The Creative Economy

John Howkins
Oct. 2001

Now worth more than $2.2 trillion worldwide, John Howkins discusses the economic and regulatory issues surrounding intellectual property*
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Intellectual property is the currency of the new economy
Economic arguments
Patent office developments
US perspective
Conclusion

Intellectual property is the currency of the new economy

In 2000, the US Patent Office issued a record number of 176,000 patents, bringing the world total of 'live' patents to about four million. The fastest growth was in bio-technology, materials, computer software and business methods (which raised some eyebrows). The US Patent and Trademark Office has given Dell Computers a patent not for the computers it sells but for the way it sells them, and given Amazon.com a patent for the way people order its books and CDs. The British Patent Office has also headed off into new territory by awarding a patent for the technique of cloning Dolly, a sheep, which covers the "possible use of the technology in cloning human cells".

Until recently, intellectual property was a specialist, arcane subject. Now, it has moved centre stage. Accountants Arthur Andersen say, "electronics, software, health-care, consumer goods, telecommunications, media and entertainment are substantially dependent upon intellectual property". I would add biology, agriculture and education. When I look at some countries' patenting policies, I am inclined to add 'everything'.

IP is the currency of the new economy. I don't mean the new network Internet economy but the new 'creative economy'. Intellectual property is the defining asset of this creative economy, just as land and land use defined the agricultural age, and financial capital defined capitalism and the joint stock company. Through the 1990s this creative economy grew twice as fast as service industries overall and four times as fast as manufacturing. Between 1987 and 1997 the American copyright and patent industries increased their output at the rate of 5.8% a year compared to 2.8% a year for other industries, and increased the number of jobs at 4.0% a year compared to 1.6% in the ordinary economy.

In the process, the justifications for intellectual property have changed. There is still a strong moral presumption, based largely on the theories of Thomas Hobbes and John Locke in the 17^th century, that people have a 'natural right' to own whatever they create. The trouble today is that companies claim to 'create' an increasing variety of matter, notably biotech processes. Nobody objects if an inventor gets a patent for a new mousetrap; but many people feel troubled when a company applies for a patent for a new mouse. Or a new hamster, as when Glaxo patented the making of Chinese hamster ovary cells.

Economic arguments

The economic arguments that intellectual property rights provide both necessary incentives and a necessary reward mechanism are more powerful. The latter is increasingly true. People are creative for many different reasons, both personal (because they want to) and external (such as market competition). But it is widely argued that everyone deserves a reward, whether or not the law encouraged them to innovate in the first place.

But the rewards must be regulated. Each country draws up its own 'property contract' to balance the need for private property against the need for a sustainable 'public domain'. Countries fall into four main camps. The US and Japanese take a 'utilitarian' approach, favouring commercial exploitation at all costs. Most of Asia's newly-industrial economies that take their business models from America follow its lead in these matters. Second, European countries, notably the French and other Continental countries whose legal systems are based on the Napoleonic Code, put a greater emphasis on protecting a creator's 'natural' rights. Third, the UK stands somewhat awkwardly between the utilitarian and natural law approaches. It favours America's commercial approach but, as a member of the European Union, it is obliged to harmonise its laws with its neighbours.

There is an even greater disparity between these Western camps and the fourth camp which is composed of all rural, developing and still-emerging economies. It is a division between exporters and importers, sellers and buyers, 'commerce' and 'culture'. Exporters want their creative products to be protected in all countries. The film, music and drug companies are reluctant to sell their products where they are likely to be copied or stolen. The importing countries, with little to protect in terms of their own intellectual property (which is why they are importers) seldom bother to have their own laws or, if they do have them, are slack to enforce them.

There is an additional factor that became clear in the attacks on the World Trade Organisation and globalisation in Seattle, London and Genoa. Many developing countries regard creativity as part of the public commons. They regard Western rules as an unwarranted, quasi-Colonial tax on the import of ideas, knowledge and technology. They dislike the WTO's policies on stricter intellectual property.

The anti-globalisation lobby centres on trademarks but patents are a much more sensitive issue, as we saw when South Africa and Brazil wanted to distribute proprietorial AIDS drugs at a price their nationals could afford.

Patent office developments

Patents are not merely property, they are monopolies, and deliberately so. Thomas Jefferson's fine and compelling words about the impossibility of owning ideas did not stop him from being one of the three people who set up America's first patent office. He was Secretary of State at the time and his fellow examiners were Henry Knox, Secretary of War, and Edmund Randolph, Attorney General. Their eminent status indicated the seriousness with which the new government took its role. America, unusually amongst countries, included intellectual property in its Constitution. In their first year, Jefferson and his colleagues gave out three patents. Now, the US gives out three patents every 20 minutes.

