How IP is Helping the Economy Grow, According to Nobel Laureate

Paul Romer recently was awarded the Nobel Prize in Economics for his groundbreaking work in the relationship between the market and consumer happiness. Dubbed the “endogenous growth theory”, Romer suggests that there is a snowball effect in the market of ideas, and as the general knowledge increases, the market benefits. His theory reinforces the basic principles of property rights: when people feel secure in their ownership of products they are likely to produce more.

Romer distinguishes the properties of certain goods to define the scope of their influence. He delineated two primary types of goods: rival and nonrival. Romer asserts that for rival goods “strong property rights lead to efficient outcomes”, meaning that when a competitive good is protected under property rights, then the good is more likely to be successful and produce outcomes for its producer. When the creator has rights to his or her goods, then the society operates more functionally and aligned with the fundamental pillars of natural rights. If the creator does not retain rights to their product, then there is nothing to assure them their product won’t be stolen. This unsureness slows production and innovation, leaving society worse for wear.

Complementary to Romer’s award winning theory, intellectual property rights induce the consumer’s happiness by fostering a sense of security about personal innovations and creations. The knowingness of personal property incentivizes many to invest and buy luxury items and maintain a sense of pride in relation to those items. When the ownership is stripped, then the consumer has become disenchanted with the items and is less likely to purchase, thereby injuring the market.

Romer’s theory suggests the market generates new ideas and those ideas are dependent on the factors of the consumer, primarily research and development. When the market is generating new ideas, the individuals who harness the output and conduct them into products have created something entirely new from the common market strain. This ingenuity is then rewarded with intellectual property protections, which are fundamental to assuring the system maintains its productivity.

Intellectual property incentivizes innovation and production and cooperates with market norms to construct a highly functional economic system. For Romer, it is pivotal to understand the relationship between the market and its consumers as they work in tandem to operate for the long-term benefit. Property rights are an assurance to the individual that their personality and creativity is protected in the market, and as a reward, they continue to produce.