The Case Against Intellectual Property

dhilvert writes "David Levine and Michele Boldrin argue that current IP laws encourage an inefficient rent model and stifle the potential for innovation without intellectual monopoly. Levine teaches at UCLA and maintains an Economic and Game Theory page."

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Adam Smith and *Intellectual monopoly*

[NZheretic]

last posted back in October, but IMO still of relevance to the topic...

From The Relevance of Adam Smith by Robert L. Hetzel.
With added commentary by yours truly...

MONOPOLY AND GOVERNMENT SUBSIDIES: The principal theme set forth in The Wealth of Nations is that a country most effectively promotes its own wealth by providing a framework of laws that leaves individuals free to pursue the interest they have in their own economic betterment. This self-interest motivates individuals? propensity to truck, barter, and exchange one thing for another and thereby leads them to meet the needs of others through voluntary cooperation in the market place:

...man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and shew them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. (p. 14)

Everyone realises and acknowledges that Microsoft is a business, there to make a profit to share with it's marjor stakeholders, from it's shareholders to it's employees. However ...

Smith also argues that the harmony between private goals and larger socially desirable goals promoted by voluntary cooperation between individuals in the market place is interfered with by monopoly and government subsidies. In contrast to competition, monopoly and government subsidies cause individuals to devote either too few or too many resources to particular markets:

....the private interests and passions of individuals naturally dispose them to turn their stock towards the employments which in ordinary cases are most advantageous to the society. But if from this natural preference they should turn too much of it towards those employments, the fall of profit in them and the rise of it in all others immediately dispose them to alter this faulty distribution. Without any intervention of law, therefore, the private interests and passions of men naturally lead to divide and distribute the stock of every society, among all the different employments carried on in it, as nearly as possible in the proportion which is most agreeable to the interest of the whole society.

All the different regulations of the mercantile system, necessarily derange more or less this natural and most advantageous distribution of stock. (pp. 594-5)
Every derangement of the natural distribution of stock is necessarily hurtful to the society in which it takes place; whether it be by repelling from a particular trade the stock which would otherwise go to it, or by attracting towards a particular trade that which would not otherwise come to it. (p. 597)

.... sometimes, because of the overiding profit motive, the end consumer can be put at a disadvantage, and the natural model can become unbalanced. This often happens in tha case of several types of monopoly...

Smith describes the actions of monopolists as follows:

The monopolists, by keeping the market constantly under-stocked, by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profit, greatly above their natural rate. (p. 61)

The natural price is the lowest which the sellers can commonly afford to take, and at the same time continue their business. (p. 61) Today we would use the word competitive for natural. The effectual demand is the demand of those who are willing to pay the natural price of the commodity. (p. 56) Monopoly, as well as a governmentally subsidized activity, contrasts with a competitive market where a commodity is...sold precisely for what it is worth, or for what it really costs the person who brings it to market. (p. 55)
The Wealth of Nations contains three general kinds of criticism of monopolies. The first is that the higher prices in a monopolized market reduce the welfare of consumers:

If...capital is divided between two different grocers, their competition will tend to make both of them sell cheaper, than if it were in the hands of one only; and if it were divided among twenty, their competition would be just so much the greater, and the chance of their combining together, in order to raise the price, just so much the less. Their competition might perhaps ruin some of themselves; but to take care of this is the business of the parties concerned, and it may safely be trusted to their discretion. It can never hurt either the consumer, or the producer; on the contrary, it must tend to make the retailers both sell cheaper and buy dearer, than if the whole trade was monopolized by one or two persons. (pp. 342-3)
In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest. The proposition is so very manifest, that it seems ridiculous to take any pains to prove it; nor could it ever have been called in question, had not the interest sophistry of merchants and manufacturers confounded the common sense of mankind. Their interest is, in this respect, directly opposite to that of the great body of the people. As it is the interest of the freemen of a corporation to hinder the rest of the inhabitants from employing any workmen but themselves, so it is the interest of the merchants and manufacturers of every country to secure to themselves the monopoly of the home market. (p. 461)

.... like deals made between vendors to set prices, which RAND "reasonable" licensing systems effectively does.