The American, European (EPO) and Japanese patent offices are the 'Central Banks' of intellectual property. They issue the currency of the creative economy.

Their mission, in Washington's phrase, is to "promote the use of intellectual property rights as a means of achieving economic prosperity". Its internal notice-boards are more punchy: 'To Help Our Customers Get Patents'.

The customers are banging on the door. In 1882 the US Supreme Court, faced with a rush of applications said that, "An indiscriminate creation of exclusive privileges tends rather to obstruct rather than stimulate invention. It creates a class of speculative schemers who make it their business to watch the advancing wave of improvement and gather its foam in the form of patented monopolies, which enable them to lay a heavy tax on the industry of the country, without contributing anything to the real advancement of the arts." Looking at the advancing waves in Washington, Tokyo and Munich, not much has changed.

The strains are beginning to show. Kevin Rivette has criticised the US Patent Office for 'serious deficiencies in staffing, resources and examination procedures." In 1999 it suddenly appointed an extra 1,000 staff, including 850 examiners, bringing the total to 3,500, an increase of 40%. According to Greg Aharonian, editor of 'Internet Patent News Service', the Patent Office's staff turnover is high at 20% a year, and over 50% of the examiners have been there for less than two years. He gives persuasive evidence that the technical knowledge and legal expertise of examiners is not good enough. He estimates that over 50% of American software patents do not cite any 'prior art', which is sloppy and probably illegal.

The US perspective

America was the first country to realise how greatly its economy depends upon intellectual property. When the world was reeling from OPEC's increase in oil prices in 1973-4, the Senate held an emergency session on whether the country could be 'held to ransom' in other areas of the economy. The subsequent Task Force concluded: "Property concepts have been central to legal theory and social and economic activity in our society, but concepts of property were formulated to deal with tangibles, primarily land and chattels. When information, ways of dealing with information, or information products are treated as property, issues arise which differ from those resulting from the application of property theories to tangible matter". The wording is awkward but the thinking is clear: we need a new foreign policy for intellectual property, for the ownership of ideas. The sub-text was equally clear: we need a global policy that suits American interests.

Ten years later, Washington achieved its goal. Over 100 governments signed a Treaty on Trade-Related Intellectual Property Rights (TRIPS). The agreement covers all creative products: patents; copyrights and related rights; trade marks and service marks; geographical indicators (for products whose value derives from the place of growth or manufacture); industrial designs; the protection of new plants; the layout of integrated circuits; and trade secrets. The WTO has a right to enforce TRIPS rules and apply sanctions.

The US victory was not welcomed by all members. Many countries resented its enforcement of Western principles of property. They complained of TRIPS's adverse effects on a country's ability to protect its own culture and knowledge and sustain its capacity for creativity and learning. This critical view is strongly put by economist Jeffrey Sachs of Harvard University: "Just as knowledge is becoming the undisputed centrepiece of global prosperity (and the lack of it, the core of human impoverishment) the global regime on intellectual property requires a new look. The US prevailed upon the world to toughen patent laws and cut down piracy. But now the transnational corporations and rich country institutions are patenting everything from the human genome to rain forest diversity. The poor will be ripped off unless some sense and equity are introduced into this runaway process."

Conclusion

Today's patent system is conceptually troubled and administratively over-burdened. The property contract needs bottom-up review. Since it first emerged in modern form in the 18^th century, it has just "growed and growed", like Alice in Wonderland.

First, we need to look hard at what can and cannot be patented. The British 'Statement of Patent Practice' says that its 'exclusions are directed to mental, intellectual, aesthetic or abstract matters'. But such matters make up an increasingly significant amount of Britain's and indeed all countries' economic output.

Second, we need a consensus about whether or not a patent requires a technological invention (as in Europe and Japan) or whether this is really immaterial (as in America). There is no effective global forum. The Trilateral Working Group of Washington, Tokyo and Munich does not go far enough.

Third, the current system is out of step with public views. The British parliament has had one debate on patenting in 20 years. It reviews the Patent Office once every five years — except, last time, it waited six years. And the review was not as independent as one would wish.

It is in the profession's own interest to put its house in order.

*This article is based on content of "The Creative Economy — How People Make Money From Ideas" written by John Howkins.
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John Howkins has advised Time Warner, IBM, Sky TV and many other companies on strategy and business development. He has worked for more than thirty governments, including those of the UK, the USA, Japan, China, Canada, Australia and Singapore, helping to formulate policy for their creative industries. He is executive chairman of Tornado productions Ltd, deputy Chairman of the British Screen Advisory Council and a Governor of the London Film School.