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How to Slow Economic Progress

June 1, 2011

Tags Free MarketsLegal System

[The Freeman, June 2011]

Advocates of free-market capitalism commonly believe in the legitimacy of intellectual property (IP) because IP rights are thought to be important to a system of private property.

But are they? There are good reasons to think that IP is not actually property — that it is actually antithetical to a private-property, free-market order. By intellectual property, I mean primarily patent and copyright.

It's important to understand the origins of these concepts. As law professor Eric E. Johnson notes,

The monopolies now understood as copyrights and patents were originally created by royal decree, bestowed as a form of favoritism and control. As the power of the monarchy dwindled, these chartered monopolies were reformed, and essentially by default, they wound up in the hands of authors and inventors.

Patents were exclusive monopolies to sell various goods and services for a limited time. The word patent, historian Patricia Seed explains, comes from the Latin patente, signifying open letters. Patents were "open letters" granted by the monarch authorizing someone to do something — to be, say, the only person to sell a certain good in a certain area, to homestead land in the New World on behalf of the crown, and so on.

It's interesting that many defenders of IP — such as patent lawyers and even some libertarians — get indignant if you call patents or copyright a monopoly. "It's not a monopoly; it's a property right," they say. "If it's a monopoly then your use of your car is a monopoly." But patents are state grants of monopoly privilege. One of the first patent statutes was England's Statute of Monopolies of 1624, a good example of truth in labeling.

Granting patents was a way for the state to raise money without having to impose a tax. Dispensing them also helped secure the loyalty of favorites. The patentee in return received protection from competition. This was great for the state and the patentee but not for competition or the consumer.

In today's system we've democratized and institutionalized intellectual property. Now anyone can apply. You don't have to go to the king or be his buddy. You can just go to the patent office. But the same thing happens. Some companies apply for patents just to keep the wolves at bay. After all, if you don't have patents someone might sue you or reinvent and patent the same ideas you are using. If you have a patent arsenal, others are afraid to sue you. So companies spend millions of dollars to obtain patents for defensive purposes.

"There is no need to impose artificial scarcity on ideas to make them more like physical resources, which — unfortunately — are scarce."

Large companies rattle their sabers or sue each other, then make a deal, say, to cross-license their patents to each other. That's fine for them, because they have protection from each other's competition. But what does it do to smaller companies? They don't have big patent arsenals or a credible countersuit threat. So patents amount to a barrier to entry, the modern version of mercantilist protectionism.

What about copyright? The roots lie in censorship. It was easy for state and church to control thought by controlling the scribes, but then the printing press came along, and the authorities worried that they couldn't control official thought as easily. So Queen Mary created the Stationer's Company in 1557, with the exclusive franchise over book publishing, to control the press and what information the people could access. When the charter of the Stationer's Company expired, the publishers lobbied for an extension, but in the Statute of Anne (1710) Parliament gave copyright to authors instead. Authors liked this because it freed their works from state control. Nowadays they use copyright much as the state originally did: to censor and ban books. (More below.)

IP, American Style

The American system of IP began with the US Constitution. Article 1, section 8, clause 8 authorizes (but doesn't require) Congress "To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries."

Despite modern IP proponents' claims to the contrary, the American founders did not view intellectual property as a natural right but only as a policy tool to encourage innovation. Yet they were nervous about monopoly privilege, which is why patents and copyrights were authorized only for a limited time. Even John Locke, whose thought influenced the Founding Fathers, did not view copyright and patent as natural rights. Nor did he maintain that property homesteading applied to ideas. It applied only to scarce physical resources.

Granted, some state constitutions had little versions of copyright before the American Constitution. (See Tom W. Bell, Intellectual Privilege: Copyright, Common Law, and the Common Good, part 1, chapter 3, section B.1.) On occasion, the language of natural rights was used to defend it, but this was just cover for the monopolies they granted to special interests. Natural rights do not expire after 15 years. Natural rights are not extended to Americans only. Natural rights wouldn't exclude many types of innovation and intellectual creativity and cover only a few arbitrary types.

And what is the result of this system? In the case of patents we have a modern statute administered by a huge federal bureaucracy that grants monopolies on the production and trade of various things, which means holders may ask the federal courts to order the use of force to stop competitors. But the competitors have not done anything that justifies force. They merely have used information to guide their actions with respect to their own property. Is that compatible with private property and the free market?

Examples of Censorship

In the case of copyright the result has been actual censorship, as recent examples will show. According to Engadget, Russian authorities, with Microsoft's approval, used IP law as a "pretext for seizing computers and other materials from political opponents of the government and news organizations." In another case Susan Boyle, the English singer from Britain's Got Talent, was prevented from singing a Lou Reed song on America's Got Talent because of copyright. Then there was the case in which a 1922 German silent film, Nosferatu, was deemed a derivative work of Bram Stoker's Dracula and ordered destroyed.

