Challenging what we think we know about "market failures" and "innovation"

I really enjoyed the final version of Brett Frischmann and Mark McKenna's article, "Comparative Analysis of Innovation Failures and Institutions in Context." The article was published in Houston Law Review in 2019. But I initially encountered it when the authors presented an early draft at the 2012 Yale Law School Information Society Project's "Innovation Beyond IP Conference," conceived and brought together by Amy Kapczynski and Written Description's Lisa Ouellette. The conference explored mechanisms and institutions besides federal intellectual property rights (IP) that government uses, or could use, in order to achieve some of IP's stated goals. Examples explored include research grants, prizes, and tax credits, among countless others.

Frischmann and McKenna's paper was world-opening for me when I first read the early version as a young(er) fellow. Back then, I was primarily struck by their insights on market failures. In IP law, we tend to talk about only one market failure: the fear of copying and the incentive problems generated by the fact that ideas resemble so-called "public goods," which can be easily copied and widely deployed by many users without depleting their value.  Frischmann and McKenna shook my understanding of this assumption. As they write, "[t]hat analysis might be useful, as far as it goes, but it would ignore other market failures, such as the demand-side failure that leads to under-provisioning of drugs to smaller or nonexistent markets." (314).

So, for instance, sure, one reason society may not see enough private investment in developing life-saving drugs is the fact that drug companies could not recoup the cost of their research and testing if they could not exclude generics from copying their novel findings and undercutting their prices. If this is the market failure, then we'd then zoom in on IP rights as the solution to the problem, to prevent that copying and competition. But we could just as well focus on other market failures, such as the fact that some diseases are so rare or so selective in the population they target that there wouldn't be sufficient demand for the life-saving drugs in the first place. All the IP rights in the world would not do anything to stimulate investment if not enough people want or are willing or able to pay for what you're selling. (I also distinctly recall how Yochai Bekler put it in his talk: "it's market failure all the way down.")

But I found new insights in Frischmann and McKenna's article even since the last time I read it. The reason is the extensive work they've done on the final, beautifully crafted version of the article, but also the reading and research I've done in the intervening years. To give just one example of a new insight: I am not even sure I will use the word "innovation" ever again in my work, or at least not without a lot of background or a long footnote defining what the word means.

To give context, many of us might confidently say, to a judge, or a student, or a congresswoman, that the goal of IP, or of any other incentive that seeks to replicate IP (e.g. research grants), is to promote “innovation.” But the reality is that, despite frequent use of the phrase "innovation" in all quarters, from courtrooms to policymaking, the term doesn't have a widely accepted meaning, even within the same field.

Frischmann and McKenna observe that it is tempting for IP lawyers to assume that Article I Section 8 Clause 8 of the Constitution's, the Intellectual Property Clause's, reference to "Progress" refers to one agreed upon objective, or to "brush the issue under the rug" by making the seemingly incontrovertible claim that "IP should promote 'innovation'—as if 'innovation' were one thing." (322).

But it's not. "[A]ny of the following understandings of 'Progress,'" they write, "are perfectly reasonable from an interpretive, historical, and normative standpoint:

A. advancement of the relevant knowledge frontiers—
scientific, technological, aesthetic, cultural, etc. 

B. advancement in the distribution of existing knowledge—
making more of what is known by some, known to all—
framed in terms of education, human capital, or
otherwise 

C. greater quantity of outputs—works and inventions (of
some types) 

D. qualitatively better outputs—works and inventions,
subject to ambiguity regarding the criteria for judging
some outputs “better” 

E. broader participation in creative and inventive
activities—possibly framed in terms of education, human
capital, and/or access to the means of production 

F. increased social welfare, subject to ambiguity about the
meaning of “welfare” 

G. economic growth 

H. sustainable development

(321)  Notably, they put "economic growth" low down on that list (G), and they not unreasonably locate it below "social welfare" (F), even though the dominant theory of why we grant IP rights—the one in the leading case book that I love and use—conceptualizes IP as a fueler of economic growth.

I saw this ambiguity in action recently, in an article I wrote from 2018 to 2020, where I did a review of U.S. state programs in the last few years that used the word "innovation" (or sometimes "technology" or "research") to describe state funding programs. For instance, a program might be called the "Innovation Fund" or the "Innovation Challenge." A person familiar with intellectual property law or federal funding for research might assume such a program would direct financing towards projects relating to bullet point A, advancement of knowledge, particularly scientific or technological; or perhaps towards bullet point F, social welfare, or bullet point G, economic growth.

In fact, these programs had another pretty specific goal in mind: job creation. They directed public money toward projects that promised to bring more jobs to the region than others. That may be a form of "innovation," to some policymakers or even to some voters. It may fall into a subset of bullet point F ("increased social welfare...") or it might even belong as a new bullet point on the list of "Progress" altogether.  But I know for sure that "job creation" is not the same conception of "innovation" or of "Progress" that we use in patent law or IP law. And it's not necessarily the one that the layperson on the street would suspect.

What's more, these disparate ideas of what counts as "innovation" may result in serious conflicts that can undermine a program's efficacy. "Innovation" that promotes advancement of knowledge that also happens to involve automation, for example, would contradict "innovation" that has job creation for people in the region as its ultimate objective. Likewise, "innovation" that promotes advancement of knowledge that happens to involve environmental disruption or the spread of disease, would contradict "innovation" that has sustainable development, social welfare, or longterm economic growth as objectives. Countless other examples of such conflicts could be derived from the list.

In any case, I highly recommend this timely article, even for those who saw an earlier draft.