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A Note on Intellectual Property and Externalities

Mises Daily: Tuesday, October 27, 2009 by


I met Hans-Hermann Hoppe in 1991, I believe. Dissatisfied with inconsistencies in Hayek's concept of individual freedom, I was looking for an assessment that (at least) tried to avoid these inconsistencies. Hoppe's approach was and still is a representative of this rare species.

Hoppe was refreshing. He did not, and does not, take things for granted, for instance the classical liberal assumption that you cannot have individual freedom without government's monopoly to protect it. If we believe in free markets, why should we easily assume that they do not work when it comes to the private production of protection? On a more philosophical level: if we look for a consistent political philosophy that allows for a peaceful solution of man's most fundamental material problem, namely scarcity of resources under competing interests, why should not we look for a set of principles that do not contradict each other, no matter how difficult it appears to achieve these principles in practice?

The anarchocapitalism of Hans-Hermann Hoppe is a model developed along this guideline. Hoppe's principles of original appropriation of free goods and of production and trade of private goods are perfectly compatible. As long as goods are identifiable, all questions regarding their proper ownership can be solved—in principle. Of course, goods which are difficult to identify pose a problem—a problem that exists apparently for each approach that tries to solve the above-mentioned, most fundamental, material problem of man.

Material goods are identifiable, at least in principle. The place where you park your car cannot be taken by another car, at least not at the same time, because matter has extension. On a more general level: matter, whatever form it has or extension it takes, fills a spot in time and space. One and the same point in the time-space-coordinate- system cannot be taken more than once. This exclusive relationship between matter, time, and space helps to identify, i.e., locate, material goods: material goods can exist side by side, but they cannot collide, e.g., take simultaneously the same spot in the time-space-coordinate-system. Hence a society in which only material goods exist can solve its material conflicts without any collisions or conflict as long as we apply coherent principles of legitimate acquisition of property.

Things become more difficult if we include property in immaterial goods. To say the least, the ontological status of immaterial goods is not the same as that of material goods. Whether immaterial goods fill spots in time and space, as material goods do, is much debated. It is also disputed whether or not it is possible to claim meaningfully that something exists if its alleged existence has no material form at all.

According to Popperian ontology, ideas have an immaterial status and began with language.[1] They are entities of World 3 and can be the subject of mental processes. These processes, in turn, belong to World 2. Of course, if we do not claim of ideas, problems, theories, arguments, etc. that they fill spots in time and space, what are they after all? Where do they go when nobody thinks of them? Where have they been in the meantime when someone "remembers" them? Do they disappear with mankind?

These questions address either deep philosophical problems or pseudo-problems. Whatever we think of the characteristics of these problems, it is clear that any meaningful concept of intellectual property presupposes that it is distinct from material property, hence immaterial. A further distinction between material goods and immaterial goods is that the former, in most cases, are tangible goods, whereas immaterial goods, for instance intellectual property, are intangible.[2] Ideas, melodies, and theories have no material extension per se as material goods do. Therefore, we cannot without further assumptions claim for them what we can claim for material goods, namely that they cannot collide with other material goods.

Intellectual property turns out to be a cumbersome element in an otherwise perfectly consistent political philosophy. Of course, Hoppe provides a solution to this problem. His solution rests on the introduction of a normative-functional explanation of private property into the debate and on the fact that immaterial goods are—unlike material goods—not scarce. As Hoppe has put it:

[O]nly because scarcity exists is there even a problem of formulating moral laws; insofar as goods are superabundant ("free" goods), no conflict over the use of goods is possible and no action-coordination is needed. Hence, it follows that any ethic, correctly conceived, must be formulated as a theory of property, i.e., a theory of the assignment of rights of exclusive control over scarce means. Because only then does it become possible to avoid otherwise inescapable and irresolvable conflict.[3]

In other words, assuming that scarcity is the reason for conflict over goods with competing interests[4] and that the very function of property rights is to solve these conflicts peacefully, there is no need to provide property rights for intellectual property, because intellectual goods are not scarce.

