Monday, June 27, 2011

More on markets and property rights - tobacco

Ever since Ronald Coase created the foundations of the New Institutional Economics with his papers on the theory of the firm and social cost, a body of work has developed that has equated economic growth and progress with the creation of "property rights".

Douglass C. North is probably the foremost exponent of the application of the concept in economic history and development.

Many of the economists of the "new right" championed the importance of "property rights", none more so than Milton Friedman in his Capitalism and Freedom, which linked the economic theory of competition/choice to the political idea of freedom.

But the important point to be drawn from the Inquisitional view is that property rights are, in fact, a social construction. This is less easy to see with tangible goods, but even there the "right" to exclusive ownership is a relatively recent creation (England's enclosure happened between 1760 and 1820).

It is more obviously a social construction with respect to intellectual property. The creation of both copyright and patent protection are political acts. The inexact nature of both is legendary, and the facility with which the law has been changed equally so. The infamous "Mickey Mouse" clauses that extend the period for which copyright endures after the creators death are the best example.

This brings us to the extraordinary campaign by Big Tobacco against plain packaging legislation. Firstly there is the ad campaign trying to push the "Nanny State" line. As this ABC news report shows the companies are wise to care - after all the US is now implementing the Australian graphic images approach and the UK is following the take the product off display approach.

But there has also been the big threat of legal action, notably under section 51(xxxi) of the constitution - the infamous "vibe of the thing" clause as celebrated in the movie The Castle.

But now Phillip Morris is evidently going early using a clause in a trade agreement with Hong Kong to argue a case that the proposed law infringes their intellectual property. The reality is these clauses are inserted in trade agreements to protect against software piracy and brand name faking.

But the appeal of their case is that people interpret it as a "battle for commercial freedom". And hence we see the link back to the idea created by Friedman.

So let's get this clear from a theory and policy point of view. Property rights are social constructions. The clear allocation of property rights facilitates trade, markets and economic activity.

But clarity of property rights does not equate to a presumption of unrestrained property rights. When you buy land you do so subject to the planning laws about what you can build on it.

Let's imagine the case where the government decided to make tobacco an illegal drug. Would the tobacco companies make the same claim about the infringement of their property rights in the brand.

Let's try something simpler. A drug company invests in the IP of R&D from a drug, they invest in the clinical trials and then they invest in branding it. Let's call the drug Thalidomide. The company then markets the drug only to discover that the drug is directly responsible for birth defects.

The Government bans the drug. Does the drug company have a case for the loss of all that IP?

You may rightly point out that the drug company is at risk from a legal action - I think it is a tort - for the damage the drug caused so it removed the product itself. But that doesn't change the logic.

The property right in a brand is a social construction that it is the gift of the "polity" to restrain, so long as that is an action taken for a public not a commercial purpose.

Novae Meridianae Demetae Dexter delenda est


johnnyz said...

Surely the legitimate issue is around the question of compensation when property rights are amended, particularly if the rights holder has not offended any current law / regulation.

David Havyatt said...

The legitimate issue may be compensation when rights are amended, the question is though are they being amended. The brand owners are asserting a right (to promote their products) which never existed.

And if it is compensation for rights being amended is Disney going to pay the Government for the benefit they obtain when copyright periods are extended?