At TechCentralStation, Arnold Kling is writing a series on capital markets, innovation, and regulation. He comments on IP, taking off from the metaphor of the economy as a giant Food Court in which people constantly experiment with different recipes:

In conventional economics, real capital means physical equipment. The financial markets mobilize funds to pay for factories, machinery, and other durable goods. . . . .

My reading of the economic literature of the past 50 years is that well over half of economic growth is explained by better use of ideas. Prior to that, economists tended to wrongly equate all economic growth with the accumulation of physical capital -- plant and equipment.

Fifty years ago, economists saw the economy as like the steel industry -- a collection of gigantic factories housing powerful, expensive machinery, producing output measured in tons. The new paradigm sees an economy that looks more like the pharmaceutical industry or the popular music industry. In pharmaceuticals . . . the capital needed for production facilities is relatively unimportant. Much more capital is absorbed in the process of searching for new compounds and testing their effectiveness on diseases.

Similarly, in pop music, the main cost is in finding new bands, marketing them, and testing the consumer response. The capital needed to manufacture CD's is small by comparison.

A steel company does not need intellectual property in order to survive (although patents certainly are a help). The sheer cost of building manufacturing facilities can deter competition.

In the Food Court, however, the loss of intellectual property could be fatal to innovation. Suppose that a risk-taking company tries several new recipes, and only one turns out to succeed. If a second company comes along and copies only the successful recipe, the second company saves all of the research and testing costs incurred by the first company. Without patent protection, no firm would want to play the role of leading-edge innovator.

I do not have a settled position on intellectual property. As I wrote here, I think that one can justify taking different positions on different industries. I view the pharmaceutical industry as resembling the Food Court economy pretty closely, in that some form of reward for intellectual property development is clearly needed. On the other hand, the music industry strikes me as somewhat of a hybrid between the food court economy and the steel industry. Because the music industry wants to ship CD's by the ton, and has dragged its feet about delivering bits instead (see this essay), I have much less sympathy with the music industry's cries for intellectual property protection.

I think of different industries as being arrayed across a spectrum, with some industries closely resembling the Food Court, some industries closely resembling the steel industry, and some, such as chip manufacturers like Intel, in between. The more closely an industry resembles steel, in which physical manufacturing capacity is a barrier to entry, the less crucial is the issue of intellectual property protection.

The trend as I see it is for the balance to continue to shift in most industries toward greater importance for research and testing, with relatively less importance to physical plant and equipment. In other words, I see intellectual property becoming a larger component of capital, as the economy drifts in the direction of the Food Court metaphor. As a result, intellectual property law is going to be increasingly important as we move forward.

I think this is a bit unfair to the music industry. Making the shift from CDs to Internet distribution is not easy, especially considering the need to maintain backwards compatibility with existing CD players and with people who want to continue that method of distribution. Cary Sherman of the RIAA gets exasperated when people argue that DRM is the magic elixir, pointing out the problems of suddenly adopting a new format that obsoletes half a billion or so existing CD machines.

The shift has been vastly complicated by the ideologues who encourage piracy, especially by the young, as a moral right. But, on the whole, and looking at rates of adoption of past technological innovations, the shift to Internet distibution is taking place with great rapidity.

But Arnold is dead on in his appraisal of the importance of IP, and in the failures of conventional economics to address it properly.