The second criticism of monopoly is that it engenders inefficient management:

Monopoly...is a great enemy to good management, which can never be universally established but in consequence of that free and universal competition which forces everybody to have recourse to it for the sake of self-defence. (p. 147)

For example, Microsoft's Internet Explorer containscurrently 20 unpatched vulnerabilities , a disproportionately high number in comparison to all the other browers on the market today. Also, because of a general disregard for security in the past, many of those same vulnerabilities are exploitable though other Microsoft applications.

The third criticism of monopoly is that it is inequitable because it increases arbitrarily the inequality in individuals? incomes:

...The policy of Europe occasions a very important inequality in the whole of the advantages and disadvantages of the different employments of labour and stock, by restraining the competition in some employments to a smaller number than might otherwise be disposed to enter into them. (pp. 118-19)

And there is many a CIO discovering that the new Microsoft enterprise licensing agreement is far more expensive than before.

Monopoly has always been a contentious issue in debates on public policy in the United States. It is interesting to examine the way in which the ideas of Smith appear in current debates over monopoly. In general, proponents of government intervention in the market place argue that monopoly is endemic in capitalism and that its elimination requires significant intervention by the government in the market place. An opposing group argues that free markets effectively restrain monopoly power and that it is in fact government intervention in the market place that is chiefly responsible for monopoly. The first group assumes that large size, fewness of firms, and operation over an extensive geographic area automatically imply monopoly power and thus supports its position by citing the existence of industries dominated by a few large firms and the existence of multinational corporations. The opposing group supports its position by trying to show that where monopoly power exists it is made possible by particular governmental actions, e.g., in the United States by marketing orders that fix the price of milk above what it would be otherwise, or FCC regulations restricting the growth of cable TV, thereby preventing competition with the established networks.

The view of the world suggested in The Wealth of Nations is that monopoly power cannot persist without the assistance of government. The specific examples of monopoly that Adam Smith attacked required the police power of the state for their maintenance. These monopolies were of three kinds. One kind of monopoly depended upon the mercantilistic system of laws which England used to monopolize trade with its colonies: Monopoly of one kind or another, indeed, seems to be the sole engine of the mercantile system. (p. 595) Another kind arose from the monopoly power granted guilds (referred to by Smith as corporations), which allowed them exclusive rights to produce a given commodity:

The exclusive privilege of an incorporated trade necessarily restrains the competition, in the town where it is established, to those who are free of the trade. To have served an apprenticeship in the town, under a master properly qualified, is commonly the necessary requisite for obtaining this freedom. The bye-laws of the corporation regulate sometimes the number of apprentices which any master is allowed to have, and almost always the number of years which each apprentice is obliged to serve. The intention of both regulations is to restrain the competition to a much smaller number than might otherwise be disposed to enter into the trade. The limitation of the number of apprentices restrains it directly. A long term of apprenticeship restrains it more indirectly, but as effectually, by increasing the expence of education. (p. 119)
The government of towns corporate was altogether in the hands of traders and artificers; and it was the manifest interest of every particular class of them, to prevent the market from being overstocked, as they commonly express it, with their own particular species of industry; which is in reality to keep it always understocked. (p. 124)

A final kind of monopoly depended upon tariffs and quotas that prevented foreign producers from competing with domestic producers:

The superiority which the industry of the towns has every-where in Europe over that of the country, is not altogether owing to corporations and corporation laws. It is supported by many other regulations. The high duties upon foreign manufactures and upon all goods imported by alien merchants, all tend to the same purpose. Corporation laws enable the inhabitants of towns to raise their prices, without fearing to be under-sold by the free competition of their own countrymen. Those other regulations secure them equally against that of foreigners. (p. 127)

Competitive markets restrain monopoly because the above-average profits associated with the exercise of monopoly power attract new producers who increase output and thereby lower prices:

When by an increase in the effectual demand, the market price of some particular commodity happens to rise a good deal above the natural price, those who employ their stocks in supplying that market are generally careful to conceal this change. If it was commonly known, their great profit would tempt so many new rivals to employ their stocks in the same way, that, the effectual demand being fully supplied, the market price would soon be reduced to the natural price.... Secrets of this kind, however, it must be acknowledged, can seldom be long kept; and the extraordinary profit can last very little longer than they are kept. (p. 60)

The next section is very IMPORTANT.

