RATIONALE OF

ECONOMIC
APPRAISAL OF IP
Parvathy K.
In pursuit of
Standardized
Valuation
Rationale of economic Appraisal of IP - Parvathy
K

RATIONALE OF ECONOMIC
APPRAISAL OF IP

Property conceptual outline.

Theoretical justification to treat IP as property

Economic significance of IP

Why value IP?

Rationale of economic Appraisal of IP - Parvathy K

PROPERTY CONCEPT

Etymology
French propret, or proprit, = something owned;
Latin proprietas, from proprius 'own'.

property is the product of social rules

Private property refers to a kind of system that allocates

particular objects like pieces of land to particular
individuals to use and manage as they please, to the
exclusion of others (even others who have a greater
need for the resources) and to the exclusion also of any
detailed control by society.
- [Stanford Encyclopedia of Philosophy]

Ppty In common parlance things

in law means rights in or to things
Private property right is an enforceable individual claim to some exclusive use or benefit of
something.
Rationale of economic Appraisal of IP - Parvathy K

LOCKEAN APPROACH

Though the Earthbe common to all Men,

yet every Man has a Property in his own
Person. This no Body has any Right to but
himself. The Labour of his Body, and the
Work of his Hands, we may say, are
properly his. Whatsoever then he removes
out of the State that Nature hath
provided, and left it in, he hath mixed his
Labour with, and joined to it something
that is his own, and thereby makes it his
Property. It being by him removed from the
common state Nature placed it in, it hath by
this labour something annexed to it, that
excludes the common right of other Men.
LOCKEAN PHILOSOPHY a person who labors
Rationale of economic Appraisal of IP - Parvathy K

SOU

Locke combined the structure of

a theory of first occupancy with
an account of the substantive moral significance of
labor .

First Occupancy theory -the first human user of a natural

resource is distinguished from all others in that he did not
have to displace anyone else in order to take possession.

It did not particularly matter how he took possession of it, or

what sort of use he made of it: what mattered was that he
began acting as its owner without dispossessing anyone else.

These ideas, of John Locke, are widely thought to be applicable to the

field of IP , where the pertinent raw materials (facts and concepts) do
seem in some sense to be held in common and where labor seems to
contribute so importantly to the value of finished products.
Later, it evolved- idea whose realization or development can become useful
to society belongs primarily to him who conceived it

Rationale of economic Appraisal of IP - Parvathy K

IP as a property
Patents, copyrights and the other legal concepts within

the category of IPRs began to take shape in the 18th

century.
(Davoll

v. Brown)
The first time an American judge uses the phrase,
intellectual property, is in a patent decision in 1845.
we protect intellectual property, the labors of the
mind, productions and interests as much a mans
own, and as much the fruit of his honest industry, as
the wheat he cultivates, or the flocks he rears.
Judges and scholars explicitly invoked Lockean property
theory to justify their creation and protection of
property rights in inventions (patents) and creative
works (copyrights)
6

Rationale of economic Appraisal of IP Parvathy K

ECONOMIC THEORIES

The history of what we would recognize

as modern economics in the western
world begins in the 17th century.
At that time, the economies of Europe
and the United States were changing
from principally agricultural to industrial.
The primary economic school of thought
of the day was the mercantilist school.
Mercantilists concluded that the primary
source of wealth during the 16th and 17th
centuries was gold and silver (and, to a
lesser extent, other metals such as
Rationale of economic Appraisal of IP - Parvathy K

In 18th century, the physiocratic school of thought, originating in France,

believed that land in general and agricultural land in particular was the principal
source of national and individual wealth.

18th century - easy for any country to acquire stocks of gold and silver, even if
they had no mines. All they did was to trade their agricultural prodn. for the
precious metals. This national source of wealth creation was also the primary
source of individual wealth accumulation.

Families that owned the land (source of agricultural production ) were

wealthiest in contemporary society. So, during the 18th century, agricultural land
was recognized as the primary source of capital formation.

In 1776, The Wealth of Nations, Adam Smiths monumental work, was

published.

Smiths classical school identified three sources of wealth creation: land, labor,
and capital.

These are the three factors of production that contribute to national wealth as
well as to individual wealth.

