Why would anyone invest large sums of capital into creating something new of uncertain income? This question captures the core of the argument for intellectual property, or the legal protection of inventors’ ideas from being copied and put to broader use. The simple logic appears intuitive and therefore persuasive, but does not stand up to scrutiny. Why? Because it applies to all entrepreneurship, which is always an investment in something of uncertain value. Yet this does not seem to stop entrepreneurs. Or, rather, it moderates which entrepreneurial projects are undertaken so that the craziest ideas are not pursued unless they are potentially very profitable.
Supporters of intellectual property would interject that entrepreneurship benefits from property of things—because they create new goods or services that are to a great degree physical, they cannot be copied as easily and at such low cost as ideas can. Therefore, they conclude, ideas need to be legally protected.
The conclusion misses the point, however, because the reason for property rights is not protection of potential revenue but resolution of conflicts. It is because physical property is of both limited quantity and rivalrous use that conflicting claims must be settled. The institution private property does this by appointing an owner of the scarce resource. But ideas are neither of limited quantity nor rivalrous. They are also very rarely unique events. Multiple discovery is the rule, not the exception.
Intellectual property therefore degenerates into arbitrary monopoly rights not unlike the royally-protected guilds of old times. This market intervention consequently gives rise to problems such as inefficient monopoly rents, patent trolling, and structural malinvestments—scarce capital used to generate what is patentable (e.g., pharmaceuticals to treat disease) instead of what may provide greater benefit (vitamins and supplements).
From an entrepreneurship perspective, the intervention of awarding one of the inventors—the first to file for a patent—with the exclusive monopoly to the idea has obvious implications in the economy. Among them is that it reduces the scope of attempts to implement and leverage the idea to provide value to consumers. Value discovery is therefore hampered for the duration of the patent. Consumers get less value later as a result.
But, as is commonly the case with regulations, intellectual property also gives rise to what I have called the Unrealized. The Unrealized is different from the standard Bastiat analysis of the seen and the unseen because it captures those opportunities that do not come to pass because of regulations. Any regulation imposed on the economy that changes economic outcomes does so by limiting the options for entrepreneurs, which forces them to pursue other ends than they otherwise would have.
This particular change may in fact be the stated rationale for the regulation. However, the change also means there is less value created in the economy. Entrepreneurs earn profits from satisfying consumers’ wants, the value of which justifies consumers in paying a price that is high enough to cover the entrepreneur’s costs of production. Profits are ultimately a result of creating value for consumers in an economizing way. This means that any entrepreneur who is—due to imposed regulations—forced to pursue some other business idea, also thereby pursues something that he or she expects to be of lower value.
The loss of value is not enough, however, because the businesses that are started under regulation use scarce resources, dedicate infrastructure and training, build production facilities, etc. to realize that particular value proposition. All of these resources are, from the perspective of the economy overall, malinvested because they would have been invested elsewhere and to greater effect had it not been for the regulation.
As a result, the economy’s overall production structure—all the machines, production processes, supply chains, extraction of original factors of production, etc.—deviates from what entrepreneurs would have generated in their unhampered pursuit of facilitating consumer value. This is bad enough, but given the cumulative nature of market progress, in which new generations of entrepreneurs react to, extend, and build on the status quo, these investments cement the error and make it the starting point for continued economic advances. The economy is therefore on a lower value trajectory than unregulated market entrepreneurship would have engendered.
The question is not, therefore, why anyone would invest in value-creating ideas for profit, as proponents of intellectual property claim, but where those investments take place—distorted by the imposed regulations. And then, what value we lose out on as consumers because entrepreneurs are not free to pursue production where they believe they are at greatest service to consumers.