I shall return to this argument later. Until then we should keep in mind that intellectual property (if it exists at all) is, unlike material property, difficult to identify and, hence, its philosophical treatment asks for special care. Before we address the analysis of intellectual property, let us look at some aspects of the role of definitions.

Types of Statements: Analytical, Empirical, and Normative

It goes without saying that statements in the sciences can have different forms. Three are of importance here: some statements are purely analytical (for instance definitions, tautologies), while others are mainly empirical (theories, hypotheses) or normative (imperatives, rules, laws).

It also goes without further notice that it is sometimes quite complicated to tell whether a statement is meant to be (purely) analytical, empirical, or normative. Sometimes statements serve two or more masters. Take for instance your wife's message: "Darling, the garbage can is full." Not only do you suppose that she made an empirical statement (an assumption which is obvious because of the grammatical structure used in this sentence), you also clearly understand the implicit imperative: "Get the trash out of the kitchen and return with an empty bucket, please!"

Leaving the peculiarities of our language aside, it appears to be common sense among all scientists that language—despite all its imperfections—should be used as precisely as necessary for the theories in question and that analytical, descriptive, and prescriptive sentences should not be confused. It also appears to me that all three types of sentences have their distinct functions in all academic disciplines: definitions, being analytical statements, provide a field with abbreviations and meaning analyzes of the most central and frequently used concepts or terms,[5] while descriptive statements are mainly used for empirical assertions and prescriptive statements for normative recommendations.

Thus, when the existence or absence of some private property is either claimed or proposed, it is the definition of private property that tells us how private property, in either the empirical or normative context, is to be understood. Obviously, without knowing how private property is to be understood, we can definitely say neither what is empirically asserted nor what the norm recommends.

In order to set the stage for the discussion of the role of functionalism in intellectual property rights, to which we turn later, we should mention here that some definitions look rather functional while others do not. The reason is quite simple. It rests on the fact that some concepts are mainly—if not exclusively—used to describe a functional relation while others do not. For instance, we usually define a wife by the relation to her husband (and vice versa). The fact of bondage by marriage is constitutional for the definition of a wife—as it is for the definition of a husband. However, not for all terms are functional relations constitutional. Looking for a functional relation of the term that is to be defined might lead to the erroneous belief that this function, if found, is constitutional for the term.

For instance, it would be misleading to define private goods by their relation to public goods. Thus, it would be fallacious to conclude that unlike public goods, for which most authors claim nonexclusivity,[6] private goods are exclusive. Whether or not a good is exclusive is a coincidental character rather than a constitutional character of the good in question.

Of course, this coincidental character comes along with most of the private goods. However, it all depends on the way the good is treated by its owner and others. If an owner shares his good with others, it loses its exclusivity.[7] Take for instance a boat that you share with your friends for a trip along the coast. Though, strictly speaking, it is not exclusive for the time of the trip, it is still your boat throughout the trip.[8]

Consequently, an appropriate definition of private property presupposes identifying the subject who privatized the good. This is because the reason for a good to become private is not in the good itself, but rather in the relationship between the good in question and its "relator," i.e., someone who owns it privately, namely the owner. If the owner is sovereign over it, then the good in question is a private good, his private good. In other words: it is sovereignty rather than exclusivity that defines private property.[9]

Having said this, it seems appropriate to add an observation on the exclusion and its costs. There are but two necessary preconditions for the existence of exclusion costs of a private good:

  1. The owner is interested in excluding others from his property; and
  2. Others covet his property.

Obviously, if the owner is uninterested in excluding others, then his property is likely to be taken away by someone who covets it. Nevertheless his exclusion costs are nil.[10] If the owner is interested in the exclusion of his property, whereas nobody covets it, he too faces no exclusion costs.

