Spillovers Theory and Its Conceptual Boundaries

INTRODUCTION Wendy Gordon has noted that "most of IP law is concerned with internalizing positive externalities." (1) In two recent articles, Spillovers (2) (with Mark Lemley) and Evaluating the Demsetzian Trend in Copyright Law, (3) I challenge the conventional economic theory of intellectual property and specifically the idea that society ought to use intellectual property systems to internalize externalities when feasible. The nature of the challenge--or the spillovers theory--can be viewed in two ways. I would frame the challenge as an internal one based on, and consistent with, welfare economics. In his reply to the latter article, economist Harold Demsetz seems to accept this view while critiquing aspects of the analysis. (4) Others, such as economist Anne Barron, have critiqued the articles, suggesting that the spillovers theory is inconsistent with welfare economics, necessarily relies on some other noneconomic social theory yet to be specified, and thus is truly an external challenge to the conventional economic theories of IP. (5) What is interesting about these responses is how they frame a boundary dispute between economic and other social theories of intellectual property. That such a boundary exists is well understood. (6) What seems worth exploring, for purposes of this Article, is how we arrive at and frame the contours of the boundary through a discussion of spillovers. Claims about what lies on one side or the other of the boundary may turn on assumptions and beliefs that might not hold up on close inspection. For example, consider the reason why Julie Cohen believes spillover theory is unlikely to be valued by economics: The spillovers argument, however, provides no determinate standard.... In the real world, this objection should not be fatal; indeterminacy does not rule out pragmatic policymaking. Within the epistemological confines of economic analysis of law, however, generalized reliance on "externalities" tends to be perceived as signaling a lack of analytical rigor. The problem, in other words, is not the argument itself, but rather these theorists' inability to provide an answer in the terms that their discipline values most highly. (7) Not surprisingly, I disagree with her view of "the epistemological confines of economic analysis of law" and the perceived need for determinacy. (8) Our disagreement rests, I think, on a version or offshoot of the boundary highlighted above. Determinacy is a requirement imposed by the exigencies of policy making or decision making more generally, but it is not an epistemological requirement imposed by economics or the economic analysis of law. If one employs economic (or any other) methodologies to resolve or guide decision making through, for example, cost-benefit analysis, then one inevitably faces difficult questions about what costs and benefits count. As described below, the spillovers theory raises these questions along the boundary noted above. In this Article, I reengage this debate and the critiques I have mentioned, and explore the boundary between economic and other social theories of intellectual property. I begin with a brief discussion of the conventional economic theories of intellectual property. Next, I discuss the spillovers theory and various critiques, and reflect on a number of conceptual boundaries that surface in this discussion. I. A BRIEF DESCRIPTION OF THE CONVENTIONAL ECONOMIC THEORY OF INTELLECTUAL PROPERTY The basic economic justification for intellectual property rights is that exclusive rights provide the necessary incentives for private investment in creating intellectual resources. (9) Information resources face a well-known supply-side problem common to public goods (10): the inability to cheaply exclude competitors and nonpaying consumers (free riders) presents a risk to investors perceived ex ante (prior to production), and this risk may lead to undersupply. …