Chapter 3--Triangular Intervention

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Chapter 3—Triangular Intervention

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N. Patents[68]

     A patent is a grant of monopoly privilege by the government to first discoverers of certain types of inventions.[69] Some defenders of patents assert that they are not monopoly privileges but simply property rights in inventions, or even in “ideas.” But in free-market, or libertarian, law everyone’s right to property is defended without a patent. If someone has an idea or plan and produces an invention, which is then stolen from his house, the stealing is an act of theft illegal under general law. On the other hand, patents actually invade the property rights of those independent discoverers of an idea or an invention who happen to make the discovery after the patentee. These later inventors and innovators are prevented by force from employing their own ideas and their own property. Furthermore, in a free society the innovator could market his invention and stamp it “copyright,” thereby preventing buyers from reselling the same or a duplicate product.

     Patents, therefore, invade rather than defend property rights. The speciousness of the argument that patents protect property rights in ideas is demonstrated by the fact that not all, but only certain types of original ideas, certain types of innovations, are considered legally patentable. Numerous new ideas are never treated as subject to patent grants.

     Another common argument for patents is that “society” simply makes a contract with the inventor to purchase his secret, so that “society” will have use of it. But in the first place, “society” could then pay a straight subsidy, or price, to the inventor; it does not have to prevent all later inventors from marketing their inventions in this field. Secondly, there is nothing in the free economy to prevent any individual or group of individuals from purchasing secret inventions from their creators. No monopolistic patent is therefore necessary.

     The most popular argument for patents among economists is the utilitarian one that a patent for a certain number of years is necessary to encourage a sufficient amount of research expenditure toward inventions and innovations in new processes and products.

     This is a curious argument, because the question immediately arises: By what standard do you judge that research expenditures are “too much,” “too little,” or just about enough? Resources in society are limited, and they may be used for countless alternative ends. By what standards does one determine that certain uses are “excessive,” that certain uses are “insufficient,” etc.? Someone observes that there is little investment in Arizona but a great deal in Pennsylvania; he indignantly asserts that Arizona deserves “more investment.” But what standards can he use to justify such a statement? The market does have a rational standard: the highest money incomes and highest profits, for these may be achieved only through maximum service to the consumers. This principle of maximum service to consumers and producers alike (i.e., to everybody) governs the seemingly mysterious market allocation of resources: how much to devote to one firm or another, to one area or another, to the present or the future, to one good or another, to research rather than other forms of investment. The observer who criticizes this allocation can have no rational standards for decision; he has only his arbitrary whim. This is particularly true of criticism of production relations in contrast to interference with consumption. Someone who chides consumers for buying too many cosmetics may have, rightly or wrongly, some rational basis for his criticism. But someone who thinks that more or less of a certain resource should be used in a certain manner, or that business firms are “too large” or “too small,” or that too much or too little is spent on research or is invested in a new machine, can have no rational basis for his criticism. Businesses, in short, are producing for a market, guided by the valuations of consumers on that market. Outside observers may criticize the ultimate valuations of consumers if they choose—although if they interfere with consumption based on these valuations, they impose a loss of utility upon the consumers—but they cannot legitimately criticize the means, the allocations of factors, by which these ends are served.

     Capital funds are limited, as are all other resources, and they must be allocated to various uses, one of which is research expenditures. On the market, rational decisions are made with regard to setting research expenditures, in accordance with the best entrepreneurial expectations of future returns. To subsidize research expenditures by coercion would restrict the satisfaction of consumers and producers on the market.

     Many advocates of patents believe that the ordinary competitive processes of the market do not sufficiently encourage the adoption of new processes, and that therefore innovations must be coercively promoted by the government. But the market decides on the rate of introduction of new processes just as it decides on the rate of industrialization of a new geographic area. In fact, this argument for patents is very similar to the “infant industry” argument for tariffs—that market procedures are not sufficient to permit the introduction of worthy new processes. And again the answer is the same: that people must balance the superior productivity of the new processes against the cost of installing them, i.e., against the advantage possessed by the old process in being already in existence. Conferring special coercive privileges upon innovation would needlessly scrap valuable plants already in existence and impose an excessive burden upon consumers.

     Nor is it by any means self-evident even that patents encourage an increase in the absolute quantity of research expenditures. But certainly we can say that patents distort the allocation of factors on the type of research being conducted. For while it is true that the first discoverer benefits from the privilege, it is also true that his competitors are excluded from production in the area of the patent for many years. And since a later patent can build on an earlier, related one in the same field, competitors can often be discouraged indefinitely from further research expenditures in the general area covered by the patent. Moreover, the patentee himself is discouraged from engaging in further research in this field, for the privilege permits him to rest on his laurels for the entire period of the patent, with the assurance that no competitor can trespass on his domain. The competitive spur to further research is eliminated. Research expenditures, therefore, are overstimulated in the early stages before anyone has a patent and unduly restricted in the period after the patent is received. In addition, some inventions are considered patentable, while others are not. The patent system thus has the further effect of artificially stimulating research expenditures in the patentable areas, while artificially restricting research in the nonpatentable areas.

