistant), Section Editor and Review Michelle Kalu (LSE), Marketing Director UK Thalia Dergham (Columbia University), Marketing Director US Peer-reviewers and proofreaders: Travis Andreas Baseler (Columbia University), Review Alan Paul Daboin (UCL), Proofreading Dr. Daniel F. Heuermann (Lecturer at University of Bayreuth), Review Yuh Yiing Loh (Oxford University), Review Danni Pi (Columbia University), Review

Copyright Š for articles belongs to the respective author. All views expressed herein are those of the authors and do not necessarily reflect the views of the editors or sponsors. All other work, published in the journal, is provided under the terms of Attribution-NonCommercial-ShareAlike 3.0 Unported Creative Commons License (http://creativecommons.org/ licenses/by-nc-sa/3.0/deed.en). The Transatlantic Journal waives the condition of attribution. All correspondence or complaints should be addressed to the editors: The Transatlantic Journal LSE Philosophy Society c/o LSE Students’ Union East Building Houghton Street London WC2A 2AE United Kingdom The Transatlantic is an academic journal adopting an interdisciplinary approach to span the gulf between Economics and Philosophy. Due to an academic void in the field of Philosophy and Economics, particularly felt by undergraduates interested in this area, students on both sides of the Atlantic decided in 2009 to collaboratively produce and publish a half-annually on the intersection of the two disciplines. The project is open to everyone and hopes to serve as a global forum for those with an interest in the field. It is in this spirit that students from London, New York, Shanghai, Toronto, Oxford, Cambridge, Edinburgh and many other places are currently working together to establish this new platform for debate.

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editorial Education and Innovation - the topic of this third and last issue of The Transatlantic – is relevant for the development of the project itself. Over the past three years since the inception of The Transatlantic we have certainly learned a lot and hopefully brought something novel to you: a fresh feel, a modern design, perhaps even some new thoughts. Nevertheless, the time for us has come to move on and start something new.

With limited time at our own disposal and the desire to transform the journal into a long-lasting, democratic project, we hoped to pass on the torch to a next generation of staff members. Unfortunately, however, we have not been able to find new editors who have the enthusiasm and spare time necessary to manage the journal. As a consequence there will no longer be a biannual publication of The Transatlantic Journal. Nevertheless, the website will stay intact in order to give others the opportunity to publish on the topic of Philosophy and Economics from a student perspective.

er Intellectual Property regulations” (p. 18) Paolo Crosetto argues to the effect that such rights are detrimental both from an intellectual and an economic point of view.

Ultimately, Michael Doyle has written a piece focused on education. He is concerned with the question of how the change in minimum leaving age for schools changes the labour market. In order to find conclusive results he has applied the Difference-in-Differences method to data from different states in the US. You can find his conclusions in the article “The impact of increasing minimum school leaving age on the labour market” on p. 12.

This third issue will not be available in print but online only. Please visit www.thetransatlantic. org to access the issue, find out more about the future of The Transatlantic and have a look at past issues.

At this point we would like to thank all our readers, authors and contributors for their interest and dedication to the project. Especially our contributors have made an immense effort to deliver high-quality work and enable this project.

The journal has been run on an entirely voluntary basis; the funds raised were dedicated solely to the production of hard copies, which were distributed at campuses on both sides of the Atlantic, with the aim of making the publication as accessible as possible. We are grateful to all members of staff for their dedication and enthusiasm – and to all readers for their keen interest!

This perspective is also what we have tried to establish in this last issue of The Transatlantic. It is a very short issue as we had to reject many submissions either because they were off-topic or on grounds of quality. Yet, we proudly present those articles to you, which live up to the standards we have set for the journal. The first two articles are on the controversial notion of intellectual property rights. We present you with two diametrically opposed positions: Marvin Backes contends in his “Intellectual Property Rights: Innovation and Social Welfare” (p. 6) that intellectual property rights are necessary to ensure incentives for innovation and promote social welfare. Contrary to that, in a guest article entitled “The case for weak-

We hope to see or hear from you again in the future!

The Editors

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content

3 the transatlantic team 4 editorial 6 intellectual property rights: innovation and social welfare 12 the impact of increasing minimum school leaving age on the labour market 18 the case for weaker intellectual property regulations

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intellectual property rights: innovation and social welfare

Recently, several arguments have been raised as to the positive externalities that would result from the absence of intellectual property rights. However, these arguments are problematic in the light of the incentive structure of rational inventors. In defence of intellectual property rights as guarantor of innovation and social welfare.

By Marvin Backes 6

Intellectual Propert y Rights: Innovation and Social Welfare

The purpose of intellectual propert y rights (IPR) is, and always has been, the encouragement of innovation. The products of innovative ideas and the related efforts of researchers, inventors, and visionaries alike have brought about revolutionary transformations in the fields of medicine, engineering, technology, and essentially all other aspects of human life.

The social benefits that have resulted from such advancements ought to be recognized as immeasurable in value to human society at large. To foster the continuation of innovative activities, the United States and other countries have created a legal framework that provides innovators with the exclusive right to the fruits of their labor. Surprisingly, intellectual property rights have become subject to increasing criticism and opposition by economists, lawyers, and philosophers.

