1 ‘The knowledge economy, the crash and the depression’ Ugo Pagano and Maria Alessandra Rossi 1. Introduction The knowledge economy is generally invoked as the key to progress, development and prosperity. Since the work of Schumpeter (1934; 1942), knowledge production and innovation have been identified as distinctive features of market economies, crucial to overcome societal inertia and, as later recognized by Abramovitz’ (1959) and Solow’s (1960) seminal contributions, more relevant than capital accumulation to explain growth. A recent strand of research has, however, emphasized that the present institutions of the knowledge economy, far from being infallible engines of economic growth, embody features that may lead to their own demise, resulting in stagnant growth. The key to understanding why the endgame of the knowledge economy may be crash and depression is the analysis of the dynamics leading to a reduction of investment opportunities as a consequence of the escalation of knowledge enclosures associated to the strengthening of the intellectual property (IP) system and the weakening of the traditional institutions of ‘Open Science’. The progressive monopolization of intellectual resources gives rise to both virtuous and vicious feedback effects between the distribution of intellectual assets and incentives to learn and develop new knowledge. Even where virtuous cycles are at play, however, the more the share of non-privatized knowledge shrinks in favour of intellectual monopolies, the less global investment opportunities tend to be available and therefore the less the knowledge economy is able to keep its growth promises. The ongoing reduction of the share of publicly available knowledge resources is compounded by the political economy of IP protection and public funding of Open Science. At the national level, large firms’ rent-seeking activities and corresponding decision makers’ capture may explain many aspects of the evolution of national IP systems and innovation policies. However, this is not the end of the story. At the international level, many forces are at play that conjure up to increase the extent of knowledge enclosures. Contemporary international IP treaties such as the Agreement on Trade-Related Aspects of Intellectual Property Rights (henceforth, also TRIPs Agreement) involve reciprocity rules such as that of ‘national treatment’: to obtain IP protection for their nationals in signatories to the Agreement, countries have to grant foreign inventors the same treatment as they grant to domestic inventors. Once rules of this type are in place in the international IP domain, countries’ incentives to (upward) harmonize their IP rules are magnified and an excessive degree of IP protection tends to result, not just for the majority (of nations) but arguably for all. More generally, the global commons nature of knowledge resources creates scope for free- riding phenomena whereby each country has an incentive to use the public knowledge of other countries and to over-privatize the knowledge that it is producing, leading to a one-way ratchet of increasing IP protection. Both at the national and at the international level, the problem is reinforced by ubiquitous feedback effects: once IP institutions are in place, firms (countries) find themselves in a prisoner’s dilemma situation whereby patenting (strengthening patent protection and reducing the scope of publicly available knowledge) is a dominant strategy for all even if choosing a strategy of greater openness would be consistent with joint welfare maximization.