Though it may seem so at first, it is in fact not trivial to note that private property is appreciated by its owner mainly, if not exclusively, for the positive externalities that come with it. Also important is the insight that not all positive externalities that may come with a private good necessarily belong to the owner of that good. Think of a trumpet player in the street. His playing might cause positive externalities (as long as it pleases the passers-by). However, we most likely do not view him as the owner of these externalities, not to mention having an associated right to ask for compensation for the positive externalities initiated.

We may list five reasons to be reluctant to maintain that the musician has a right in these externalities. First, implicitly we assume that the busker, though the unopposed owner of his instrument, is not the owner of the public space or the air in which he performs and that, hence, he has no privilege to use that sphere exclusively or ask for compensation if others use it. He uses the public space and the free good "air," and so do the passers-by.

Second, though the musician while playing initiates the sound waves, the listening of the passers-by is required in order to produce the full effect of listening to and enjoying music. In other words, though the musician is sufficient to produce the good "music," he is not sufficient to produce the positive externality that may accompany it. Third, the passers-by could also—per impossibile— claim a property right to remuneration of positive side effects, because their forming an audience attracts others to join the event and, hence, enlarge the group of possible donators.

Fourth, the internalization of positive externalities is a problem of its initiator. To the extent that positive externalities are created without agreement (that would allow for compensation) and not internalized by its producer, these effects are nothing but free goods which can be internalized by anybody as he or she thinks fit.

Fifth, since there is no agreement between the busker and the passers-by that would allow for compensation, the positive externalities generated by the guitar player are at best an offer that one is free to accept or reject, and, if accepted, can be treated as a gift while the passers-by are free to respond to it by a return gift, i.e., throwing a few coins in the cap.

However one may view these considerations individually, they all seem to rest on the assumptions that property cannot generate new property for the owner if, in the process of this creation, property of others is included in one way or another; and that this holds true if the new "would-be property" is an externality. In other words, many positive externalities come into existence only by intermingling with property of others; and only if they don't can the initiator claim a right in these without facing awkward queries.

These considerations are closely linked with the topic of intellectual property rights, although this might be not obvious at first sight. In order to become aware of this linkage, one should review the current debate on intellectual property rights.

Libertarians Views of Intellectual Property

Libertarians differ on the point of whether intellectual property rights can be explained and legitimized in the same way as property rights in material goods and services.[11] Some, like Ayn Rand, argue that the origin of property rights lies in the creative process that leads to private goods and thus conclude that intellectual goods, as results of a creative process, are also private and endowed with property rights. In other words, the legitimacy of patent rights, copyrights, etc. rests on the creative act of the author or inventor.[12]

Others argue that the creative act as such would not initiate new property.[13] They rest their criticism on the fact that ideas can be reproduced without any loss of quality and can be shared by many without creating any scarcity problems. As mentioned before, assuming that scarcity is the potential reason of conflict and that the very idea of property rights is to solve these conflicts peacefully, they see no need to provide property rights for intellectual property.[14]

However we might judge these competing views, it is quite interesting that both camps bring in functional explanations of private property, not functional definitions or any other sort of definition, as defined in the "Types of Statements" section above. From the proposed function of private property (be it "to give a man the right to the product of his mind" or "to assign rights of exclusive control over scarce means") they either defend or deny intellectual property rights. However successful these approaches may be, they do not provide definitions of intellectual property in terms of an exclusively analytical statement. In the above-mentioned cases, the definitions of private property serve at the same time descriptive and normative functions, i.e., they also say how private property is and ought to be used in society.

Be this as it may, following the distinctions made herein, a definition of intellectual property has to take account of at least two implications. Assuming that talking of intellectual property is meaningful at all, the definition of intellectual property seems to imply that it shares with all other sorts of property the constitutional characteristic of property, namely being owned in a sovereign way by its owner. Another implication comes from the fact that intellectual goods are immaterial, hence not to be confused with material goods.

Intellectual Property, Material Property, and Externalities

Let us keep in mind that the most fundamental objection to intellectual property rights seems to be the following argument: as soon as we agree to the idea to establish intellectual property rights, we agree to the fact that they can collide principally with property rights in material goods.

