Friday, October 8, 2010

Trade, IP, Creativity and Civilization

Will Mercantilism Destroy Civilization?

"The world is just beginning to get it on trade."

Mark Anderson speaking at the Bellevue Club 10/6/10
Mark Anderson 10/6/10
So said Mark Anderson in thought-provoking remarks at the Bellevue Club in honor of the Puget Sound Venture Club's 25th birthday. The criteria on which trade decisions are made is about to change. Today, trade decisions are based on money. Tomorrow, trade will be governed by intellectual property (IP) protection instead. This change arises from the braided strands of IP, creativity, civilization and prosperity. The economic implications are profound.

Anderson decried a system of trade he dubbed mercantilism: an export economy where goods are built under contract using IP developed elsewhere. Countries engaged in mercantilism do not create or invent, but instead co-opt or steal IP by forcing disclosure from others using tariffs, restrictions or other regulatory means. It is "a very good model" to rapidly create an industrial infrastructure, similar to the "fast follower" model a business might use to compete against an innovative first mover. However, it is also a "killer model" where each country that adopts it improves the implementation used by the previously leading country, taking what was once their business, shrinking their exports, and ultimately hollowing out their industrial might. This is what South Korea did to Japan, and what China has now done to South Korea. This is also what Asia collectively has done to the United States.

Since ancient times "the essential function of human beings is to be creative." Creativity is the fundamental art of being human, or being civilized. It is "at the core of who we are." Mercantilism devalues IP as it destroys incentives to create. The destruction of those incentives and the subsequent decline in creativity is the same as the decline of civilization itself. "Free trade" and "fair trade" as practiced devalue IP by releasing it into the wild of mercantilist exploiters.

Entrepreneurial, startup companies are at heart a vehicle to build and distribute IP. They are the most efficient way to distribute IP, as long as there is some way to sustain that and be paid for the work of creativity. "Entrepreneurs are irrational, or they wouldn't be doing what they're doing" in sending production overseas to mercantilist countries in search of short-term cost reductions. But entrepreneurs must ask the question: "How long can I trade with you while protecting my IP?" The nature of trade will change as entrepreneurs and business leaders of all kinds first ask, and then seek a sustainable answer to this question. Trade in the future will be based on blocs of countries that embrace and protect the sustainable value of IP—and those that don't.

Where is IP valued and sustainable today? Only in "what looks much like the British Commonwealth," with a few additions—the US, the UK, Australia, Canada, the Nordic countries and most (but not all of Europe.) These are countries that gave early protection to IP and consequently have been the global economic winners for some time. Economic competitiveness arose from sustainable treatment of IP and its value. The much-lamented loss of US domestic manufacturing capability and the decline of America's industrial heartland are in part linked to the embrace of the mercantilist model of trade. The solution starts with trade based on IP protection.

Trade decisions must be based on the sustainability of IP. Protecting IP protects and incentivizes creativity. While government must take a role in advocating for treaties and agreements that protect IP, we as entrepreneurs must make choices that protect our own economic interest and that of our shareholders. Not only is it good for our business, it's good for our country, and it may just save civilization too.

Happy 25th Birthday to The Puget Sound Venture Club, and thanks for an engaging, festive and entertaining evening. Happy birthday too to Gary Ritner, founder of the Club, and visionary leader of Seattle-area angel investing. All best wishes for many more successful years!

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