Besides ideological disagreements regarding the extent to which the government is justified in controlling economic activity, it is often argued that the absence or loosening of IPR protection would bring about positive externalities which would benefit society as a whole (Lessig 2005).

Mark A. Lemley, a prominent voice among the critics of today’s intellectual property rights discussion argues that ‘real’ property and intellectual property are inherently different and require unlike treatment before the law. Lemley suggests that the protection of ‘real’ property is necessary in its prevention of negative externalities resulting from its shared use, while in the case of intellectual property negative externalities from shared use are non-existing (Lemley 2005). The logic underlying this reasoning is that the value of ‘real’ property (e.g. land) diminishes under shared use, while the value of intellectual property (e.g. an idea) is not inherently affected by the amount of people that have access to it. However, Lemely seemingly ignores the exchange value, or economic value, of intellectual property. The value diminishing effects resulting from the shared use of intellectual property becomes apparent once foregone profits are considered. Given the intangible nature of intellectual property, it is not the abstract entity of the idea itself that diminishes in value, but instead the potential value it could create, in other words, its economic or exchange value.² The fact that intellectual property, like ‘real’ property, holds a certain economic value demands the equal treatment of the two types of property before the law.

This paper will examine the justification for equal treatment of ‘real’¹ property and intellectual property; it will further emphasize the necessity of international property rights for the creation of future innovation, and outline the chain of dependency that links the positive externalities prophesied by critics back to the presence of intellectual property protection. Finally, the paper will present the social benefits created by IPR in determining long-term economic growth.

2, Encouraging Innovation The justification and necessity for IPR protection can be derived from economic incentives that generally motivate rational economic agents to participate in the market economy: Any innovative idea requires research and development (R&D) before it can be brought to the market and distributed - this process is often associated with significant fixed costs, which need to be recovered by the inventor. In order for an invention or innovation to be economically feasible it needs to create a profit. In the absence of IPR protection nothing would hinder another

1, Real Property and Intellectual Property Let us first consider the reason for which intellectual property and ‘real’ property are identical in an economic sense, and why this demands equal treatment before the law.

When Locke published the Second Treatise of Government (1690) his treatment of property was primarily focused on the inherent use value of land. However, Locke was aware of the general shift in property evaluation from use- to exchange value that arose with the development of a monetary system (Locke 2010). Evaluating property based on its potential yield in the market lies at the heart of capitalism. Thus, what property rights protect in the modern capitalist system is the owners’ claim to the exchange value of their property. The growth in research and development (R&D) intensive sectors, modern means of production, and economies of scale have in many cases moved the innovative idea to the top of the value creation chain.

¹ The term ‘real’ property referring to tangible property has been adopted from Mark A. Lemley’s use of it in Property, Intellectual Property, and Free Riding (2005) for its conceptual clarity. ² To illustrate this point, let us briefly consider the common example of a piece of music. If a piece of music is shared among people, the piece itself does not physically decrease in value, for unlike ‘real’ property it is not being used up.

However, the economic value of the piece decreases as a result of the sharing process since less people will be inclined to purchase the piece. The economically relevant demand decreases.

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THE TRANSATLANTIC — EDUCATION AND INNOVATION

1877: Patent Office on fire

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Intellectual Propert y Rights: Innovation and Social Welfare

party from copying or imitating an inventor’s product and thereby benefiting from the initial research. Ceteris paribus the party copying the inventor’s product would be able to offer their product at a lower price since they are not subjected to the pressure of recovering the initial R&D costs – their fixed costs are significantly lower. The rational consumer would buy the product at the lowest price. Thus, in the absence of IPR the incentive for invention and innovation is reduced.

This is the reasoning behind the legal body composed of six regimes around IPR protection in the United States (Besen and Raskind 1991). In the United States Constitution (Article I, Section 8) the incentivizing nature of IPR is clearly stated:

also called market risk premium, as it measures the return an investor receives for taking a given risk. The y-intercept of the SML is the risk-free rate of return.

The limitation of property rights would affect two variables in this model. First, the expected rate of return (Err) would decrease, driving down the profitability of the investment, as its return gets closer to the risk-free rate. Second, the risk term β would increase as limitations on property rights would increase uncertainty. Both of these factors negatively affect investors’ willingness to provide funds for a given project. In addition to driving down the inventor’s expected returns, the limiting or loosening of intellectual property could potentially drive up the cost of borrowing money (increase in β), making the innovative process increasingly less profitable and therefore less likely. Schumpeter also recognized the peculiar role that profits play in inducing investment, and famously said Profits in excess of what is necessary “provide the baits that lure capital on to untried trails” (Schumpeter 2011, 90).

To understand the motives of a rational inventor we need to consider two fundamental concepts in economics:

“To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writing and discoveries” (Besen and Raskind 1991, 3).

In recognition of the negative social welfare implications resulting from insufficient IPR protection, namely the discouragement of research and development, it has been argued that intellectual property protection is justified to the extent that it allows inventors to recover their initial fixed costs (Lemley 2005, 33). Such a policy, however, ignores the motives of inventors, as well as of investors who provide the funds for R&D. In accordance with neoclassical economic theory, we would expect both agents to act rationally. Let us first turn our attention to the peculiar role of the investor who offers financial support for a given project. Three primary factors are relevant in an investor’s decision-making process.