Rationale of economic Appraisal of IP - Parvathy K

 Adam Smith (1776)

Jeremy Bentham (1839)
19th century, several classical school

economists expanded on Smiths theories.

David Ricardo
John Stuart Mill (1850s)
Clark (1927)
Arnold Plant (1934)

Joseph Schumpeter (1934)

Arrow (1962)
Machlup and Penrose (1950)
Demsetz (1969), Hirshleifer (1971)
Landes and Piosner

Rationale of economic Appraisal of IP Parvathy K

The philosophy of intellectual property developed in

response to the use of monopoly power to spur
innovation.

Adam Smith* - was critical of monopoly power as detrimental,

but justified the need for limited monopolies to promote
innovation and commerce requiring substantial up-front
investments and risk.

Jeremy Bentham (1839) went beyond this justification for IPRs

, providing a clear explication of the differential fixed costs
borne by innovators and imitators:

That which one man has invented, all the world can imitate.
Without the assistance of the laws, the inventor would almost
always be driven out of the market by his rival, who finding
himself, without any expense, in possession of a discovery
which has cost the inventor much time and expense, would
be able to deprive him of all his deserved advantages, by
selling at a lower price.
Rationale of economic Appraisal of
IP - Parvathy K

10

By the end of the 18th century, it was widely

recognized that the sources of income (and
the associated accumulation of wealth) were
landowners ownership of both industrial
and agricultural land,
workers ownership of their own labor, and
capitalists ownership of industrial
factories and equipment.
In the early 19th century, several classical
school economists expanded on Smiths
theories.
David Ricardo studied the distribution of
income between landowners, workers, and
industrialists. Rationale
In particular,
Ricardo identified
of economic Appraisal of
IP - Parvathy K
that, ultimately, returns
to land, labor, and 11

John Stuart Mill by the 1850s, Mill concluded that

governments would have to intervene in the
economic system in order to more rationally allocate
income among the three sources of wealth.
Mill (1862) concurred that patent monopolies were
justified, arguing that a temporary exclusive
privilege was preferable to general
governmental awards on the ground that it avoided
discretion and ensured that the reward to the
inventor was proportional to the usefulness
to consumers of the invention.
Clark (1927) reinforced this justification, noting that
a system that did not give inventors control of
their inventions would result in a rivalry in
waiting for others rather than an effort to distance
others in originating improvements.
Rationale of economic Appraisal of
IP - Parvathy K

12

Building upon the growing understanding of

oligopoly and the economics of imperfect
competition (Arnold Plant, 1934) offered a more
skeptical view of intellectual property rights,
questioning whether such rights were in fact
needed to stimulate inventive activity and
investment in actual as opposed to idealized
markets.
Arnold Plant argued that much invention is
spontaneous and hence forthcoming without the
provision of patent protection.
He contended further that first mover advantages,
imperfections in markets and other factors
provided inventors and publishers sufficient
rewards to create and market their works even in
the absence of IPRs.
Rationale of economic Appraisal of
- Parvathy K protection would lead
13
Plant concluded thatIP patent

Joseph Schumpeter (1934)

Schumpeter was an economist to recognize the importance

of technological change in modern capitalist economies.
Schumpeters work emphasized three principles:
(1) innovations continually upset established relationships
in markets and organizational structures through a process
of creative destruction;
(2) technological innovation provides the opportunity for
temporary monopoly profit, and this linkage explains the
rapid economic growth of the Western economies; and
(3) large monopolistic firms are the prime source of
technological innovation because they are best able to
bear the high costs of technological innovation.
He argued that the competition for innovation resulted in
temporary monopolies. One monopoly followed after
another; new firms tried to displace the existing monopolist.
In this sense, there could be intense competition. This kind of
competition was referred to as Schumpeterian competition.
Rationale of economic Appraisal of
IP - Parvathy K

14

Ronald Coase - 1960

Negotiating transfers of property rights and its effects on

efficiency is the subject of an economic theorem, known as the
Coase Theorem.
Coase's Theorem, according to which granting property
rights guarantees efficient allocation in the absence of
transaction costs.
In a hypothetical world where rights on inventions and
creations are precisely defined and where it does not cost
anything to draft, sign and execute contracts, innovations
would always be used by those who value them most,
regardless of who made them in the first place.
In other words, leaving aside incentive issues, if transaction
costs are zero, the allocation of the initial rights on innovations
does not affect the wealth created. Whether the first innovator
is granted a broad right or a narrow right makes no difference
in terms of static efficiency.
In such a perfect world, every new word or idea could be
assigned a propertyRationale
rightofand
an owner and every user would
economic Appraisal of
- Parvathy
K
15
have to pay to be able to IPuse
them.