     As Arnold Plant summed up the problem of competitive research expenditures and innovations:

Neither can it be assumed that inventors would cease to be employed if entrepreneurs lost the monopoly over the use of their inventions. Businesses employ them today for the production of nonpatentable inventions, and they do not do so merely for the profit which priority secures. In active competition . . . no business can afford to lag behind its competitors. The reputation of a firm depends upon its ability to keep ahead, to be first in the market with new improvements in its products and new reductions in their prices.[70]

     Finally, of course, the market itself provides an easy and effective course for those who feel that there are not enough expenditures being made in certain directions on the free market. They are free to make these expenditures themselves. Those who would like to see more inventions made and exploited are at liberty to join together and subsidize such efforts in any way they think best. In doing so, they would, as consumers, add resources to the research and invention business. And they would not then be forcing other consumers to lose utility by conferring monopoly grants and distorting the allocation of the market. Their voluntary expenditures would become part of the market and help to express its ultimate consumer valuations. Furthermore, later inventors would not be restricted. The friends of invention could accomplish their aims without calling in the State and imposing losses on the mass of consumers.

     Patents, like any monopoly grant, confer a privilege on one and restrict the entry of others, thereby distorting the freely competitive pattern of industry. If the product is sufficiently demanded by the public, the patentee will be able to achieve a monopoly price. Patentees, instead of marketing their invention themselves, may elect either to (1) sell their privilege to another  or (2) keep the patent privilege but sell licenses to other firms, permitting them to market the invention. The patent privilege thereby becomes a capitalized monopoly gain. It will tend to sell at the price that capitalizes the expected future monopoly gain to be derived from it. Licensing is equivalent to renting capital, and a license will tend to sell at a price equal to the discounted sum of the rental income that the patent will earn for the period of the license. A system of general licensing is equivalent to a tax on the use of the new process, except that the patentee receives the tax instead of the government. This tax restricts production in comparison with the free market, thereby raising the price of the product and reducing the consumer’s standard of living. It also distorts the allocation of resources, keeping factors out of these processes and forcing them to enter less value-productive fields.

     Most current critics of patents direct their fire not at the patents themselves, but at alleged “monopolistic abuses” in their use. They fail to realize that the patent itself is the monopoly and that, when someone is granted a monopoly privilege, it should occasion neither surprise nor indignation when he makes full use of it.

O. Franchises and “Public Utilities”

     Franchises are generally grants of permission by the government for the use of its streets. Where the franchises are exclusive or restrictive, they are grants of monopoly or quasi-monopoly privilege. Where they are general and not exclusive, however, they cannot be called monopolistic. For the franchise question is complicated by the fact that the government owns the streets and therefore must give permission before anyone uses them. In a truly free market, of course, streets would be privately, not governmentally, owned, and the problem of franchises would not arise.

     The fact that the government must give permission for the use of its streets has been cited to justify stringent government regulations of “public utilities,” many of which (like water or electric companies) must make use of the streets. The regulations are then treated as a voluntary quid pro quo. But to do so overlooks the fact that governmental ownership of the streets is itself a permanent act of intervention. Regulation of public utilities or of any other industry discourages investment in these industries, thereby depriving consumers of the best satisfaction of their wants. For it distorts the resource allocations of the free market. Prices set below the free market create an artificial shortage of the utility service; prices set above those determined by the free market impose restrictions and a monopoly price on the consumers. Guaranteed rates of return exempt the utility from the free play of market forces and impose burdens on the consumers by distorting market allocations.

     The very term “public utility,” furthermore, is an absurd one. Every good is useful “to the public,” and almost every good, if we take a large enough chunk of supply as the unit, may be considered “necessary.” Any designation of a few industries as “public utilities” is completely arbitrary and unjustified.[71]

P. The Right of Eminent Domain

     In contrast to the franchise, which may be made general and nonexclusive (as long as the central organization of force continues to own the streets), the right of eminent domain could not easily be made general. If it were, then chaos would truly ensue. For when the government confers a privilege of eminent domain (as it has done on railroads and many other businesses), it has virtually granted a license for theft. If everyone had the right of eminent domain, every man would be legally empowered to compel the sale of property that he wanted to buy. If A were compelled to sell property to B at the latter’s will, and vice versa, then neither could be called the owner of his own property. The entire system of private property would then be scrapped in favor of a society of mutual plunder. Saving and accumulation of property for oneself and one’s heirs would be severely discouraged, and rampant plunder would cut ever more sharply into whatever property remained. Civilization would soon revert to barbarism, and the standards of living of the barbarian would prevail.