The reason for this collision is obvious: a patent forbids everybody, with the exception of the patentee and his licensees, from using their material property in ways that are forestalled by the patent. Thus a patent to bake a plum cake—given to a baker—would prohibit all (nonlicensee) housewives from baking the cake in the patented way despite the fact that they would do it with their own ingredients. Hence, patents can collide principally with property rights in material goods (assuming that the patentee and the owner of the material goods in question are not identical).

Consequently, as soon as we include intellectual entities among the goods that can be private we end up with a political philosophy that has incoherent elements, while the very same political philosophy was coherent before this inclusion. In order to avoid this unpleasant problem, it seems to be necessary either to demonstrate that intellectual property and/or the right in it is nonexistent or to show that the aforementioned collision does not exist at all. Hoppe's approach includes the former demonstration while the latter does not need to presuppose the nonexistence of intellectual property and/or intellectual property rights.

In fact, against the background of some arguments mentioned earlier and some to come it appears to me that the alleged collision does not exist at all and that we can talk meaningfully of intellectual property and intellectual property rights. In order to show this, it is helpful to look at the widespread distinction of the three kinds of usage of goods, namely usus, usus fructus, and abusus. Following this categorization, we distinguish the use of a good, its fruits, and its sale or transformation. I may use my apple tree by sitting under it (usus), eating its apples (usus fructus), or by selling it to a neighbor (abusus). Material usus, usus fructus, and abusus of the apple tree are possible without any further material good added to it.

Obviously, when it comes to immaterial goods, things become different. The material usus of any immaterial good is not possible without material added to it. Take a melody. It takes a voice, a guitar, or any other instrument to use it materially.[15] Mixing the melody with an instrument makes for a usus fructus. Neither an idea nor its fruits are per se material. Even if transformed into another idea, an idea stays immaterial. The material "extension" of an idea, so to speak, comes into existence subsequent to the mixture of the idea with matter.

That intellectual property alone cannot "breed" material property has far-reaching consequences. If it holds for intellectual property what holds for all private property,[16] namely that the sovereignty that comes with it does not go beyond the borders of that good, then no collision between intellectual property and material property is possible. Such a collision would require that the sovereignty that comes with an intellectual good would extend over material property.

Whatever intellectual property is (in ontological terms), the sovereignty over it does not extend to any material property. Thus an idea, whether patented or not, does not provide the owner of the idea with an extra sovereignty over any material property, be it his or the material property of somebody else.[17] That a patented idea (or any other intellectual good) cannot collide with material property means that the collision between the right of intellectual property and the homesteading principle simply does not exist. To put it differently, intellectual property rights and material property rights are in principle compatible.


The alleged collision between the two rights (material property rights and intellectual property rights) seems to rest on a misinterpretation of intellectual property. As some reflection on the different types of usage of goods shows, this misinterpretation rests on the confusion of intellectual property and its (material) externalities. These externalities are not, as shown, per se property of the owner of the idea. Only those externalities that derive from material goods he owned before or from free goods he appropriated belong to him. In particular, he is not the owner of the material goods owned by others. Hence the owner of the plum cake recipe remains the owner of "his" idea but cannot claim sovereignty over the ingredients owned by housewives. There is no collision with his intellectual property and their "using his" recipe of baking a plum cake.

To put it differently, we can talk meaningfully of intellectual property and intellectual property rights. However, intellectual property as such—being free of any material "extension"—is of no immediate importance to business life. What counts in the market are the externalities that can be derived from intellectual property. How to deal with these externalities is, of course, a different matter.


[1] Karl Popper, The Open Universe: An Argument for Indeterminism [The Postscript to The Logic of Scientific Discovery, vol. II] (Totowa, N.J., Rowman & Littlefield, 1982), 116.

[2] Though some speak exclusively of tangible and non tangible goods, I prefer to talk of material and immaterial goods. See, for instance, Stephan Kinsella, "Against Intellectual Property," Journal of Libertarian Studies 15, no. 2 (Spring 2001): 2. The point about material goods is not that they are tangible, for some are not. For instance, atoms and many other small material units are not tangible; they are identifiable only indirectly, though this does not prevent us from calling them material.

