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Knock it Off

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Jacob Sullum's excellent Reason column, The Knock Against Knockoffs, he discusses knockoffs of high-fashion, which are not currently subject to copyright. Surprise—designers are lobbying for copyright protection of clothing designs. Sullum does a great job of setting forth, in a very pithy and persuasive (and sound) manner, both the utilitarian and moral problems with the state granting copyrights and patents. Regarding the utilitarian case, Sullum notes that designers have advantages over copiers even without copyright protection: "1) They can get to the store first ...." and "2) Some people insist on buying the genuine article even when the knockoffs are indistinguishable, and they are willing to pay more (a lot more) for the designer label."

[Update: The Piracy Paradox]

Regarding the moral case, Sullum notes that granting property rights in ideas "imping[es] on ownership of physical property (copiers and computers, for example) and on the creation of new intellectual products (which is why copyrights have terms, the length of which is inherently arbitrary yet treated as sacrosanct by copyright holders)." Sullum mentions a 2003 Reason article by Douglas Clement, Creation Myths: Does innovation require intellectual property rights?, which discusses the anti-IP theories of Boldrin and Levine. Boldrin and Levine challenge the conventional wisdom that knowledge-based innovations are "nonrivalrous" and therefore subject to increasing returns—which, it is widely held, means

"that an equilibrium with price taking cannot be supported." In other words, economic growth — and the technological innovation it requires — aren't possible under perfect competition; they require some degree of monopoly power." [Clement, quoting Paul Romer]

Boldrin and Levine argue that this nonrivalrousness is irrelevant in a real economy, because the economic application of ideas is not costless.

Ideas "have economic value only to the extent that they are embodied into either something or someone." What is relevant in the economic realm is not an abstract concept or formula — no matter how beautiful — but its physical embodiment. Calculus is economically valuable only insofar as engineers and economists know and apply it. "Only ideas embodied in people, machines or goods have economic value," they write. And because of their physical embodiment, "valuable ideas...are as rivalrous as commodities containing no ideas at all, if such exist."
A novel is valuable only to the extent that it is written down (if then). A song can be sold only if it is sung, played, or printed by its creator. A software program — once written — might seem costless, Boldrin and Levine write, but "the prototype does not sit on thin air. To be used by others it needs to be copied, which requires resources of various kinds, including time. To be usable it needs to reside on some portion of the memory of your computer....When you are using that specific copy of the software, other people cannot simultaneously do the same."
In each instance, the development of the initial prototype is far more costly than the production of all subsequent copies. But because copying takes time — a limited commodity — and materials (paper, ink, disk space), it is not entirely costless. "Consider the paradigmatic example of the wheel," they write. "Once the first wheel was produced, imitation could take place at a cost orders of magnitude smaller. But even imitation cannot generate free goods: to make a new wheel, one needs to spend some time looking at the first one and learning how to carve it."

Now Boldrin and Levine's economics is far from flawless, but this insight is similar to a very good point recently made by Jeff Tucker in Is Intellectual Property the Key to Success?. In that piece, Tucker notes that even if an ice cream company, say, enjoys a state-granted monopoly on its ice cream recipe and method of manufacture, this is not enough to ensure success. "It must [also] do good business, meaning that it must economize, innovate, distribute, and advertise. The company does all these things and then goes from success to success." How many times have you had a buddy say, when seeing a new product hit the market, "Hey, I invented that 5 years ago!" Yeah, right!

The point is, there are all sorts of costs to succeeding in business, including costs of exclusion; and these costs can differ from industry to industry. Boldrin and Levine make a similar point when they dispute the conentional view

that the dramatic difference between development and replication costs can be modeled as a single process with increasing returns to scale: a huge fixed cost (the initial investment) followed by costless duplication. Boldrin and Levine say this misrepresents reality: There are two distinct processes with very different technologies. Development is one production process involving long hours, gallons of coffee, sweaty genius, and black, tempestuous moods. At the end of this initial process, the prototype (with any luck) exists and the effort and money that produced it are a sunk cost, an expense in the past.
Thereafter, a very different production process governs: Replicators study the original, gather flat stones, round off corners, bore center holes, and prune tree limbs into axles. Stone wheels roll off the antediluvian assembly line. In this second process, the economics of production are the same as for any other commodity, usually with constant returns to scale.

In other words, the costs of exclusion faced by entrepreneurs varies greatly for any given enterprise, and these costs are only part of all the costs of the endeavor.

As quoted in Against Intellectual Property (n. 67),

the cost of producing any service or good includes not only labor, capital marketing, and other cost components, but also fencing (or exclusion) costs as well. Movie theaters, for example, invest in exclusion devices like ticket windows, walls, and ushers, all designed to exclude non-contributors from enjoyment of service. Alternatively, of course, movie owners could set up projectors and screens in public parks and then attempt to prevent passers-by from watching, or they could ask government to force all non-contributors to wear special glasses which prevent them from enjoying the movie. "Drive-ins," faced with the prospect of free riders peering over the walls, installed—at considerable expense—individual speakers for each car, thus rendering the publicly available visual part of the movie of little interest. . . . The costs of exclusion are involved in the production of virtually every good imaginable. There is no compelling justification for singling out some goods and insisting that the state underwrite their production costs through some sort of state-sanctioned collective action, simply because of a decision to make the good available on a nonexclusive basis.

On this issue, see Hoppe, Fallacies of the Public Goods Theory and the Production of Security.

Stephan Kinsella is an attorney in Houston, director of the Center for the Study of Innovative Freedom, and editor of Libertarian Papers.

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