     The government itself is the original holder of the “right of eminent domain,” and the fact that the government can despoil any property holder at will is evidence that, in current society, the right to private property is only flimsily established. Certainly no one can say that the inviolability of private property is protected by the government. And when the government confers this power on a particular business, it is conferring upon it the special privilege of taking property by force.

     Evidently, the use of this privilege greatly distorts the structure of production. Instead of being determined by voluntary exchange, self-ownership, and efficient satisfaction of consumer wants, prices and the allocation of productive resources are now determined by brute force and government favor. The result is an overextension of resources (a malinvestment) in the privileged firm or industry and an underinvestment in other firms and industries. At any given time, as we have stressed, there is a limited amount of capital—a limited supply of all resources—that can be devoted to investment. Compulsory increase in investment in one field can be achieved only by an arbitrary decline in investment in other fields.[72]

     Many advocates of eminent domain contend that “society,” in the last analysis, has the right to use any land for “its” purposes. Without knowing it, they have thus conceded the validity of a major Henry Georgist plank: that every person, by virtue of his birth, has a right to his aliquot share of God-given land.[73] Actually, however, since “society” does not exist as an entity, it is impossible for each individual to translate his theoretical aliquot right into real ownership.[74] Therefore, the ownership of the property devolves, not on “everybody,” but on the government, or on those individuals whom it specially privileges.

Q. Bribery of Government Officials

      Because it is illegal, bribery of government officials receives practically no mention in economic works. Economic science, however, should analyze all aspects of mutual exchange, whether these exchanges are legal or illegal. We have seen above that “bribery” of a private firm is not actually bribery at all, but simply payment of the market price for the product. Bribery of government officials is also a price for the payment of a service. What is this service? It is the failure to enforce the government edict as it applies to the particular person paying the bribe. In short, the acceptance of a bribe is equivalent to the sale of permission to engage in a certain line of business. Acceptance of a bribe is therefore praxeologically identical with the sale of a government license to engage in a business or occupation. And the economic effects are similar to those of a license. There is no economic difference between the purchase of a government permission to operate by buying a license or by paying government officials informally. What the briber receives, therefore, is an informal, oral license to operate. The fact that different government officials receive the money in the two cases is irrelevant to our discussion.

     The extent to which an informal license acts as a grant of monopolistic privilege depends on the conditions under which it is granted. In some instances, the official accepts a bribe by one person and in effect grants him a monopoly in a particular area or occupation; in other cases, the official may grant the informal license to anybody who is willing to pay the necessary price. The former is an example of a clear monopoly grant followed by a possible monopoly price; in the latter case, the bribe acts as a lump-sum tax penalizing poorer competitors who cannot pay. They are forced out of business by the bribe system. However, we must remember that bribery is a consequence of the outlawing of a certain line of production and, therefore, that it serves to mitigate some of the loss of utility imposed on consumers and producers by the government prohibition. Given the state of outlawry, bribery is the chief means for the market to reassert itself; bribery moves the economy closer to the free- market situation.[75]

     In fact, we must distinguish between an invasive bribe and a defensive bribe. The defensive bribe is what we have been discussing; that is, the purchase of a permission to operate after an activity is outlawed. On the other hand, a bribe to attain an exclusive or quasi-exclusive permission, barring others from the field, is an example of an invasive bribe, a payment for a grant of monopolistic privilege. The former is a significant movement toward the free market; the latter is a movement away from it.

R. Policy Toward Monopoly

     Economic historians often inquire about the extent and importance of monopoly in the economy. Almost all of this inquiry has been misdirected, because the concept of monopoly has never been cogently defined. In this chapter we have traced types of monopoly and quasi monopoly and their economic effects. It is clear that the term “monopoly” properly applies only to governmental grants of privilege, direct and indirect. Truly gauging the extent of monopoly in an economy means studying the degree and extent of monopoly and quasi-monopoly privilege that the government has granted.

     American opinion has been traditionally “antimonopoly.” Yet it is clearly not only pointless but deeply ironic to call upon the government to “pursue a positive antimonopoly policy.” Evidently, all that is necessary to abolish monopoly is that the government abolish its own creations.