[3] Hans-Hermann Hoppe, A Theory of Socialism and Capitalism (Boston: Kluwer Academic Publishers, 1989), 235, n. 9.

[4] Ibid., 10:

[B]ecause of the scarcity of body and time, even in the Garden of Eden property regulations would have to be established. Without them, and assuming now that more than one person exists, that their range of action overlaps, and that there is no preestablished harmony and synchronization of interests among these persons, conflicts over the use of one's own body would be unavoidable. (emphases added)

[5] On the role of definitions, see Gerard Radnitzky, "Definition," in Handlexikon zur Wissenschaftstheorie, Helmut Seiffert and Gerard Radnitzky, eds. (Munich: Ehrenwirth, 1989), 22–33.

[6] We cannot appropriately deal here with the related question of how to define public goods . It seems, however, obvious that non exclusion is an appropriate constitutional character of public goods. So while a likely concomitant of public goods, it is only coincidental. For instance: for the time a public library is used by just one person, it is, strictly speaking, not non exclusive.

[7] Bringing in the owner's right to exclude others shifts the story onto another level for which different conditions hold. Foremost, talking of rights requires the inclusion of normative sentences in the debate, while the aforesaid operates with descriptive sentences exclusively.

[8] Analogously, it would be misleading to say that a private good is a good for which the owner has solved the exclusion problem, or paid the exclusion costs. Although this may hold for many private goods, it is accidental, but not constitutional. Some private goods do not have any exclusion costs, simply because there is nobody interested in being included. Think of bulky waste that nobody wishes to have. If placed on no man's land it becomes a common good (or a bad, for that matter); if placed on a public good (street) it becomes a public good (or bad, for that matter); if thrown in the neighbor's garden, it continues being private—and most likely becomes the subject of a fierce dispute among neighbors. However, it seems appropriate at least to indicate that an explication of the term "public good" would show that one of its main characteristics is non sovereignty.

[9] As Anthony de Jasay has put it: "Sovereignty may be delegated revocably, or transferred for good, but it cannot be shared, and that is why there is no true property that, after cancelling out agents, delegates and intermediaries, is not mine, yours, his or hers." Anthony de Jasay, Choice, Contract, Consent: A Restatement of Liberalism (London: Institute of Economic Affairs, 1991), 75.

[10] Talking of the exclusion costs for goods, from which the owner does not want to exclude others, is pointless. In any case, talking of costs is meaningful only if there exists at least one possible cost-bearer. It is equally pointless to speak of the costs or the price of a good for which there is no demand. The seller might have some clear ideas on the amount of money he wishes to get in return for the good, but he cannot determine the price alone. The price is determined by supply and demand, and this determination finds its expression in the market transaction.

To put it in Lockean terms, "costly" is a secondary quality of a good, but not a primary one. Plainly speaking, secondary qualities of any object presuppose a possible relation between the object and a subject. According to Locke, the primary qualities of an object exist with the object, for instance gravity, while secondary qualities, like color, come into existence through the relation of the object and an observer.

[11] The best account on the different libertarian perspectives on this topic is given by Kinsella in "Against Intellectual Property."

[12] Ayn Rand, "Patents and Copyrights," Capitalism: The Unknown Ideal (New York: The New American Library, 1967), 130–34. "Patents and copyrights are the legal implementation of the base of all property rights: a man's right to the product of his mind" (130).

[13] For instance, Boudewijn Bouckaert, Henri Lepage, Wendy McElroy, Benjamin Tucker and—partially—Murray Rothbard. See Kinsella, "Against Intellectual Property," 11.

[14] See footnote 2.

[15] Of course, this changes the fact that you may use it immaterially, namely, mentally by thinking of it.

[16] In fact, this must hold for intellectual property if intellectual property is to be understood as a sort of private property.

[17] The only sovereignty over his material property comes with that very material property, and with nothing else.