Monopolists can preserve their favorable position only if the government prevents potential competitors from entering the monopolized activity:

The exclusive privileges of corporations, statutes of apprenticeship, and all those laws which restrain, in particular employments, the competition to a smaller number than might otherwise go into them, have the same tendency...They...may frequently, for ages together, and in whole classes of employments, keep up the market price of particular commodities above the natural price, and maintain both the wages of the labour and the profits of the stock employed about them somewhat above their natural rate.

Such enhancements of the market price may last as long as the regulations of police which give occasion to them. (pp. 61-2)

In fact, the term "intellectual property" is a misnomer, a more correct term would be intellectual monopoly. Patents, Copyrights and even Trademarks are a government granted monopoly, they do not occur naturally. That does not mean that they are a bad thing per-say, but their use should be dictated by the benefit to socitety in general, with approprate limits so their use cannot be abused.
These statutes give the power that the ol' Mercantile laws gave to those monopolies. There is no true effective choice in the market. Compainies like Microsoft are sustaining it's dominate position in the markerplace by using a state-constructed and granted monopoly, which gives Microsoft the monopoly over it's protocols , effectively just as restrictive as the East India Trading Company trading zone monopoly of the Orient.

Free markets make the formation of monopoly difficult because monopoly requires the adherence of all actual and potential sellers in a market. Self-interest makes achievement of such adherence difficult because each seller has an incentive to undercut the monopoly price in order to increase his share of the market. Monopoly power is increased or made possible if enforced by the government. In the following passage Smith refers to the guilds, or corporations, of his day:

An incorporation...makes the act of the majority binding upon the whole. In a free trade an effectual combination cannot be established but by the unanimous consent of every single trader, and it cannot last longer than every single trader continues of the same mind. The majority of a corporation can enact a bye-law with proper penalties, which will limit the competition more effectually and more durably than any voluntary combination whatever. (p. 129)

Smith?s ideas appear in current public debate over monopoly. Advocates of deregulating the transportation and communications industries by eliminating or reducing the power of Federal regulatory agencies argue that these agencies promote monopoly by limiting the entry of new firms and by fixing prices for all producers. Government regulations enforced upon all firms in an industry have the effect of allowing producers to eliminate competition and to raise prices. At the same time, lack of competition reduces incentives for efficient production.

It could use some fact checking.

[jkheit]

It's tough to take anything they say too seriously when they seem not to have bothered to do the most BASIC research and/or fact checking. They cite incorrect durations for both patents and copyrights. A rather impressive feat.

Design patents have a term of 14 years. Utility patents have a term of 20 years from filing. They had it reverse. Also, the current term for copyright is the life of the author plus 70 years, not 50 years--this was changed several years ago (is the piece that old?)--and I believe one of the reasons Disney and others had an excuse to request extensions of copyright law (yea right to "harmonize" the old and new law/copyright term).

That's in the first 4 pages of chapter 1. Perhaps they are typos and not indications of the intellectual rigor that went into the book.

Re:Marconi vs Tesla

[vinsci]

The Tesla biography by O'Neill covers the story in detail, quite interesting reading if you ask me! Complete online volume: PRODIGAL GENIUS The Life of Nikola Tesla.

Also see: NIKOLA TESLA 1856 - 1943 FORGOTTEN AMERICAN SCIENTIST

"ERASED AT THE SMITHSONIAN

OMITTED IN SCHOOL TEXTBOOKS

OMITTED IN TECHNICAL JOURNALS

UNKNOWN, EVEN TO SOME ENGINEERS"

The above page is in co-operation with Yale Scientific Magazine, who has this story: To the Smithsonian or Bust: The Scientific Legacy of Nikola Tesla

The summary for lazy people

[Erpo]

Chapter 1: The idea of "intellectual property" is broken down into two components.

1. Right of sale. If someone has an idea, that person can sell a copy of it to someone else. If someone makes a copy of it and the originator hasn't agreed to sell it, legal action can be taken. Example: An aspiring screenwriter sends a copy of his latest script to a famous director. The director likes it so much that he makes a movie out of it -- without having first acquired the right to use the script's contents. The script's author could sue the director in this case.

2. Intellectual monopoly. The originator of information can decide what others can do with that information once sold. Shrinkwrap software licenses/EULAs are a great example of this.