1. Unintended consequences 2. Opportunity cost The contributions that innovators and inventors make to the overall welfare of society can be seen as largely unintended consequences (Sen 1999, 254). Inventors and innovators cannot be expected to actively advance social welfare, but by acting in their own best interest unintentionally contribute to the common good. As Adam Smith famously said:

1. Expected return 2. Absolute Risk 3. Relative Risk compared to the market

“It is not for the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages” (Smith 1994, 15).

These three factors determine how much money an investor will allocate to a certain project, and further the return an investor requires for his investment. The security market line (SML) is one way in which investors determine the percentage return they require on their investment (Ross and Westerfield and Jordan 2011).

(3) SML = Rƒ + β(Err - Rƒ)

In the absence of incentives to invent or innovate, they will simply stop doing so and as a result, again unintentionally, stop contributing to the social good. It is of course conceivable that some inventions or innovative activities are the product of motives other than profit (one example being idle curiosity), but the economic feasibility remains imperative for any such invention to enter the market.

The concept of opportunity cost has already been explained. The loosening of intellectual property protection drives down expected re-

In calculating the security market line the absolute risk of a particular investment β is multiplied with the expected return of the investment as compared to the risk-free rate of the market; U.S treasury bonds, for example, are assumed to have virtually zero risk. The slope of the SML is

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THE TRANSATLANTIC — EDUCATION AND INNOVATION

turns, and increases the risk and uncertainties associated with the innovation processes. Thus alternative opportunities of employment will become more attractive in that they yield more certainty and possibly higher returns.

tive relationship between intellectual property protection and economic growth. Growth and development generally lead to an increase in living standards and subsequently social welfare. A cross-sectional study of up to 95 countries found that IPR protection is a significant determinant of economic growth (Gould and Gruben, 1996).

Adding to the dialogue on IPR and economic growth, Kwan and Lai (2001) established that under-protection of intellectual property could hurt economic growth substantially, and thereby lead to welfare losses, while welfare losses resulting from over-protection are non-substantial.

In an additional study, Park and Ginarte (1997) found a positive correlation between intellectual property protection, and factors associated with long-term economic growth. IPR protection is shown to positively affect factors associated with development and growth such as investment activities, education, and R&D (Ibid.). In economic literature it is well established that these three tangible and intangible forms of capital are responsible for sustainable, long-term economic growth³. If innovation is profitable, then related factors such as schooling and research become more valuable as well as more likely to receive funding. Thus, IPR indirectly contribute to the economic growth of a country by encouraging the research sector to invest.

The positive effects of IPR on growth enhancing economic sectors illustrate the importance of protecting intellectual property sufficiently. It is taken for granted, after all, that economic growth is to be viewed as a generally desirable development with the potential to significantly enhance social welfare. Fostering and accelerating economic growth thus presents another channel through which intellectual property protection positively affects the overall welfare of society.

3, Positive Externalities It has further been suggested by opponents and critics of current intellectual property legislature that the absence of such laws would create a network of positive externalities resulting from the freedom to use others novel ideas, and innovations (Lemley 2005).

This claim, however, is logically problematic; consider the following chain of economic interdependencies: 1. The free access to novelties and innovations creates positive externalities and thereby enhances social welfare.

2. The costs and uncertainties associated with the creation of novelties require incentives to inventors in the form of profits.

3. The profits necessary for innovation require protection by IPR. Through deductive reasoning, we arrive at the conclusion that the claimed positive externalities would only come about in the presence of IPR protection. Without IPR, there would be no positive externalities that could possibly increase social welfare, as innovation would stall. This argument rests on the classic assumption that innovation only occurs when economic profitability is expected; the relevance of this assumption has been established in the previous section.

While exceptions to this rule may exist, for example idle curiosity or purely altruistic nonprofitoriented motives, a general desire for profitability appears to be a widely spread and realistic assumption in a capitalist economy. What IPR opponents fail to consider is that the positive externalities on which their argument rests are dependent on the very existence of intellectual property protection. Social welfare will only be enhanced if the creation of new products, technology, and ideas is secured through intellectual property protection. Ergo, the claimed positive externalities in the absence of IPR protection are of illusionary nature.

5, Conclusion This paper has presented various arguments in support of the claim that the protection of intellectual property is imperative to the continuous growth of the aggregate stockpile of human knowledge and achievement. It is in this respect

³ See: E. Borenszteina, J. De Gregoriob, J-W. Lee. 1998. How Does Foreign Direct Investment Affect Economic Growth?

Journal of International Economics, Volume 45, Issue 1.

115-135.

Richard R. Nelson and Edmund S. Phelps. 1966. Investment in Humans, Technological Diffusion, and Economic Growth. The American Economic Review, Vol. 56, No. 1/2.

69-75.

