Incorporate Free Innovation into Microeconomic Theory

Despite the large and growing importance of free innovation in the household sector, free innovation has not yet been incorporated into standard microeconomic thinking. In part this is because statistical data series on free innovation do not exist yet. In part it is because, absent compelling data or other reasons, researchers with an interest in innovation may be quite satisfied to work within the traditional producer innovation paradigm, ignoring the important and growing levels of innovation in the household sector of national economies. After all, the Schumpeterian framework does fit a substantial portion of innovation development activity. Further, scholarly findings and data accumulated over many decades have made the producer paradigm an ever richer and more convivial environment for the conduct of normal science.

Expanding innovation research and research questions to include the free innovation paradigm offers very interesting new spaces for novel and enriched economic theories of innovation. Several illustrative examples have been initially explored in this book. In chapter 4, I explained why free innovators tend to pioneer new applications and markets, with producers following later. In chapter 5, I explored a market failure likely to reduce the diffusion of free innovations. In chapters 3 and 6, I discussed the potentially fruitful concept of a division of labor between free innovators and producer innovators. My colleagues and I have also shown that free innovation has positive effects on social welfare, and generally also on producers' profits, relative to a world in which only producers innovate.

Strikingly from the research perspective, my colleagues and I have documented that innovation activities in the free innovation paradigm do not require intellectual property rights to be viable. This finding can open the way to rethinking a central feature of microeconomic models of innovation: the assumption that private investments in innovation must be protected by systems of intellectual property rights. The argument underlying this assumption is that producers' profits from innovation investments will disappear if anyone can simply copy their innovations, and so producers must be granted exclusive control over their innovations for some period of time. (See Machlup and Penrose 1950; Teece 1986; Gallini and Scotchmer 2002.)

We now see that, even if producers do require intellectual property rights to protect and profit from their own investments in innovation design, adoption of free designs from free innovators requires much less producer investment—and so perhaps much less protection, too. This would be a welcome option to explore because, as is well known, intellectual property rights are a devil's bargain from society's point of view. At the same time as they (putatively) enhance producers' incentives to innovate, they also create deadweight losses for society by enabling monopoly pricing. Patents also disrupt the efficient forward movement of fields as owners of intellectual property place tollbooths astride promising pathways to further research and development (Murray and Stern 2007; Bessen and Maskin 2009; Murray, Aghion,

Dewatripont, Kolev, and Stern 2009; Dosi, Marengo, and Pasquali 2006; Merges and Nelson 1994). Efforts to ease these negative effects have a long history (e.g., Hall and Harhoff 2004). However, the inbuilt conflicts between social goals and producer goals with respect to intellectual property are fundamental, and problems will predictably fester.

A rethinking of the need for and effects of intellectual property rights should be based on an improved empirical understanding of where such rights are actually effective today. Sometimes patent rights do not exist in practice even when legally granted. Thus, biomedical researchers in universities and governmental and nonprofit institutions have been found to routinely ignore the legal rights of patent holders whose claims might impede their research (Walsh, Cho, and Cohen 2005). Contrastingly, many innovation types that are not legally protectable, and so assumed by economists to be freely available, are actually protected from potential free adopters by social means rather than legal means. For example, accomplished chefs cannot legally protect exclusive rights to the novel and economically important recipes they develop and practice in public—recipes are not patentable or copyrightable subject matter. However, these recipes are effectively protected nonetheless by community enforcement of anti-copying norms within communities of expert chefs (Fauchart and von Hippel 2008; King and Verona 2014).

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