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Note: This is the second of a three-part post. (Part 1 | Part 3)

If there is such a great need for pricing information on the global IP market, then why has no one ever bothered to gather it together and analyze it? Unfortunately, this is a difficult question to answer, partly because different people give different reasons. Many understand that the fact that virtually all IP transactions are confidential makes it extremely difficult to gather this information. However, there are also a lot of misconceptions, particularly regarding patents, that are often cited as fundamental reasons why this kind of data wouldn’t be meaningful even if it were available.

One issue that has been widely blamed for the non-emergence of IP markets is the fact that IP assets are all unique by definition, and therefore transaction prices cannot be comparable. However, the attributes that distinguish patents within a definable group do not appear to have a distortive influence on the dimension of market value. Although patents within a specific technical area are all scientifically distinct in some dimensions, it is not evident that these differences are the driving factor in determining the market price. It is important to remember that what makes patents different scientifically is very different than what makes them different economically. The scientific and economic dimensions are less interconnected than most people think, and this is a major source of confusion about valuation.

More important, however, is this argument misunderstands the role of market data in many if not most contexts in which it is successfully used. First, it falsely assumes that other types of assets or products being traded in market are truly identical, or at least that their differences have a smaller impact on their economic value. In fact, there are very few products and markets where the products are truly homogeneous (sometimes thought of as “commodities”). Many things that appear to be commodities actually exhibit considerable variance along dimensions that have meaningful impacts on price.

Most market pricing data are aggregated, reported, and used in ways that obscure the impact of variability in attributes on pricing. An example of this is an automobile blue book. If you look-up the price for a particular car model and year you will see a high value (implying a car that has marginally higher than average value - usually associated with better condition or features) a low value (implying worse condition or features) and a mid point (implying typical condition and features). In reality, these numbers obscure the variability associated with these and a lot of other attributes such as where the transaction takes place, and even what color the car is. Obviously some variation in price is attributable to things like the color which are not visible in the market data (the blue book). Nevertheless this data is used to successfully enable what has become a very fluid market in used cars.

Looking at other types of assets such as real estate, industrial equipment, and labor reveals how much more variability is associated with other markets. Yet, the existence of the variability does not eliminate the usefulness of market data in negotiating transactions and providing the key input for sophisticated financing instruments such as securitization, insurance, and more. In fact, most market data that is used as the basis of a wide range of industries is aggregated, averaged, or summarized in ways that obscure significant variations in the attributes of the assets or products. Market pricing data are almost never generated in a context of perfect comparability. For this argument to be valid, one would need to demonstrate that the dimension of variation in the attributes within other markets has a proportionately smaller impact on aggregate market pricing data than it does in patents. However, there is really no evidence to support this.

Another version of this argument is that because patents are scientifically unique, only one or a few companies will be in a position to commercialize them. Therefore, as the argument goes, patents cannot exhibit a “market value” as the market for any given patent is too small to be generalizable. However, this demonstrates a misunderstanding of the concept of market value. Even if an asset has only one buyer, it will have a market value at which it will trade hands. In this scenario, the market may be small but this will only have the effect of giving the buyer more bargaining power in the negotiation. For all of these reasons, we can reject the argument that the dissimilarity of patents prevents their economic comparability.

Further evidence supporting this view is that there actually have been many efforts to aggregate comparables for IP transactions over the years, some of which are embodied in commercial services. A substantial amount of effort has also been invested in alternative ways of approximating market value. In a way, the legitimacy and comparability of the data have already been defined by the demand for it in specific contexts. This is not surprising as it has actually been the case in other areas where market data are now used actively. Ultimately, the valid interpretation of the data will always be defined by the use case and the need, and as I have already argued, there are a lot of valid potential uses for IP market pricing data.

The folks over at WorldMapper.org have some pretty fascinating maps of the world, including one that shows the size of countries proportional to their contribution to the world’s patenting (data are from 2002). Where is the Southern Hemisphere you ask? (You can see pictures of it in National Geographic of course!)

Obviously it is not exactly an “innovation map” but they also have a similar map showing contribution to scientific literature (data from 2001). Patenting and scientific literature have been shown to be useful proxies at least for scientific and technological innovation in many studies. Of course, what these both leave out is every other kind of innovation.

But it sure throws the disparity of participation in the idea economy into bold relief. And it raises the legitimate question of whether the idea economy will really have the flattening or leveling affect that is often claimed. To the extent that intellectual property is one of the most important economic assets of the new millenium, what can the southern half of planet Earth do to participate in the idea economy?

A few years ago Alan Greenspan went before the US Congress in an attempt to explain the dramatic economic transformation sweeping across the planet. The problem was that economics and even the english language simply didn’t equip Mr. Greenspan with the vocabulary to describe it. This isn’t because Greenspan isn’t erudite - quite the contrary. The problem is that economics is a language created to describe the world as it was in the 19th and 20th centuries. In other words, economics is a good way to talk about all the things that used to be important.

But everything has changed. In the space of just a single generation the global economy has shifted from a reliance on physical capital to intellectual capital. It is no longer the tangible ingredients that make up the recipe for economic success, but the intangible ones. Ideas, innovation, technology, knowledge, and creativity now dominate at every level of the global economy, from small companies, to multinationals, and even to entire nations.

Of course Greenspan did what great scientists always do when encountering a new phenomenon they cannot describe - he made up a new word. He simply said, “We are entering the era of ideanomics.” And there it was, in one word. It was as brilliant and elegant as it could possibly be. Ideanomics: the economics of ideas. Here is a word that reduces an almost incomprehensibly complex global phenomenon down to the level of perfect clarity. Virtually anyone that hears or reads it immediately understands its meaning. It is a seminal dissertation in a single word, a sumptuous banquet in a single bite, and a scientific expedition in a single step . Ironically it is, in itself, an idea that is the very model of economy.

But ideanomics is more than just cute and pithy. It is an astonishingly bold proclamation, declaring the inextricable fusion of the intellectual and the material realms. It shines a naked light on the link between the progress of ideas and that of the human condition. Had this word been invented just 20 years earlier it would likely have been derided as a hysterical folly. But spoken as it was at the dawn of the new Millenium, it has hardly been noticed.

Throughout history, economic ideas have often aspired to the ideological heights of religions, variously joining and competing with religions for the opportunity to define a person’s behavior and even his very existence. So by the time Greenspan had proclaimed a new era of ideanomics, the world had already converted to the new industrial religion of “innovation”. But we have only just begun to understand how this changes the rules of the game, and how it will ultimately change virtually everything else.

This blog is devoted to exploring the meaning of “ideanomics” and its radical assertion that the world economy is driven by ideas. Although this may sound highly academic and abstract, it is actually very practical, because “ideanomics” is an extremely practical concept. The focus is on the practical experiences of working in the idea economy, and particularly about managing inventions, patents and other types of intellectual property. Ideanomics is about the way that ideas drive economic activity, and particularly how they transform into intellectual assets and ultimately create value. Topics of interest include business and technology innovation, intellectual property and patents, intellectual asset management (IAM), strategic management of IP, technology commercialization, IP valuation and finance, and much more. I hope you enjoy the blog and return often to learn and contribute.