4, Intellectual Property Rights and Economic Growth The last argument to illustrate the positive impact of IPR on social welfare is based on the posi-

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Intellectual Propert y Rights: Innovation and Social Welfare

that IPR protection is essential to the overall welfare of society. Rarely does classical libertarianism, in its defense of individuals’ natural right to the fruits of their labor, and utilitarian ethical theory in its concern for the common good come to the same conclusion on sociopolitical matters.

The case of IPR is one of the few examples in which the two opposing theories yield the same conclusion, considering that individual property protection directly leads to the enhancement of the common good.

In the light of this, it is not merely justifiable to protect intellectual property to the same extent that we protect ‘real’ property; the resulting advancements in social welfare through intellectual and scientific progress oblige us to do so.

Bibliography Gould, David M. & Gruben, William C. 1996. The role of intellectual property rights in economic growth. Journal of Development Economics, Vol. 48, Issue 2.

Kwan, Yum K. & Lai, Edwin L.-C. 2003. Intellectual property protection and endogenous economic growth. Journal of Economic Dynamics & Control, Vol. 27. 853-873.

Lemley, Mark A. 2005. Property, Intellectual Property, and Free Riding. Texas Law Review, Vol. 83. p. 1031 Lessig, Lawrence. 2005. Free Culture. New York: Penguin Books.

Locke, John. 2010. Two Treatises of Government. New York: Classic Books International.

Park, Walter G. & Ginarte, Juan Carlos. 1997. Intellectual Property Rights and Economic Growth. Contemporary Economic Policy, Vol. 15.

Ross, Stephen A., Westerfield, Randolph W. & Jordan, Bradford D. 2011. Essentials of Corporate Finance. New York: McGraw-Hill/Irwin.

Schumpeter, Joseph A. 2011. Capitalism Socialism and Democracy. Connecticut: Martino Publishing.

Sen, Amartya. 1999. Development as Freedom. New York: Anchor Books.

Smith, Adam. 1994. The Wealth of Nations. New York: The Modern Library.

Besen M., Stanley & Raskind, Leo J. 1991. An Introduction to the Law and Economics of Intellectual Property. The Journal of Economic Perspectives, Vol. 5, No.1.

Marvin Backes is currently a senior at Westminster College in Salt Lake City. He will graduate with a BA in Philosophy and Economics in June 2013.

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the impact of increasing minimum school leaving age on the labour market

Neoclassical Economics provides a sufficient theoretical framework to predict what happens if within a jurisdiction the minimum school leaving age is changed. But how do these predictions fare against the background of empirical data from a couple of States in the US? And of how much use is the difference-in-differences method in this context?

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By Michael Doyle

The impact of increasing minimum school leaving age on the labour market

1, Methodology

The purpose of this paper is to investigate whether the changes in minimum school leaving age that have occurred between states in the United States have had a positive or negative affect upon the labor market within those states. To this end, we will start off describing the theoretical impact of changes to minimum leaving age on the education market against the background of which we will then examine empirical data on such changes.

From a theoretical perspective, we can split the market demand of education into two levels of educational attainment, one group demanding less than 16 years of education, the other demanding more. Let us state that Group A consists of students who would have preferred less than 16 years in education and Group B consists of students who, all along, would have preferred an educational stint greater than 16 years. Also, let us postulate, for argument’s sake, that those from Group A are likely to end up in job Market A, which expresses lower skill level jobs and, similarly, let us state that those from Group B are likely to end up in job Market B, expressing higher skill level jobs.

Within the (neo-)classical economics framework, more people are pushed out of Market A and into Market B when the state raises the minimum school leaving age. It is these policy changes that we are attempting to investigate. Let us begin our investigation by turning our gaze toward the theoretical consequences that arise due to this upon job Markets A and B. Within this theoretical framework, such a change is likely to cause greater competition for the jobs in Market B. The higher competition should lead to a decrease in wages in job Market B. However, the higher level of education within the economy may have the beneficial effect of raising the economy’s level of innovation and entrepreneurship. These increases may, in fact, create enough jobs in Market B to overcome the excess supply, in which case we may not see any changes in wages. In due course we shall attempt to see if the increases in innovation and entrepreneurship have been great enough through looking at the changes in wage and the employment rate. We cannot, however, state that our results are fully conclusive. The problem is that wages may be pushed up in Market A in order to lure workers back to that market. Indeed, further studies could look more in depth at relative changes in the wages of skilled and unskilled workers in order to arrive at stronger conclusions.

In this section we shall empirically test the theoretical reasoning from above. The methodology we shall use is known as Difference-in-differences.

The basic idea is to observe outcomes for two separate groups. One of these groups is exposed to a change (the treatment group), whereas the other is not (the control group). The change experienced in the control group is then subtracted from the treatment group. This is supposed to remove biases that result from factors other than the change in minimum school leaving age, which may have caused the observed change in the labor market.

We followed a basic Difference-in-differences method as explained in many econometrics textbooks.¹ However, the Difference-in-differences approach is not without its critics. The biggest problem we face with using the Difference-in-differences approach is the parallel trends assumption.

It states that absent the change, which we try to measure, control and treatment states would have trended the same way economically. However, if there was a change in only one of either the control or treatment states that affects employment and which is unrelated to the change in minimum leaving age, then the parallel trend assumption would be violated and our results inconclusive.