Arrow (1962) provides the seminal modern diagnosis of

markets for information. Arrow recognized that the
marginal cost of increasing the utilization of information
is zero.
Any information obtained, say a new method of
production, should, from the welfare point of view,
be available free of charge (apart from the costs
of transmitting information).
This insures optimal utilization of the information but of
course provides no incentive for investment in research.
In a free enterprise economy, inventive activity is
supported by using the invention to create property
rights; precisely to the extent that it is successful, there
is an underutilization of the information.

16

Rationale of economic Appraisal of IP - Parvathy K

KARL MARX

During the 2nd half of the 19th century, Karl Marx also studied
inefficiency in the allocation of national and personal income (wealth)
among the three factors of production.
From the 1840s, landmark Marx publications advocated the labor theory
of economics.
Marx believed that landowners and capitalists (the owners of industrial
factories and machinery) exploited workers by not giving them a fair
return on their labor.
Marx predicted that capitalism was only an evolutionary phase of
economic development, soon to be replaced by a labor-based economic
system.

Rationale of economic Appraisal of

IP - Parvathy K

17

David Hume

A man's property is some object related to

him. This relation is not natural, but moral,
and founded on justice.
David Hume's conclusions. There is
nothing natural about private property,
wrote Hume.
Until possession is stabilized by social
rules, there is no secure relation between
person and thing. We may think that there
ought to be: we may think, for example,
that a person has a moral right to
something that he has made and that
society has an obligation to give legal
backing to this moral right.
Rationale of economic Appraisal of
IP - Parvathy K

18

MACHLUP AND PENROSE

The Natural Property Right in Ideas - That a man has a "natural"

property right in his own ideas was a principle solemnly adopted by
the French Constitutional Assembly in 1791.
In the preamble of the patent law passed in that year it was stated
that every novel idea whose realization or development can
become useful to society belongs primarily to him who
conceived it, and that it would be a violation of the rights of man in
their very essence if an industrial invention were not regarded as the
property of its creator.
The notion of private property of ideas challenged the ingenuity of
lawyers and philosophers, especially when many writers insisted that
intellectual property was not different in logical nature from material
property, and others went as far as to say that a man's property in
his ideas was more sacred than his property in things material.
The concepts of "property and of "intellectual product" were
carefully analyzed by lawyers, philosophers, and economists.
Everyone conceded that a man of course has exclusive control of his
new idea before he communicates it to others; but, once he shares it
with others, exclusive control is obviously gone; when others are also
in possession of the idea , nothing can be done to accomplish
"restitution.
Rationale of economic Appraisal of
IP - Parvathy K

19

Some economists and lawyers To restrain

others from selling products that embody the
same idea is obviously a possible use of state
power but has nothing to do with "natural
property rights.
They pointed out that the logical elements of the
concept of property as applied to material things
occupation, possession, control, appropriation,
restitution, and so forth -were largely inapplicable
to "ideas" or "creations of the intellect.
Machlup and Penrose depicts the basis of IP as a
property as well as critically outlines the
implications of IP.

Rationale of economic Appraisal of

IP - Parvathy K

20

Landes and posner

The economic theory of property rights emphasizes not

only their incentive effects, that is, the investment
they encourage, but also their effect in optimizing
current uses of property.
William Landes and Richard Posner merely assert as a
foundational truism that making intellectual
property excludable creates value.
They mean economic value when they speak of value,
and they do not feel it necessary to even consider the
proposition that value is created, not by the legal
definition of property rights under the law, but by the
labor of a creator.
The significance of IPRs, as of rights to physical
property, is that they are enforceable against
strangers.
Without exclusive rights to the use of tracts of
land or other valuable physical objects, these
properties would
be overused.
Rationale of economic Appraisal of
IP - Parvathy K
Second, without exclusive
rights, there will be

21

WHY IP MUST BE PROTECTED

To save the investment of the creator with adequate incentive.