     It is certainly true that in many (if not all) cases the privileged businesses or laborers had themselves agitated for the monopolistic grant. But it is still true that they could not become quasi monopolists except through the intervention of the State; it is therefore the action of the State that must bear prime responsibility.[76]

     Finally, the question may be raised: Are corporations themselves mere grants of monopoly privilege? Some advocates of the free market were persuaded to accept this view by Walter Lippmann’s The Good Society.[77] It should be clear from previous discussion, however, that corporations are not at all monopolistic privileges; they are free associations of individuals pooling their capital. On the purely free market, such men would simply announce to their creditors that their liability is limited to the capital specifically invested in the corporation, and that beyond this their personal funds are not liable for debts, as they would be under a partnership arrangement. It then rests with the sellers and lenders to this corporation to decide whether or not they will transact business with it. If they do, then they proceed at their own risk. Thus, the government does not grant corporations a privilege of limited liability; anything announced and freely contracted for in advance is a right of a free individual, not a special privilege. It is not necessary that governments grant charters to corporations.[78]

APPENDIX A
ON PRIVATE COINAGE

     The common, erroneous phrasing of Gresham’s Law (“bad money drives out good money”) has often been used to attack the concept of private coinage as unworkable and thereby to defend the State’s age-old monopolization of the minting business. As we have seen, however, Gresham’s Law applies to the effect of government policy, not to the free market.

     The argument most often advanced against private coinage is that the public would be burdened by fraudulent coin and would be forced to test coins frequently for their weight and fineness. The government’s stamp on the coin is supposed to certify its fineness and weight. The long record of the abuse of this certification by governments is well known. Moreover, the argument is hardly unique to the minting business; it proves far too much. In the first place, those minters who fraudulently certify the weight or fineness of coins will be prosecuted for fraud, just as defrauders are prosecuted now. Those who counterfeit the certifications of well-established private minters will meet a fate similar to those who counterfeit money today. Numerous products of business depend upon their weight and purity. People will either safeguard their wealth by testing the weight and purity of their coins, as they do their money bullion, or they will mint their coins with private minters who have established a reputation for probity and efficiency. These minters will place their stamps on the coins, and the best minters will soon come into prominence as coiners and as assayers of previously minted coins. Thus, ordinary prudence, the development of good will toward honest and efficient business firms, and legal prosecutions against fraud and counterfeiting would suffice to establish an orderly monetary system. There are numerous industries where the use of instruments of precise weight and fineness are essential and where a mistake would be of greater import than an error involving coins. Yet prudence and the process of market selection of the best firms, coupled with legal prosecution against fraud, have facilitated the purchase and use of the most delicate machine-tools, for example, without any suggestion that the government must nationalize the machine-tool industry in order to ensure the quality of the products.

     Another argument against private coinage is that standardizing the denominations of coin is more convenient than permitting the diversity of coins that would ensue under a free system. The answer is that if the market finds standardization more convenient, private mints will be led by consumer demand to confine their minting to certain standard denominations. On the other hand, if greater variety is preferred, consumers will demand and obtain a more diverse range of coins. Under the government mintage monopoly, the desires of consumers for various denominations are ignored, and the standardization is compulsory rather than in accord with public demand.[79]

APPENDIX B
COERCION AND LEBENSRAUM

     Tariffs and immigration barriers as a cause of war may be thought far afield from our study, but actually this relationship may be analyzed praxeologically. A tariff imposed by Government A prevents an exporter residing under Government B  from making a sale. Furthermore, an immigration barrier imposed by Government A prevents a resident of B from migrating. Both of these impositions are effected by coercion. Tariffs as a prelude to war have often been discussed; less understood is the Lebensraum argument. “Overpopulation” of one particular country (insofar as it is not the result of a voluntary choice to remain in the homeland at the cost of a lower standard of living) is always the result of an immigration barrier imposed by another country. It may be thought that this barrier is purely a “domestic” one. But is it? By what right does the government of a territory proclaim the power to keep other people away? Under a purely free-market system, only individual property owners have the right to keep people off their property. The government’s power rests on the implicit assumption that the government owns all the territory that it rules. Only then can the government keep people out of that territory.

     Caught in an insoluble contradiction are those believers in the free market and private property who still uphold immigration barriers. They can do so only if they concede that the State is the owner of all property, but in that case they cannot have true private property in their system at all. In a truly free-market system, such as we have outlined above, only first cultivators would have title to unowned property; property that has never been used would remain unowned until someone used it. At present, the State owns all unused property, but it is clear that this is conquest incompatible with the free market. In a truly free market, for example, it would be inconceivable that an Australian agency could arise, laying claim to “ownership” over the vast tracts of unused land on that continent and using force to prevent people from other areas from entering and cultivating that land. It would also be inconceivable that a State could keep people from other areas out of property that the “domestic” property owner wishes them to use. No one but the individual property owner himself would have sovereignty over a piece of property.

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