In October 2008, Congress directed GAO “to provide information on the quantification of the impacts of counterfeit and pirated goods.” GAO sprang into action, “interviewed officials and subject matter experts from U.S. government agencies, industry associations, nongovernmental organizations, and academic institutions, and reviewed literature and studies quantifying or discussing the economic impacts of counterfeiting and piracy on the U.S. economy, industry, government, and consumers,” and produced Intellectual Property: Observations on Efforts to Quantify the Economic Effects of Counterfeit and Pirated Goods (GAO-10-423 April 12, 2010).

The conclusion: Who knows? The data is no good and the methodology non-existent. GAO did note that “research in specific industries suggest that the problem is sizeable, which is of particular concern as many U.S. industries are leaders in the creation of intellectual property.”

My reaction to the report alternates between sympathy for the difficulty of the task, and bafflement that anyone would think it worthwhile to try to perform it. Property rights, including rights in creations and brands, is one of the great bedrock institutions underlying civilized society, and particularly high tech industrial society. Any first order effects from counterfeit or pirated goods are trivial compared with the second-, third-, and n-order consequences of undermining the institution. For example, the first-order effect of counterfeiting may be the losses caused to both producer and consumer by substitution of  low-quality goods, but this loss is trivial compared with the long term losses to society if it is impossible for producers to invest in quality. So why spend a lot of money and time on the first effect when what we really care about is the second?

For such issues, there is simply no point in trying to perform complex analysis; the back of an old envelope and a few scraps of data will tell us that the problem is non-trivial, which is all that we really need to know.

As for the importance of the institution, the report notes:

Intellectual property is an important component of the U.S. economy, and the United States is an acknowledged global leader in the creation of intellectual property. According to the USTR, “Americans are the world’s leading innovators, and our ideas and intellectual property are a key ingredient to our competitiveness and prosperity.” The United States has generally been very active in terms of advocating strong IP protection and encouraging other nations to improve these systems for two key reasons. First, the U.S. has been the source of a large share of technological improvements for many years and, therefore, stands to lose if the associated IP rights are not respected in other nations. Secondly, a prominent economist noted that IP protection appears to be one of the factors that has helped to generate the enormous growth in the world economy and in the standard of living that has occurred in the last 150 years. This economist pointed out that the last two centuries have created an unprecedented surge in growth compared to prior periods. Among the factors attributed to creating the conditions for this explosion in economic growth are the rule of law, including property rights and the enforceability of contracts.7

7William J. Baumol, The Free-Market Innovation Machine: Analyzing the Growth Miracle of Capitalism. (Princeton, N.J.: Princeton      University Press, 2002).

Many years go, when I was on the Program Analysis staff of old U.S. Bureau of the Budget, my bosses, mostly Rand Corporation alumni, would have called this “dominant information,” which is information so determinative of the result that you don’t really care about the details. GAO needs to meet my old bosses, and maybe Congress should, too.