For instance, if there is an exogenous shock which causes a fall in employment in one state but not another, say flooding in a state which employs many within the agricultural sector, bias would occur, and our results would be skewed.

We expanded slightly from the basic methodology in order to create a more usable Differencein-Differences approach. First, we included a Difference-in-Differences value for a number of periods after the change in order to get a better view of the periodic consequences of the event.

Looking at the change over time will also decrease the impact of any anomalous results. Another step we took to remove the chance of anomalous results was to take average values for a number of states which kept their minimum leaving ages constant at 16, 17, or 18 – a flood is less likely to occur in two states hence taking the average of more than two should decrease the chance that we break the parallel trends assumption. One final precautionary step we took was to repeat the Difference-in-Differences analysis for three states which changed their minimum leaving age in different years.

¹ The textbook we used was Mostly Harmless Econometrics by D. Angrist

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THE TRANSATLANTIC — EDUCATION AND INNOVATION

1921: When minimum school leaving age was seldom higher than 14

14

The impact of increasing minimum school leaving age on the labour market

2, Results

their leaving age to those which kept it at 16. For instance, if companies notice that more educated workers are now in greater supply, they may attempt to get them with no increase in wage by moving to the area of high supply hence increasing employment but decreasing the average wage by swamping Market B participants.

When comparing to states with constant 17 or 18 leaving age we see more conformable results. In the case with constant 17 we have higher wages and employment. This is in accordance with moving more workers into the higher paying Market B and an increase in participation rate overall. There appears to be job creation in Market B. Whether this is due to innovation from those with more education or because more companies have come in to take advantage we cannot say. In the case with constant 18 we have higher earnings and lower employment. The likely explanation is that we have successfully ploughed participants into the higher paying Market B but without the increase in job creation. Possibly, the respective states have been able to build up a better infrastructure through having a higher leaving age for longer and, on the time-scale we have looked at, our experimental states have not been able to catch up. We must remember that we cannot say how much of the increase in average wages is from higher wages being offered in Market A in an attempt to lure workers back. As aforementioned this is left open for further study.

A note must be made that we have focused upon purely the economic impact of changes in the minimum leaving age. We have disregarded the fact that education is a merit good with many positive negative externalities. As a further aside, in the majority of cases there is also a rise in average earnings. On a personal scale, this is likely to be seen as an advantage of raising the minimum leaving age. Finally we can mention that our results can tentatively be generalized to other areas in which there is high mobility of labor, e.g. the European Union. The results are likely to be different in zones where labor mobility is restricted with the inability for a person to leave their education zone to find a higher paying job.

Our first experiment was to analyse the affect of an increase in leaving age upon the unemployment rate.² In this case, a positive Difference-inDifferences value indicates a negative effect upon the employment rate. Our results are housed in appendix A. The results of our cross-state analysis between states with constant minimum leaving age of 16 and states with a change in minimum leaving age imply a positive effect on the rate of employment.

These results were replicated between states with a constant leaving age of 17 and those with a change. However, in the case between a constant leaving age of 18 and those with a change, increasing the leaving age was actually seen to bring about negative effects on employment.

Our second experiment was to analyses the effect of increasing the leaving age upon the average earnings in the state.³ In this case, a positive Difference-in-Differences value indicates a positive effect on average earnings. Our results are housed in appendix B. The results of our cross-state analysis between states with a constant leaving age of 16 and those with a change, earnings appeared to fall with the increase in leaving age. In both the cases of constant leaving ages of both 17 and 18 compared to those with a change beneficial effects are shown on average earnings.

3, Conclusion We have seen that states which change their leaving age are likely to find improvements to their employment rate when compared with states which constantly had lower leaving ages. But they face a tougher time matching the increased employment rates in states with an already higher leaving age. Also, changes appear likely to find increased earnings when compared to states with a higher leaving age but decreased earnings when compared to states with lower leaving ages.

The results with respect to the states that kept their leaving age constant at 16 seem a bit puzzling. We experience higher employment but lower wage increases when we increase the leaving age. A possible explanation for this lies at the heart of the Difference-in-Differences technique. We noted earlier that if there is an exogenous change between the two states which affects employment in one but not the other we will end up with an anomalous result. Indeed, the resultant breaking of the parallel trends assumption is what could have occurred here. Alternatively, there are many possible causes of the increased employment yet lower wages when comparing states which increased

² School leaving age data taken from NCES website, Unemployment rate data taken from United States Department of Labor website ³ Median earnings data taken from United States Census Bureau

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THE TRANSATLANTIC — EDUCATION AND INNOVATION

References: Angrist, J.D. & Pischke, J. 2008. Mostly Harmless Econometrics. Princeton University Press

Data: Leaving data: National Center for Education Statistics, www.nces.ed.gov Median earnings data: United States Census Bureau, www.census.gov Unemployment data: United States Department of Labor, www.dol.gov

Michael Doyle is currently a final year Undergraduate at the University of York in the UK. He will receive his BSc in Economics and Econometrics by June 2013.

