The Chicago Intellectual Property Rights Tradition and the Reconciliation of Coase and Hayek

In this paper I trace a fairly continuous line of argument about the institutional mechanisms by which intellectual property is produced and maintained in an advanced, commercial economy.1 The better part of the economic thinking on this subject owes directly to an approach to policy analysis advocated by Ronald Coase.2 Coase's ideas influenced a number of talented economists especially after his arrival at the Law School in 1964. I speak of a "Chicago intellectual property rights tradition" not only because of the splendid bouquet of ideas at the law school proper, but also because of the cross-fertilization that took place between the lawyers and several economists on the Chicago econom ics faculty.3 The enigma of intellectual property can be summarized quite simply this way: Since commercially valuable information can be kept proprietary only for limited periods of time, how is it that so many individuals and businesses are at work producing this information each day? Somehow they must benefit from producing valuable information, either by the lead time advantage they gain over competitors before this information becomes generally available to other firms or else by somehow keeping this information from being utilized by other competing firms. Surely, other firms must be discouraged from copying or at least copying without permission from the original information "owner." How do information-producers establish their proprietary interests in the first place? How do they protect their intellectual harvests from would-be poachers who wish to free-ride on the first information producer's often costly investments?4 To appreciate the contribution of the "Chicago tradition," toward the unraveling of this puzzle, I have organized my discussion in three main parts. In Part I, I emphasize Aaron Director's role both in inaugurating a field of research in law and economics at Chicago and in pioneering a particular methodology for accomplishing that task. Director and his students literally paved the way for Coase and the celebrated property-rights approach to policy analysis.5 As I demonstrate in Part II, Coase's students, especially Harold Demsetz and Steven Cheung, applied Coase's thesis to the problem of the production and profitable distribution of business information.6 The Coase group broke new ground. They systematically applied a method which they called "comparative institution analysis" to the problem of intellectual property.7 I also survey Edmund Kitch's work, which utilizes the basic logic of the Chicago human capital approach in order to reach a surprising result about the effectiveness of the division of knowledge and the organization of work within large business organizations.8 Finally, in Part III I show that the property rights approach applied to intellectual property helps us reconcile Friedrich A. Hayek's celebrated appreciation of the pricing system as a mechanism for quickly and effectively utilizing commercially valuable economic information with another of Coase's pioneer ing essays, namely, the one about the nature of the firm.9 To some extent the firm exists to retard the diffusion of commercially valuable information while, at the same time, effectively and "selfishly" utilizing that information for business gain. Whereas Hayek argued that, once property rights are