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IP: It's a market failure argument

February 10, 2009

In the hundreds of emails I've received over the issue of intellectual property, the number one most common objection to doing without goes like this. We can't subject the matters to free market competition. Some innovations are too easy to copy. Just one look or listen and the producer's idea is taken from. Then another company that had nothing to do with bearing the costs of innovation will be able to reap the rewards. We have to have a period of monopoly if only to inspire people to innovate and bring things to market.

Now, consider first what a central-planning apparatus this entails. A vibrant and enterprising economy will consist of hundreds if not millions of innovations per day. Our work lives, no matter what field we are in, are all about doing things better, bringing better products to the world, stepping forward into a future in which ever better stuff is ever more affordable. That requires unrelenting innovation.

If you are to establish a government office to keep tabs on this activity, that alone is going to require massive bureaucracy. If the bureaucracy is charged with granted monopolies for all these things, the business of enterprise is going to find itself in an amazing tangled. If we find that society works at all, it is precisely due to the absence of such tangles.

Consider also what the above critic presumes about how markets work in world without intellectual monopolies. Consumers all sit around wanting something and wanting to pay for it. It could be a new song or a cool painting or something as simple as a q-tip. Entrepreneurs all over the country know that consumers want these things but they refuse to bring them to market for fear of being copied by the next guy. As a result, everyone just sits around doing nothing.

Is this really a realistic scenario? All experience suggests that in a vibrant economy, entrepreneurs are going look for unmet demands. This is what they live for. IP is not necessary to bring about this result, else there would have been no economic growth in the entire world until recent years when IP began to its march to ubiquity.

All these arguments really come to down to yet another market failure argument, the idea that unless the government comes to the rescue, market players will just sit around confused while the economy does down the drain.

All market failure arguments have the appearance of plausibility about them.

Let's say you have a poorly managed apartment unit with a porchlight that is out. Everyone would benefit from having the bulb changed. But if one person benefits, so does everyone. All dwellers enjoy the light and only one pays. That's not going to work, is it? No one would act. Except that at some point, someone comes along and befuddles the failure theorists by changing the lightbulb.

So it is with markets and innovation. It is just a plain fact that many products come to us every day that are not patented. Look at a Kleenex, I mean, a facial tissue. Any paper manufacturer can make one. The Kleenex company was first to make the big time, and it has stayed on top through relentless innovation in design. So we have fancy boxes of every shape and size, tissues with oil in them, tissues with smells, and various colors and things. The company is still on top.

Boldrin and Levine give the example of TravelPro, the suitcase with wheels. Every company can replicate it. But TravelPro stays on top through new design and marketing.

Everyone has to marvel at how Arm and Hammer stays on top of the baking soda market. Talk about easy to replicate. And yet the company practically has a market monopoly, and has held it for many decades. The innovation here too is relentless: toothpaste, deodorant, cleaning products, you name it.

You can try this at home. Think of any company that has an open-source product that continues to make money and stay up top: Tupperware, Red Hat, Band Aid, Firefox, Tylenol, Bayer, Hershey. It is a long list, nearly infinite.

The competition is fierce. How do they deal with it? The model is always the same. Get there first. Stay on top through marketing. Count on brand loyalty. Innovate. Explain your superiority. Never rest on your laurels. Move forward and watch the competition carefully.

It is interesting because another market failure argument posits even that there is a reverse problem than the one used to defend IP. It suggests that the market has a "path dependence" problem, that once people get stuck on one technology or brand name, they have too high a hump to get over in order to move to one that is otherwise obviously superior.

Both can't be true.

The defenses of IP share a trait in common with all claims that the free market can't work. Hayek called it a kind of constructivism. We can't imagine how a market might solve a particular problem so we conclude that the market must fail in this instance. It's good to look outside the window and observe how the market solves the problem every day in ways we don't expect.

There are a thousand possibilities for how producers deal with being copied even in digital media. If we open the market up to competition, we will see more innovation in book publishing and movie making, as every more goodies are piled on the consumer to earn loyalty and a range of options are made available. Consumers win, competitive producers win, and all without government privilege. What's not to like?

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