Appendix A Periods After Change (Years)

Appendix B Difference-in-Differences Change in Unemployment (%)

Difference in Differences 1 2 3 4

Conn/18

Conn/17

Conn/16

0,96 -0,08 0,52 0,02

0,70 -0,30 0,20 -0,33

0,86 -0,02 0,52 -0,18

Difference in Differences 1 2 3 4

Col/18

Col/17

Col/16

-0,20 -1,16 -0,48 -0,02

0,10 -1,03 -0,47 0,10

0,32 -1,28 -0,36 0,20

Difference in Differences 1 2 3 4

Ill/18

Ill/17

Ill/16

0,12 -0,68 0,36 0,30

-0,20 -1,03 0,53 0,70

0,12 -0,88 0,48 0,44

Periods After Change (Years) Difference in Differences 1 2 3 4 Difference in Differences 1 2 3 4 Difference in Differences 1 2 3 4

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Difference-in-Differences Change in Earnings ($)

Con/18

Con/17

Con/16

47,82 -1382,00 298,00 2469,00

1320,69 -3614,00 -1037,00 3967,00

1320,69 -3614,00 -1037,00 3967,00

Coll/18

Coll/17

Coll/16

521,16 3308,26 86,43 639,49

-505,84 5134,26 1896,43 -2002,51

-1245,84 4579,26 1556,43 -1351,51

Ill/18

Ill/17

Ill/16

1298,94 -2967,75 2115,80 1398,47

-36,06 -1469,75 1799,80 125,47

318,94 -1796,75 2847,80 -1718,53

The impact of increasing minimum school leaving age on the labour market

Ferdinand Georg Waldmüller – The day labourer with his son, 1823

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the case for weaker intellectual property regulations

The legal quarrels surrounding the publication of a story of an aged Holden Caulfield, protagonist of Salinger’s Catcher in the Rye, are a paramount example of the conflict between intellectual property rights and artistic freedom. How are we to draw the line? And on top of legal or moral considerations, what should be the economic stance on the subject matter?

By Paolo Crosetto

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the case for weaker intellectual propert y regulations

In the fall of 2008 Fredrik Colting, a Swedish writer acting under the pseudonym of J.D. California, wrote a book whose title read 60 Years Later: Coming Through the Rye. In the book Mr. C, an older version of J.D. Salinger's Holden Caulfield from his 1951 novel The Catcher in the Rye escapes a retirement house and wanders through New York, rambling about his troubled relationship with his creator.

The book was no big literary success; nonetheless, it sparked a bitter legal controversy, initiated by the late Salinger and continued by his heirs, over intellectual property infringement. The controversy ended with a settlement in January 2011, according to which the book was completely banned from the United States and Colting was forbidden from dedicating the book to J.D. Salinger or from publishing any other book in any way related to him or to the Catcher.

Some months after Colting published his banned sequel, in the spring of 2009, Seth Grahame- Smith, an American writer, released the book Pride, Prejudice and Zombies, an ‘undead’ version of the classic by Jane Austen, in which Elisabeth Bennet and Mr. Darcy fall in love having to cope with, among other things, zombies eating their friends. The book was a success, and sparked several derivative works – a graphic novel, a video game, and, in the foreseeable future, a movie – but no legal dispute.

The difference between Holden Caulfield and Elisabeth Bennet is that Pride and Prejudice is in the public domain, while The Catcher in the Rye is not. Holden is intellectual property of Salinger and his heirs until (at least) 2046 – 95 years after the publication date – and derivative works on the Catcher can be, and are, effectively blocked by the rights holders; Ms Bennet, on the other hand, is part of the cultural inheritance of mankind, and is free for everyone to use as they see fit.

use, change, sell, exclude the others from, or dispose of it. I own an apple; I can consume it – in which case it's gone – or I can sell it to you – in which case I cannot consume it nor sell it anymore, but you can.

But knowledge is a public good: it is non-rival – if you have an idea and you explain it to me, now we both have, and can use, the idea, and we can both spread it further – and non-excludable – once I have a copy of the idea, you cannot take it away from me. Moreover, knowledge stems from knowledge, new ideas being built on old ones: science profits from standing ‘on the shoulders of giants’, music and art evolve by mimicking or subverting old traditions, movies are made out of classic tales, and new product designs continually improve on older ones. As a society, we are interested in spreading ideas as much as possible to foster development and growth.

Creating knowledge, though, similar to growing an apple tree, requires skills, capital and labor.

Authors will need to be compensated for their effort, if we want knowledge to be created. In a world of free circulation of knowledge, the creation of new knowledge could be slowed down, or indeed halted altogether, by the fact that developing it entails costs that are impossible to recoup.

As a society we then face a trade-off between compensating authors for their work and spreading knowledge as much as possible. The rules of 'Intellectual Property' are our way of dealing with this trade-off: by giving the authors a monopoly right on the idea for a limited time we provide them with incentives to invest their skills in the creative process; after this time, the idea goes in the public domain, where it is free to be used by anyone as they see fit, thus serving our social goal of more ideas for everyone. The wording of the US Constitution could not be any clearer: “The Congress shall have Power […] To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”¹

1, Property and Knowledge The set of rules pertaining to copyright, patents, and trademarks has been dubbed ‘Intellectual Property’, conveying the idea that it embodies just another form of property – the property of the fruit of one's creative efforts, whether it be a written work, a painting, a song, an algorithm, or even a business model.

