It is a well-known and well-documented fact that wealth is very unequally distributed in the United States (Mother Jones). For example, a study conducted by a Harvard Business School professor in 2011 found that the top twenty percent of Americans own over eighty percent of the nation’s wealth (Mother Jones). There are many hypotheses regarding the distribution of wealth in the United States. However, Thomas Pikkety’s hypothesis stands out among the rest. Professor Pikkety believes that inequality in the United States has increased over time because the average annual rate of return on capital has exceeded the average rate of economic growth overall (Kapczynski). If Pikkety’s hypothesis is correct, then inequality will continue to rise and then plateau over time (Kapczynski). Given the amount of inequality that exists in the United States today and the potential for more inequality in the future, it is important to find practical means by which to solve the inequality crisis. In this blog, I will argue that OSD better curbs inequality than IP because it cuts back on rent-seeking activities, it accounts for unequal market distribution, it lowers the amount of return to scale, and it does not allow companies to monopolize the market for certain technologies.

Photo Citation: http://www.motherjones.com/politics/2011/02/income-inequality-in-america-chart-graph

First, OSD cuts back on rent-seeking activities, which leads to a better distribution of wealth between the rich and the poor. Rent-seeking occurs when companies grow their profits not by contributing to economic growth, but by taking a larger share of the existing economy (Stiglitz). Oftentimes, companies looking to rent-seek will purchase a patent for an idea that they own, thereby forcing others to pay a “rent” to the company each time the idea is used (Stiglitz). Rent-seeking is dangerous for two reasons. First, it excludes other members of society from competing with the company, which means the rent-seeking company can raise the price of the product (Investopedia). Second, because the company is not producing anything new outside of the patented idea, it is taking resources out of the economy that could otherwise be distributed to the poor (Stiglitz). OSD curbs rent-seeking activities because it does not allow companies to profit endlessly off of one idea without making a contribution to economic growth as a whole.

Second, OSD fixes the problem of market ordering that is prevalent in IP. Market ordering means that production in the economy is directed towards those with the ability to pay rather than those who want to pay (Kapczynski). IP raises the cost of goods because patents create an additional cost that would not be present if the market alone distributed the good (Kapczynski). The increased cost of IP goods combined with market ordering means that the majority of IP goods produced will cater towards those who can pay higher prices (Kapczynski). For example, Kapczynski says that more drugs and other goods will be produced for the rich than for the poor (Kapczynski). OSD fixes this problem of market ordering because it cuts out the extra cost added by IP and allows the market to operate freely. Then, products can be distributed more equally amongst those who are both willing and able to pay.

Third, OSD does not allow for significant increasing returns to scale, which slows the rate of increasing inequality over time. IP generates increasing returns to scale because information generated under IP typically has a high fixed cost and a low marginal cost (Kapczynski). Therefore, the average cost per unit decreases as production or distribution increases (Kapczynski). Over time, these increasing returns to scale cause inequality to increase (Kapczynski). Unlike IP, OSD does not allow for any returns to scale because the information is freely distributed. For example, an artist may produce a record. But, they cannot make a profit on the distribution of that record because the record is freely available. The use of OSD would slow the rate of increasing inequality over time because it would prevent creators from amassing a huge amount of wealth by utilizing increasing returns to scale.

Lastly, OSD does not allow companies to monopolize the market for a certain idea or product, which leads to less inequality and better prices for everyone. When a company is able to lay claim to an important idea such as the gene mentioned in the Myriad case, that company has the ability to price the idea or product higher than its market value (Stiglitz). In doing so, more wealth is generated for the company, leading to greater inequality (Stiglitz). In addition, this monopolization has social consequences because less wealthy individuals, who may need the product more, cannot afford it (Stiglitz). In OSD, companies would be unable to monopolize the profits from one idea. Instead, they would be competed against, they would not be able to amass as much wealth, and the price of the product would be lowered for everybody.

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