My RMIT colleague Jason Potts and I have a new working paper “The Stationary Bandit Model of Intellectual Property” up at SSRN.

From the introduction:

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The first duty of government is to protect its citizens. Put the other way, the value to a citizen of a strong government is to protect their life, liberty and property from the depredations of others. In the political romantic view, this is the protection of the weak by the strong. But the real nature of the bargain is that the weak must then pay tribute to the strong. In his anti-‘social contract’ model of the origin of government, Mancur Olson (1993) argued that governments offering protection are essentially ‘roving bandits’ who have settled down to establish a monopoly on theft as ‘stationary bandits’ who protect their tributes—now called tax-paying citizens—from external threats. Stationary bandits still plunder their captives to the maximum extent, but they do so rationally, leaving them sufficient resources and furnishing peaceful order and public goods to maximize the future stream of taxes.

We propose a new model of intellectual property based on the stationary bandit model of government.[1] We argue that new ideas—of the sort that become patents, copyrights and trademarks—emerge as economic rights[2], born global as it were into a world of roving bandits. They seek protection from a stationary bandit, who extracts tribute in return. The key insight of our new model, however, is a sharper distinction of who those bandits are.

In the standard model of intellectual property, benevolent national governments grant a temporary monopoly privilege to protect the creative inventor citizen from the unscrupulous depredations of corporations, or teenage pirates. The argument goes that without a prohibition on copying (institutionally defined as theft), a competitive market will provide only weak incentives to invest in creating new ideas—i.e. there will be market failure (Arrow 1962) and society will suffer a sub-optimally low level of creative-inventive activity. In the standard model, government protects from private theft, making the nation safe for private creativity.

Now private theft is certainly a problem, but we maintain that public theft is much worse. The main predators on intellectual property, we argue, are not competing inventors or teenagers, but other governments through their client services and cronies, who variously engage in outright theft or coercive measures to diminish and deplete the value of their property (Ezell et al 2016). A common example is the treatment of biopharma, routinely subject to outright theft, compulsory licensing, and other practices that diminish its value (Wu and Ezell 2016). In our new model, vulnerable subjects seek protection for their private economic property from the banditry of other governments, by registering their property with their own government, whom they trust to be powerful enough to protect it as they peacefully engage in trade and commerce throughout the world. The origin of intellectual property is when one of these roving bandits finds it worthwhile to become a stationary bandit by protecting the idea (the entrepreneurial discovery and the economic asset) from competitive theft from other governments, and settling down as a monopoly exploiter.

This sort of public action on behalf of private citizens should not be confused with rent-seeking or cronyism, where agents seek private benefit from insider markets to public power (Dourado and Tabarrok 2015). This is important, because the standard model of intellectual property is in effect a benevolent form of rent-creation—producing novelty, and making it public, in return for a government granted monopoly—thus creating a mechanism to transfer resources from other agents in the economy to the target. But in our model of intellectual property when a private agent seeks protection they are not seeking to exploit insider political markets, or to transfer resources from other groups of citizens (Olson 1965), but rather to have their property rights represented and extended as far as possible. In return, they grant that government an exclusive right to exploit them through perpetual taxation of the property. The other side of the intellectual property is not market failure, but a monopoly on taxation.

A better model of this exchange is ‘gunboat diplomacy’, as a type of government action to protect the rights of citizens operating beyond the nation state through the threatening deployment of naval assets. When the US Commodore Perry sailed into Edo (now Tokyo) harbor in 1853 to open Japan to trade with the West; or the British Naval fleet ended the Opium wars with China in 1839-42, resulting in the Treaty of Nanking that opened Hong Kong to foreign trade; or the US defeated the Barbary States, ending tribute to the pirates under protection of the Ottoman empire, enabling US and European merchants to trade along the North African coast without harassment, we have governments protecting private property against the depredations of other governments.[3] Governments have long used force to open markets when acting as agents on behalf of their merchant citizens seeking to extend their property rights, and therefore opportunities for exchange and commerce, into new territories. This sort of engagement is widely misrepresented as imperialist venturing, implying a political empire-building motive. But these actions can be better understood as tax policy, because the crucial part of the equation is that the displays of government force—through the posturing of naval assets, say—are on behalf of those who the government has monopoly tax rights over.

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[1] Our approach also builds on Barzel’s (2002) Hobbesean model of the state as a violent third party enforcement mechanism that citizens consent to power when safeguards are in place to mitigate abuse.

[2] In the Allen and Alchian (1977: 114) sense of ‘economic rights’ as the expectation of benefiting from the value of the assets created, for which they then seek third party enforcement.

[3] While more common during the 19th century, US carrier groups still patrol the South China Sea and coalition task forces protect merchant shipping in the Straights of Malacca and off the Somalia coast.