But the principle underpinning ‘Intellectual Property’ has not much in common with our usual understanding of ‘Property’. As a society, we protect property rights, and for good reasons.

Property is the base of a market system, creates incentives to work and to properly manage scarce resources, and it is argued by many to be a natural right. Owning something means being able to

Intellectual Property is not a property right. It stems from a utilitarian trade-off and not from natural rights, and it does not regulate what one can do with his own property, but rather regulates what others can do with their legally acquired copy of the ‘property’. IP is not about what J.D. Salinger is free to do with Holden Caulfield: it is about what F. Colting can (or cannot) do. IP is a trade-off: we 'buy' an incentive for authors to pro-

¹ Constitution of the United States of America, Article I, Section 8, Clause 8

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vide more creative works and inventions at the social 'cost' of creating monopoly rents for authors and inventors. Precisely because widespread availability of knowledge is a good thing, the monopoly rent is bad, as it increases prices, limits diffusion, gets in the way of follow-up inventors and generates transaction and legal costs.

The advent of the Internet resulted in a radicalization of the basic trade-off: for the first time in history instantaneous distribution of digitized ideas could be done at something very similar to zero cost, thus generating both an unprecedented potential for spreading knowledge and an ever more pressing need to protect authors in order to secure incentives. Or so the story goes, if the standard theoretical model underlying IP is held to be correct.

At the turn of the century, exactly at the same time as right holders succeeded in securing extension after extension of the copyright term, from the original 14+14 of the 19th century to 95 and more years today, and broader and broader patents were being granted to a growing set of ‘ideas’, from software to databases to business methods, the consensus in economics started being challenged by models and evidence that indicate that less or even no IP would be socially beneficial.

first innovator enjoys a competitive rent even absent IP protection. This rent is higher than zero, and, coupled with a first-mover advantage, sales of complementary products and returns from an increased diffusion, is high enough to provide substantial – if smaller than the ones currently available thanks to temporary monopoly – incentives to creation absent IP. History also seems to support this finding: after all, the whole of classical music, most of the literature before the late 18th century, all early software, and all of science have been produced absent any form of IP. Second, inventions do not happen in a vacuum, nor does the romantic idea of an inventor singlehandedly providing a new product or idea in a stroke of genius have any resemblance to what happens in reality. The real invention process is sequential and path-dependent, as innovations build on previous knowledge, just like Pride, Prejudice and Zombies builds on Jane Austen's novel.

The incorporation of these insights into economic models revealed an ambiguous nature of the IP trade-off: as shown by James Bessen and Eric Maskin in a recent paper, once the sequential nature of innovations is taken into account, not only is society better off without patents, but under mild conditions firms themselves will choose not to impose IP on their creations. This result could help explain the spectacular rise of IP-free content on the Internet, both in form of Open Source Software and of photos, videos, and music released as Creative Commons by millions of users, some of which are professionals.

Third, this very sequential nature, coupled with the recent extensions of length and breadth of IP rights can indeed lead to a gridlock of the system of innovation: if upstream inventions are patented, downstream inventions can be slowed down or altogether blocked, especially if, as is the case in modern development, the follow-up inventor can have valuable ideas not available to the firm or person holding the rights on the upstream invention. Michael Heller labeled this process ‘anticommons’, and showed it to be at play in the recent slowdown of innovation in the biomedical sector in the US; other authors talk about a 'patent thicket' that burdens innovators with increasing licensing, transaction and legal costs. The widespread tactics of amassing patents in order to be able to sue your competitors or avoid being sued by them, as news stories about IT giants report on a daily basis, is one case of the adverse effect of patents both on costs – firms must spend an increasing share of their revenues in lawsuits and transaction costs – and on competition – entering a market is more and more difficult as patents are used by incumbents to block start-ups.

2, The Economist’s Perspective From an economist's point of view it is important first to investigate if and in which cases IP is really needed in order to promote creativity, and secondly to set the terms of the trade-off right. Can innovations and creative works thrive, absent IP protection? Is granting a monopoly the only effective way of providing creators with incentives, or is it the best one? Too low or too narrow a protection, and we might forgo important inventions and creations for lack of incentives; too high or too broad a protection, and we might generate high costs on society, a lower amount of follow-up inventions, and ultimately hurt creativity.

On the theoretical side of the issue recent work has underlined that innovation can thrive absent patent protection, and creativity absent copyright; it has moreover shown that IP can generate higher costs than previously thought.

