The Complement Cooperative

Sep 23rd, 2008 | By | Category: Economics, Featured Articles, Lead Article

Well, that was a lot of money chasing nothing.

It’s not as if we’re lacking in problems needing solutions–climate change, energy scarcity, almost every meaningful commodity priced at historical highs. A vast pool of money and a growing list of problems–why wasn’t the connection ever made? Why didn’t at least some of this wealth go toward solving these problems?

We could be riding high on American ingenuity. But we’re not.

Let’s say you and I start a company with the goal of replacing petroleum-based jet fuel. We engineer a bug that spits out something pretty close to kerosene. Excellent. Since we’re a company, we immediately patent the invention.

Now what? While we’ve just figured out a key step, our invention by itself cannot replace jet fuel. We need more pieces–the technology to refine our proto-fuel into something we could put into jets, the bioreactor technology to grow our bugs, a factory and its land, a distribution network, sales to airlines, and so on.

That’s a lot of pieces; we only own one right now. If we raised the money and assembled all of these to the point where we could actually sell an useful product, we’d be first. We don’t want to be first.

If we show it can be done, what would stop someone in China or India or somewhere else in the world from stealing all of this technology and competing with us? (Our present global economy isn’t exactly brimming with respect for intellectual property.) Without the cost of buying up patents—the costs of developing the technology—they’d easily outcompete us. By being first, we end up broke.

We’re better off selling our patent. We could sell this patent to someone who wants to turn it into a product—but they’d run into the same problem we would on that path.

The most likely buyer of our patent would be someone who desires our technology to never be turned into a product—someone who already makes jet fuel from petroleum. Patents, in our post-intellectual-property world, are more valuable as a defensive weapon. To a large extent, this is why all the wonderful scientific knowledge and technical ability pouring out of R&D labs fails to translate to something useful for humanity.

Think of all the companies that would benefit from a competitor to petroleum jet fuel: airlines, airplane manufacturers, hotels, restaurants, theaters… and if it benefits tourism, it benefits governments. For all of these, jet fuel is an economic complement.

The global economy suffers from antiquated complements. Energy sources. Commodities. The markets for many of these tricky complements are highly monopolized. Alternatives require the combination of many different technologies into a chain. By buying up one piece of the chain, the dominant company can prevent the competition from existing.

Broad swaths of the global economy would benefit from the cracking of these monopolized complements–just not the people who would have to be first in actually developing these alternative technologies. So the chains don’t get built. How do we get around this market failure?

I have a crazy idea: Since we’re rapidly socializing our economy–at least the financial industry–we should consider starting a new GSE, the Complement Cooperative.

The co-op would produce financial entities whose goal is to assemble these chains–“alternative to gasoline” or “alternative to jet fuel”–and give the entire chain away. Just like anyone can download Linux and install it for free, anyone could take the technologies in the chain and start a company–secure in the knowledge that someone has already shown that the chain works.

These Complement Co-op funds would take their endowments and contract out to labs to develop the key missing technologies or buy up patents as they enter the market. Throw in some talented patent lawyers, rooting around for prior art to destroy blocking patents. If we want to be really aggressive, the Complement Co-op could be given the right to use eminent domain to forcibly buy blocking patents–paying fair market value for the intellectual property–to promote the public good of new competition.

Combine a government-sponsored Complement Cooperative with a lending agency promoting the formation of new companies based on these given-away technologies, and you have a monopoly-crushing machine.

If the co-op’s entities are giving away the technology, how will they be kept solvent? By raising money from the industries that would benefit from the new technology chain.

In the above jet fuel list of potential beneficiaries, you’d hit them all up. The returns would come not from licensing fees, but from reduced costs on key inputs for their industries. Sovereign funds of governments would be delighted to invest, if the new product could help their economy or serve as a weapon against commodity-based rival nations.

This isn’t “risky.” If you have a sense of the likelihood of success of a given fund–how big are the technological hurdles?–as well as the potential reduction in costs–by breaking up a monopolized commodity market–you could calculate a probable return on investment for these sorts of financial instruments.

It’s a crazy idea, but less crazy than the farce that was our financial industry–the insane financial derivatives that crashed the market this time around. We have to adjust how we think of intellectual property. New inventions are still of use. We need to just help the market feel the value again. Something like the Complement Co-op would do it.

We need to start a new engine behind our economy. One hundred billion dollars–one tenth what we’re contemplating, about on order of what we paid for the tattered remains of AIG–would be more than enough to get something like the Complement Co-op started. We should do it.