Patents, Monopolies, and New Growth Theory

-->

I think our class discussion on Tuesday regarding Stiglitz’s view of patents connects well with Peter’s blogpost a few weeks ago about Paul Romer’s New Growth Theory.  Stiglitz mainly dedicates his discussion of intellectual property rights in Chapter 4 in Making Globalization Work, but in Chapter 7 he refers to it again when discussing the ills of multinational corporations.  He criticizes Microsoft’s monopoly power in PC operating systems, claiming it to lead to higher prices and less innovation.  On this notion, Romer would disagree.  In a 1999 Wall Street Journal article titled “Wealth of Notions,” Romer highlights some key aspects of his New Growth Theory, using Microsoft as a prime example.  He notes that Microsoft Corp. invested hundreds of millions of dollars to develop the first copy of Windows software.  The next copies after that cost virtually nothing in comparison.  Essentially they’ve built their own platform that allows for immeasurable amounts of innovation in the future.  Yet unlike Xerox Corp. or Apple Computers who adapted their own innovative platforms but set prices very high, Microsoft sold their technology at comparatively lower prices.  Romer would agree with Stiglitz when it comes to limiting patents.  Romer acknowledges that knowledge-based economies tend to produce quasi-monopolies like Microsoft, but with limited patents they have to face what Romer calls “their inevitable comeuppance,” and what economist Joseph Schumpeter called “creative destruction.”  Essentially, with a shorter window of patent protection, Microsoft faces the possibility of other firms innovating off of its original operation system platform.  The looming effect of this competition would spur a quasi-monopoly like Microsoft to innovate faster.  In comparing Romer and Stiglitz’s deliberations regarding patents, innovation, and mutli-national corporations, its apparent that economic growth and efficiency, especially in the knowledge-based economy, hinges heavily upon the transferring of ideas between multinational corporations.  In Stiglitz’s view, these ideas need to be made freely available especially for developing countries to flourish in this global economy.