First, economists took a new look at the assumption that ideas and knowledge are transferred without cost. At a bare minimum, ideas need to be explained, or some reverse engineering has to take place; moreover, an idea needs to be embedded in a medium to be sold, and it is this medium that is exchanged, and not the idea per se. In the model of 'Perfectly Competitive Innovation' by Michele Boldrin and David K. Levine, the

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Jane Aust en

PR ID E A N D P R E JUD ICE

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Low Library, Columbia University, Date: unknown, ET: long

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3, Evidence on Intellectual Property

quite unable to guess why there should be a limit at all to the possession of the product of a man's labor. There is no limit to real estate. [...] When I appeared before that committee of the House of Lords the chairman asked me what limit I would propose. I said, 'Perpetuity'.” The paradox of modern times is that, at the exact time in world history when costless knowledge diffusion has become possible and we are becoming aware that IP is possibly introducing more problems than it is solving, Mark Twain's wish of eternal copyrights is, extension after extension, becoming effectively true. But theory and evidence are increasingly showing that as a society we are not striking the best deal, and that IP should instead be shortened and limited if we are to take the best out of the digital age we live in. As Lawrence Lessig wrote in his (freely distributable) 'Free Culture' book, “Creation always involves building upon something else. There is no art that doesn’t reuse.

And there will be less art if every reuse is taxed by the appropriator. […] If the Internet teaches us anything, it is that great value comes from leaving core resources in a commons, where they’re free for people to build upon as they see fit,” adding Zombies to old English novels included.

All those theory developments notwithstanding, deciding how broad IP or how long copyright terms must be is an empirical question: are the current terms too long, as many critics argue, or are they too short, as the content providers repeat, in some famous cases arguing for infinite copyright terms? What is the optimal IP strength, one that enables the society to enjoy the largest possible amount of creative works and inventions, while at the same time providing enough incentives to creators?

Collecting real-world evidence is particularly difficult in the case of IP. For one, because we do not and cannot know what would have happened if a different regulation were in place, we badly lack counterfactuals. The copyright term has been extended by 20 years in the United States in 1998 with the Sonny Bono Copyright Extension Act, and we cannot know if the great surge in music, videos and books produced in the world in the first decade of the 21st century is a consequence of it or rather of the development of the internet, and of file-sharing networks. Moreover, we do not know what would have happened if the regulation were not adopted. Some natural experiments took place in the world – for example, the EU allowed copyright over databases and collections of facts in 1996 while the US did not. In the years following the EU directive, the US database sector flourished much more than the European one. But evidence from this case is hard to generalize, as the success in the US is difficult to track back to the IP issue and not to other underlying factors.

Recently, economics has started to rely on laboratory experiments to test theories and generate counterfactual evidence. In lab settings rules can be manipulated and the impact of different patent lengths and breadths or of different copyright regimes can be assessed, albeit at the cost of having to assume that abstract laboratory games can capture the features of the real world and offer policy guidance. The evidence collected from the first studies bringing IP to the lab seems to indicate that indeed too broad and long an IP protection can lead to less innovation being created, both in a setting incorporating sequential innovation, as I show in a 2010 paper, and in a fairly different setting replicating the conditions of a standard non-sequential model, as shown in a recent paper by Joy Buchanan and Bart Wilson.

At least in the lab, IP is not crucial to generate incentives to innovate, and more IP protection can be harmful for the overall rate of innovation in the lab economy.

As Mark Twain famously noted, while fighting for the extension of copyright lengths, “I am

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References:

Further reads:

Bessen, J. & Maskin, E. 2009. Sequential innovation, patents, and imitation. RAND Journal of Economics, Vol. 40, Issue 4. pp. 611-635 Boldrin, M. & Levine, D.K. 2008. Perfectly Competitive Innovation. Journal of Monetary Economics , Vol. 55, Issue 3. pp. 435-453 Heller, Michael A. & Eisenberg, Rebecca S. 1998. Can Patents Deter Innovation? The Anticommons in Biomedical Research. Science 280 (5364). 698-701.

Lessig, Lawrence. 2005. Free Culture. New York: Penguin Books.

Buchanan, Joy & Wilson, Bart J. 2011. An Experiment on Protecting Intellectual Property. Gruter Institute Squaw Valley Conference: Law, Institutions & Human Behavior, 2011. Available at SSRN: http://ssrn.com/abstract=1850849 Crosetto, Paolo. 2010. To Patent or Not to Patent: A Pilot Experiment on Incentives to Copyright in a Sequential Innovation Setting. DEAS WP 2010-05. Available at SSRN: http://ssrn.com/abstract=1944915

Akerlof, George A. et al. 2002. Brief of the Amici Curiae in Support of the Petitioners, Eldred vs. Ashcroft, Supreme Court of the United States of America. Available at: http://cyber.law.harvard.edu/openlaw/eldredvashcroft/ supct/amici/economists.pdf Boldrin, M. and D. K Levine. 2008. Against Intellectual Monopoly. Cambridge University Press.

Boyle, James. 2010. The Public Domain: Enclosing the Commons of the Mind. Yale University Press.

Buccafusco, Christopher J. & Sprigman, Christopher Jon. 2010. Valuing Intellectual Property: An Experiment.

Cornell Law Review, Vol. 91, 2010. Available at SSRN: http://ssrn.com/abstract=1568962

Paolo Crosetto is currently a Post-doc Research Associate at the Max Planck Institute of Economics, Jena, Germany.

He is an experimental economist, and his main areas of interests are copyright and innovation, consumer biases, risk attitudes and various topics in experimental game theory.

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