Broadening the scope of plant patent eligibility solves vertical disintegration, the number one cause of secular stagnation.

Herman Schwartz 21, Politics Department, University of Virginia, Charlottesville, VA, USA, 5/6/21, “Global secular stagnation and the rise of intellectual property monopoly”, Review of International Political Economy, pg 23-24, https://doi.org/10.1080/09692290.2021.1918745, kcab

6. Conclusion

Returning to classical analyses complements and more fully explains current growth puzzles than analyses focusing only on income inequality, or apparent supply side limits, or which assume homogenous firms enthralled by the shareholder value model. Keynes and Veblen highlight how firms’ fear and management of excess capacity might depress net new investment even in a low interest rate environment. Schumpeter and Veblen highlight how mobilizing capital investment into existing rather than novel channels pushes the economy towards a lifeless and low inflation circular flow. Veblen highlights how differential profitability flows from heterogenous strategies and differential success pursuing monopoly. Politically mediated changes in corporate strategy and organizational structure away from the pursuit of oligopolistic profit through control over physical capital embedded in vertically integrated firms towards the pursuit of monopoly profit through control over IPRs in a vertically disintegrated commodity chain have shifted the OECD-21 economies onto a low investment, low growth, low inflation trajectory characterized by income inequality among workers and a specific form of profit inequality among firms. Vertical disintegration of the production process – the segmentation of production into different legal containers or firms – produced three different kinds of firms out of Fordism’s dual industrial structure. Low headcount human capital-intensive firms deploy IPRs to capture and hoard a disproportionate share of profit, reducing the growth impulse from investment.

Physical capital-intensive firms rationally delay or avoid investment to avoid creating excess capacity and thus worsening their bargaining position versus the first type of firm. Labor-intensive firms typically invest little. Profit inequality has shifted investable resources towards firms with a low marginal propensity to invest; firms that might invest hesitate to create new capacity in a low growth environment. Firms with monopoly positions fear cannibalizing their sales, inhibiting productivity growth through innovation. Wage and profit trends combine to reduce total aggregate demand and thus growth.

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Counterfactually, had firms remained vertically integrated, the increasing share of profit captured by IPRs would have been distributed more evenly across a larger workforce and firms would have had the resources to make investment with higher multiplier effects. Although this article does not consider fiscal policy and tax avoidance to any degree, the analysis suggests that a more sustained expansionary fiscal stance, like that present in Fordist Europe (Eichengreen, 2008), would have reduced fear of creating excess capacity. In this respect, easy tax avoidance by IPRrich firms is one factor contributing to fiscal stress, and thence to reduced growth in aggregate demand.

The tripartite structure is a political and legal reality, not a technological or physical reality, as any tour of an automobile factory or perusal of the iPhone bill of manufactures reveals. The same tasks are being done as in the past, when automobile firms or Apple were vertically integrated. But now they are fragmented over different legal entities, producing highly unequal profit and wage outcomes. The primary problem is the legal separation of IP ownership from physical production and the bulk of employment. While the intangibility of IP matters (Haskel & Westlake, 2018), so do industrial organization and IPRs, which are matters of legal form.

In short, it is not just concentration of profits, but concentration into specific kinds of firms subsequent to a politically mediated legal fissuring of production activities and labor forces. Fragmentation reflects choices made by the political actors that control the organizations regulating antitrust enforcement (Christophers, 2016), defining what qualifies for patent or copyright protection (Pistor, 2019), and defining who is legally the employer (Weil, 2014). The good news here is that nothing about the current era of slow growth and rising inequality is baked into the cake of a ‘service economy’ or ‘information economy’.

Changes in regulation, labor relations, and tax structure, as well as more the more aggressive fiscal policy that Covid-19 has already sparked could accelerate growth and change firms’ strategy and structure. None of that will be easily accomplished given the current concentration of profits and thus wealth, but Covid-19 has clearly opened the door to more aggressive policy backed by popular demands.