Sunday, 14 July 2013

Fakes are Fabulous

Review of The Knockoff Economy: how imitation sparks innovation by Profs Kal Raustiala and Christopher Sprigman, Oxford Unviersity Press, 2012.

Ever been tempted to buy a fake designer handbag while on holiday but felt too guilty to make the purchase?  Professors Kal Raustiala and Christopher Sprigman will assuage your conscience; in their new book The Knockoff Economy, they argue that the copying of luxury goods can serve as free and powerful advertising for the genuine brand.   They cite research by the NBER which found that the advertising effects of counterfeits often outweigh the substitution effects.  So go ahead, wear that fake Dior with pride – you’re doing the brand a favour and improving the livelihoods of the knockoff makers and sellers.

The thesis of this very enjoyable read is that new technologies have facilitated the ability of individuals and companies to imitate others’ designs or to borrow and tweak them.  This process has resulted in effusive amounts of creativity and innovation in a number of industries and professions, thus challenging the principle behind the monopoly theory of intellectual property protection.    

The authors examine a variety of industries and arts, some which have strict rules on copying, like music (copyright) and pharmaceuticals (patents), but most of the book provides  a deeper examination of disciplines where restrictions (in the US) on copying are absent or are not used, such as fashion, databases, football strategies, finance and fonts.  In these fields they find that copying has stimulated rather than inhibited innovation and call this the “piracy paradox.”  In other fields, such as comedy and magic, social norms protect the interests of performers by preventing outright copying.  And in the world that is fine cuisine, the possibility of imitation leads chefs to structure their creativity in ways that make it less vulnerable to copying, making not only signature dishes but unique dining experiences.

The chapter on fashion is a thorough and engaging tour through the history of the industry, culminating in where we are today – enthral to both the luxury brands and the knockoffs of the high street.  The fashion cycle is described to show how innovation is diffused from the catwalk to Zara to Forever 21 and why it benefits each producer along the quality spectrum.  In fashion, “copying acts like a turbocharger that spins the fashion cycle faster.”   The authors acknowledge the ethical dimension of fast fashion, but remark that this is not the focus of their story.  Still, the whole issue of foreign working conditions and textile landfill are serious human and environmental costs of the industry which don’t get even a mention.  Likewise, the dark side of financial innovation is ignored.

For many of the creative endeavours examined in the book, social norms play a significant role in protecting the uniqueness of certain works or performances, such as stand-up comedy and the cuisine of top-flight chefs.  “If social norms are powerful enough, they can achieve much the same outcome that legal regulation would...they express the rules of a given community about what is allowed and what is not.”  The authors surmise that norms can achieve this at a lower cost to society than legal rules, though this is difficult to actually measure.

Another means of innovation discussed in the Knockoff Economy is the work of the tweakers; those that take the work of a pioneer, such as open-source software, and improve upon it collaboratively.    The very idea of open source is that cooperation and unimpeded propagation are a better means of promoting innovation than the enforcement of property rights.  American football highlights the tweaking strategy as certain formations are quickly copied when proven to be effective, then tweaked to suit the strengths and weaknesses of a particular team (didn’t expect to find this as interesting as I actually did!).  “As more and more Tweakers wring the flaws out of a Pioneer’s code, the solutions to the problem get better and better.”

The epilogue to the book is an examination of an industry which attempted to use legal means to prevent copying with disastrous effect - the music business.  (You’ll probably have heard economist Alan Krueger citing the music industry as a microcosm of the entire US economy over the past few decades.)  The result is that in music as in cuisine, the creative edge now comes from the performance rather than just the product.  In fact, recordings are now oftentimes used as an advertisement or lure for the live concert.  The result is that both the restaurant and live music performance businesses are booming. 

Though I found much of the conclusion section to be rather repetitive of the previous chapters, there is a very interesting section at the end on the costs and benefits of creativity.   The major points here are that the benefits of innovation are often overestimated by the innovator  (this is called optimism bias) which actually serves to induce more innovation than otherwise even in the face of copying.  And secondly, the costs of creation are dropping in many fields which further encourages innovation.  They also refer to the superstar effect -  that many markets for creative goods are characterised by tournaments where a huge reward goes to a few at the very top while much less is won by those just below.  These nevertheless induce more investment than is rational, leading to high levels of innovation. 

So imitation is not just the sincerest form of flattery, it’s an engine that sustains creativity, innovation and growth.

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