One of the most outrageous cases concerns the novel Sixty Years Later, Coming Through the Rye, Frederik Colting's sequel to J. D. Salinger's The Catcher in the Rye. Salinger got the courts to ban publication of the book on copyright grounds. "I am pretty blown away by the judge's decision," Colting said. "Call me an ignorant Swede, but the last thing I thought possible in the US was that you banned books."

These examples will be dismissed as abuses of an otherwise good law, but it's the law itself that is the abuse.

Although natural rights are often invoked, the most common argument for IP, even among libertarians, is utilitarian, or "wealth-maximization," which was the approach of the Founding Fathers: IP monopoly encourages innovation and therefore creates net wealth. In other words, the benefits outweigh the costs.

No doubt the patent system imposes costs on American society. I've estimated the net cost at $38–48 billion a year, and this is probably conservative. The costs include patent-attorney salaries, fees, litigation, increased insurance premiums, and higher-priced products — plus innovation and research lost when companies concentrate on patentable innovations and allocate fewer resources to more basic scientific research, or when an entire field is avoided for fear of patent-infringement lawsuits.

Anyone who argues that patents yield a net gain is obliged to estimate the total cost (including suppressed innovation) as well as the value of any innovation thereby stimulated. But IP proponents never provide these estimates. I'm no empiricist — my opposition to IP is based on principles of justice and property rights — but IP advocates make the empirical claim that we are richer because of the patent system. They say we have more innovation at a low price. Yet virtually every empirical study I've seen on this matter is either inconclusive or finds a net cost and/or a suppression of innovation. (I ignore here the valid Austrian objection that costs and benefits are subjective and not measurable.)

Thus a good utilitarian would have to conclude that patent and copyright laws are harmful.

Creation

Some IP advocates do make a serious natural-rights case on the grounds that the innovator has created some new, valuable thing — a song, a painting, a novel, or an invention. Because he created it, the argument goes, he is its natural owner. But this conflates the source of property rights with the source of wealth. As Ayn Rand — a strong proponent of IP — recognized (in "The Metaphysical Versus the Man-Made," Philosophy: Who Needs It),

The power to rearrange the combinations of natural elements is the only creative power man possesses. It is an enormous and glorious power — and it is the only meaning of the concept "creative." "Creation" does not (and metaphysically cannot) mean the power to bring something into existence out of nothing. "Creation" means the power to bring into existence an arrangement (or combination or integration) of natural elements that had not existed before.

In other words, individuals create wealth by using their intellect, creativity, and labor to transform already-owned scarce resources into more valuable configurations. In a free society a producer owns the resulting products because he owned the factors transformed in the production process. The idea behind production adds nothing to the ownership claim that wasn't already present.

Control of Physical Property

In fact, assigning property rights in ideas and other immaterial things, such as patterns or recipes, ends up restricting other people's rights to control their physical property. Copyright and patent holders thus become, in effect, co-owners of others' property, courtesy of the state. This is illustrated in the copyright-censorship examples provided. And it is seen in cases where a patentee uses the courts to shut down competitors.

Another way to understand the error in treating information, ideas, and patterns as property is to consider IP in the context of human action. Ludwig von Mises explained in The Ultimate Foundation of Economic Science that "to act means: to strive after ends, that is, to choose a goal and to resort to means in order to attain the goal sought." Knowledge and information of course play key roles in action. As Mises puts it, "Action … is not simply behavior, but behavior begot by judgments of value, aiming at a definite end and guided by ideas concerning the suitability or unsuitability of definite means" (emphasis added).

Moreover, "means are necessarily always limited, i.e., scarce, with regard to the services for which man wants to use them." This is why property rights emerged. Use of a resource by one person excludes use by another. In contrast, ownership of the information that guides action is not necessary for performing the action. Two people who each own the ingredients can simultaneously make a cake with the same recipe.

Quantity Discounts Available

Material progress is made precisely because information is not scarce. It can be infinitely multiplied, learned, taught, and built on. The more patterns, recipes, and causal laws that are known, the greater the wealth multiplier as individuals engage in ever more efficient and productive actions. It is good that ideas are infinitely reproducible. There is no need to impose artificial scarcity on ideas to make them more like physical resources, which — unfortunately — are scarce. As Frédéric Bastiat observed, "All innovation goes through three stages. One possesses unique knowledge and profits from it. Others imitate and share profits. Finally, the knowledge is widely shared and no longer profitable on its own which thereby inspires new knowledge."

Patents artificially prolong the first stage at the expense of the others. Thus, IP is inimical to progress, prosperity, and freedom.


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