They are easily replicated and that enjoyment of them by one

person does not prevent enjoyment of them by other persons.

Those characteristics create a danger that the creators of such

products will be unable to recoup their "costs of expression" ,
because they will be undercut by copyists who bear only the low
"costs of production and thus can offer consumers identical
products at very low prices.

Rationale of economic Appraisal of IP - Parvathy K

22

IMPLICATIONS OF IP AS A PROPERTY

Unlike physical objects, intellectual objects cannot be

depleted or degraded. Thus, intellectual objects are
non-rivalrous, meaning one person can consume
an intellectual object without diminishing any
other persons ability to consume that object.

Further, because intellectual objects are nonrivalrous, the economic notion of scarcity does not

apply to them.
IP can be used by many at once, without being used
up.
The marginal cost of its use is almost zero ;

Rationale of economic Appraisal of IP - Parvathy K

23

PROPERTY AND VALUE

In concept, IP begins with identifying it as nonphysical

property which stems from, is identified as, and whose value
is based upon some idea or ideas.
Locke identifies the ultimate source of property in valuecreating is productive labor.
He expressly praises the value creating, productive labor in
inventive activity within his exegesis of his property theory in
the Second Treatise.
IPRs, such as copyrights, are justified given their economic
value and overall contribution to social welfare.
Waldron
According to Lockes theory of natural property rights, the
legal enforcement of exclusion in property and
intellectual property rights follows from the creation of
value.
Landes and Posner- making intellectual property excludable
creates value.
Rationale of economic Appraisal of IP - Parvathy K

24

ECONOMIC SIGNIFICANCE OF IP

Intellectual property is the central resource for

creating wealth in almost all industries.
The foundation of commercial power has shifted
from capital resources to intellectual property.
Earlier, capital resources would bring to mind
balance sheets of cash or pictures of sprawling
manufacturing plants. Capital resources are
now dominated by intellectual property such as
technological know-how, patents, trademarks,
copyrights, and trade secrets.

Rationale of economic Appraisal of IP - Parvathy K

25

Economic significance of IP

The world has moved towards intellectual capitalism.

IPRs - intangible assets - forms substantial part of

assets of company and thus increase the valuation.

IP play an increasingly fundamental role in corporate

strategy to maximize revenue and attract new
investment.

IPRs allow selling, buying, trading or licensing

innovation and can be used for various business
purposes and like other forms of property.

Rationale of economic Appraisal of IP - Parvathy K

26

WHY IP VALUATION?

IP increasingly play a lead role in promotion of

innovation and economic growth in a knowledgebased economy.
Effective management and utilization of intellectual
assets is essential to business performance and
competitiveness, foreign direct investments
decisions, Business combination decisions etc.
Also there are other reasons for economic valuation
of IP Transactional reasons
Tax Reasons
Financial reasons
Legal reasons
Therefore there is a need to improve knowledge and
information about the valuation and utilisation of IP.
IP Valuation - Parvathy K

27

REFERENCE

Books
Gordon V. Smith , Russell L. Parr, Intellectual Property
Valuation, Exploitation, And Infringement Damages , Wiley
Richard Razgaitis, Valuation And Dealmaking Of
Technology-based Intellectual Property: Principles,
Methods, And Tools , Wiley

Articles

Adam Mossoff , Saving Locke From Marx: The Labor

Theory Of Value In Intellectual Property Theory
John F Duffy, The Marginal Cost Controversy In Intellectual
Property.
Joseph E. Stiglitz, Economic Foundations Of Intellectual
Property Rights
Leonardo Burlamaqui, Intellectual Property, Innovation
and Competition: Towards a Schumpeterian Perspective
Machlup and Penrose, patent controversy 19th century
N. Stephan Kinsella , Against Intellectual Property
Peter S. Menell, Intellectual
28
IP Valuation - Parvathy K Property: General Theories