All Commentary
Wednesday, August 19, 2009

The Gridlock Economy: How Too Much Ownership Wrecks Markets, Stops Innovation, and Costs Lives

Without private property rights, people have incentives to overuse an asset. Conflicting private property rights, on the other hand, create a “tragedy of the anti-commons” in which resources are underused, according to Michael Heller. In The Gridlock Economy, he treats the reader to a compelling array of examples of the tragedy of the anti-commons in practice, from conflicting rights to the electromagnetic spectrum to problems assembling the rights necessary to expand airports to the ways innovation is slowed by the need to assemble bundles of patents.

Heller, who teaches property-law courses at Columbia Law School, summarizes his point this way: “Gridlock is a free market paradox. When too many people own pieces of one thing, cooperation breaks down, wealth disappears, and everybody loses.” I’m not convinced that this is really a “free market paradox.” If anything, gridlock is a state failure rather than a market failure.

The book’s main contribution to the literature on property rights and institutions is to show that private ownership is a necessary but not sufficient condition for the market to work its magic. When many people have private property rights that allow them to exercise veto power over more valuable projects, wealth dissipates because bargaining is dominated by holdup problems. Russian privatizations, for example, split rights across too many parties and erected veto points that created anti-commons resources.

Heller offers a wide-ranging discussion of regulatory pathologies leading to “gridlock,” particularly in the ways intellectual property is regulated in the biotechnology industry. He doesn’t, however, answer a question I had throughout the book. If it’s clear, as he says, that regulation cannot keep up with innovation (as we’ve seen in technology, medicine, and most recently high finance), why should we trust the state to regulate further? As a Hayekian, I’m skeptical of the notion that regulators can have the information they need to get the market as it is to function as it does on the blackboard in economics 101.

Since outside observers can’t articulate a theory of rights or a structure of institutions that will “work” a priori, it stands to reason that legal institutions should be flexible so as to allow for innovation across fields. While Heller looks for new ways to design institutions, perhaps we should find better ways to let these institutions evolve.

Heller notes that “judicial and political battles are overtaking the academic research” and that Congress is considering serious overhaul of the patent-law infrastructure. But will that solve the “gridlock” problem? Why should we expect members of Congress to know how intellectual property in biotech should be structured? We shouldn’t. I am afraid that Heller is too caught up in what James Buchanan calls “the romance of politics,” expecting politicians to solve problems of their own making.

It would be the height of folly for me as an economist in Memphis to presume to know how intricately detailed contracts in biotech firms should be structured, but we can see some of the pathologies of regulation in a dynamic economy emerging in high-tech enterprises. For example, Heller notes that the Federal Trade Commission arbitrarily dissolved the patent pool for laser eye surgery. He also points out a disturbing trend that deserves further investigation: “In telecom, competitors know that often the most profitable approach is not to innovate, but to stop others from investing.” He’s right. Patent law is often used in a rent-seeking fashion that burdens real innovators, but that has nothing to do with any market failure. Our system of intellectual property is a creature of the government.

Among the causes of gridlock Heller identifies is antitrust law. He writes, “For biotech pooling to have any chance, Congress may need to create special antitrust rules.” He seems not to see how such rules will be hard to adapt to further innovations. And again, he is too trusting of politicians to tinker with legislation to solve a problem. Outright repeal of the antitrust laws would be a much better move, solving numerous problems all at once.

There is much in The Gridlock Economy that could be explored in greater detail, but these are directions for further research rather than criticisms of the thesis. I expect that the book will find its way onto reading lists across campuses worldwide. It offers much food for thought, but readers should think skeptically about Heller’s eagerness to have politicians solve problems that are mostly if not entirely of their own making, not the free market’s.