They argue that right of sale is a good thing because it gives creative people an incentive to produce and some amount of legal protection. They also argue that while intellectual monopoly gives them even more incentive to produce, controlling what people do with information after they have bought it (including making copies for other people) cannot be done without terrible social consequences:

Take the case of slavery. Why should people not be allowed to sign private contracts binding them to slavery? In fact, economists have consistently argued against slavery -- during the 19th century David Ricardo and John Stuart Mill engaged in a heater public debate with literary luminaries such as Charles Dickens -- with the enconomists opposing slavery, and the literary giants arguing in favor. The fact is that our labor cannot be separated from ourselves. For someone else to own our labor requires them to engage in intrusive and costly supervision. Such transaction costs are socially damaging as they imply violation of privacy and essential civil liberties. Hence they are commonly rejected on economic, not just moral, grounds. Moreover, there is no economic reason to allow slavery. With well functioning markets, renting labor is a good substitute for owning it. And so we allow the rental of labor, but not the permanant sale.
For intellectual property we are proposing the reverse: allowing the permanent sale, but not rental. For with intellectual property, posession belongs to the buyer and not to the seller. If you sell me an idea, I now have that idea embodied either in me or an object I own. For you to control the idea requires intrusive and costly supervision. Similarly if you sell me a book, a CD or a computer file. In each case, I have physical control of the item, and you can control its use only through intrusive measures.

I haven't read all of chapter 2 yet, but I'm trying to compromise between providing a decent summary of what's obviously a very insightful text in the hope that people will read it, and not getting buried on the second page where nobody will see the post.

From what I've read so far, this is really good stuff.

Against intellectual property?

[Garen]

The title of this story completely misconstrues the author's position. The paper is titled "The Case Against Intellectual Monopoly " Not property .

Ip has been fucked since WW1

[CrazyJim0]

Radio was invented 5 years before the war, but before all the companies that held seperate patents were commanded by the government to give them so the war could be fought... Basically technology was at a standstill.

This is why I like Linux, without free code sharing, I'd be unable to create a 3d MMORPG to compete with the big dogs. Crystalspace has got me up and running on a 3d engine, all I need to do is add new networking code, some animations, balance, some levels, and a story.

Facts and figures against copyright...

[Paul Fernhout]

This AEI-Brookings Joint Center for Regulatory Studies article by Mark S. Nadel is also relevant to showing the case against intellectual property.

http://www.aei.brookings.org/publications/abstract .php?pid=302

From the abstract: This article questions the economic justification for copyright laws prohibition against unauthorized copying. Building on the thesis of Stephen Breyers 1970 Harvard Law Review article, The Uneasy Case for Copyright, it contends that not only may copyright laws prohibition against unauthorized copying (17 U.S.C. 106) not be necessary to stimulate an optimal level of new creations, but that 106 appears to have a net negative effect on such output! It observes that the higher revenues that 106 generates for popular creations are, in the lottery-like entertainment markets, generally used for promotional efforts (rent seeking), and that such marketing crowds out many borderline creations. The article also identifies and explains how new technologies and social norms provide many viable business models for financing new creations relying on only a heavily abridged version of 106. Hence, the article questions whether the current 106 could survive the intermediate scrutiny standards of the First Amendment, given the lack of evidence that the benefits of 106 exceed its costs.

This is a fantastic paper. It is full of references and numbers a lot of hard work and scholarship obviously went into it.

For support for eliminating copyrights or greatly reducing their terms, see Richard Stallman, especially here:
http://www.memes.net/index.php3?request=displaypag e&NodeID=650

and also Brian Martin's essay "Against intellectual property" (part of a large book -- _Information Liberation_)
http://www.uow.edu.au/arts/sts/bmartin/pubs/98il/i l03.html

You can also see lots of other ongoing discussion here on Lawrence Lessig's blog here http://cyberlaw.stanford.edu/lessig/blog/ and in his two books.

Here is a paper by an intellectual property lawyer against the current system: http://emoglen.law.columbia.edu/publications/anarc hism.html

Here are some of my own comments on the situation: http://cyberlaw.stanford.edu/mt/mt-comments.cgi?en try_id=898 http://cyberlaw.stanford.edu/mt/mt-comments.cgi?en try_id=889