Is “Intellectual Property” a Necessary Incentive?

Download: “Intellectual Property”: A Libertarian Critique

I. The Ethics of “Intellectual Property”

II. Privilege as Economic Irrationality

III. “Intellectual Property” and the Structure of the American Domestic Economy

IV. “Intellectual Property” and the Global Economy

V. “Intellectual Property,” Business Models and Product Design

VI. Is “Intellectual Property” a Necessary Incentive?

Advocates for “intellectual property” defend it as necessary to encourage innovation, asking what the incentive for innovation or artistic creation would be without it. But in fact patents suppress innovation as much as they encourage it, and many producers in the cultural and information fields have demonstrated that value can be captured without “intellectual property.”

Patents are a hindrance to progress because of the “shoulders of giants” effect. Any new invention presupposes a wide variety of existing technologies that are combined and reworked into a new configuration. Patents on existing technologies may or may not marginally increase the incentives to new invention, but they also increase the cost of doing so by levying a tariff on the aggregation of existing knowledge to serve as building blocks of a new invention.78 James Watt’s refusal to license his patent on the steam engine, for example, prevented others from improving the design until the patent expired in 1800. This delayed the introduction of locomotives and steamboats. [79]

Rothbard pointed out that patents eliminate “the competitive spur for further research” because incremental innovation based on others’ patents is hindered, and because the holder can “rest on his laurels for the entire period of the patent,” with no fear of a competitor improving his invention. And they hamper technical progress because “mechanical inventions are discoveries of natural law rather than individual creations, and hence similar independent inventions occur all the time. The simultaneity of inventions is a familiar historical fact.” Patents also distort whatever research and innovation does occur in artificial directions—toward patentable research, at the expense of non-patentable research. [80] Chakravarthi Raghavan argued, likewise, that patents and industrial security programs prevent sharing of information, and suppress competition in further improvement of patented inventions. [81]

And patents are not necessary as an incentive to innovate. According to Rothbard, invention is motivated not only by the quasi-rents accruing to the first firm to introduce an innovation, but by the threat of being surpassed in product features or productivity by its competitors. He cites Arnold Plant: “In active competition… no business can afford to lag behind its competitors. The reputation of a firm depends upon its ability to keep ahead, to be the first in the market with new improvements in its products and new reductions in their prices.” [82]

This is borne out by F. M. Scherer’s testimony before the Federal Trade Commission in 1995. [83] Scherer spoke of a survey of 91 companies in which only seven “accorded high significance to patent protection as a factor in their R & D investments.” Most of them described patents as “the least important of considerations.” Most companies considered their chief motivation in R & D decisions to be “the necessity of remaining competitive, the desire for efficient production, and the desire to expand and diversify their sales.” In another study, Scherer found no negative effect on R & D spending as a result of compulsory licensing of patents. A survey of U.S. firms found that 86% of inventions would have been developed without patents. In the case of automobiles, office equipment, rubber products, and textiles, the figure was 100%.

The one supposed exception was drugs, according to Scherer, of which 60% would not have been invented. But it’s likely Scherer underestimated the effect of drug patents in discouraging or distorting innovation. For one thing, drug companies get an unusually high portion of their R & D funding from the government, and many of their most lucrative products were developed entirely at government expense. And Scherer himself cited evidence to the contrary. The reputation advantage for being the first into a market is considerable. For example in the late 1970s, the structure of the industry and pricing behavior was found to be very similar between drugs with and those without patents. Being the first mover with a non-patented drug allowed a company to maintain a 30% market share and to charge premium prices. We have already seen, in the previous chapter, the extent to which the direction of innovation of skewed by considerations of gaming the patent system and patent trolling the competition. The majority of R & D expenditure is geared toward developing “me, too” drugs: in essence slightly different versions of existing drugs, tweaked just enough to justify repatenting. And of the enormous R & D expenditures which patents are allegedly necessary to allow the drug companies to recoup, a majority goes not to developing the actual drug that goes to market, but to securing patent lockdown on all the possible major variations of that drug.

The injustice is only compounded by government funding of research and innovation, with private industry reaping monopoly profits from technology it spent little or nothing to develop. The Government Patent Policy Act of 1980, with 1984 and 1986 amendments, allowed private industry to keep patents on products developed with government R & D money–and then to charge ten, twenty, or forty times the cost of production. For example, AZT was developed with government money, and the patent subsequently given away to Burroughs Wellcome Corp.84 As if the deck were not sufficiently stacked already, Congress has more than once extended drug companies’ patents beyond the expiration of their normal term under patent law; as just one example, the pharmaceutical companies in 1999 lobbied Congress to extend certain patents by two years by a special act of private law. [85]

Copyrights have also been granted arbitrary extension for certain favored parties (e.g., copyright extension, sponsored by Sonny Bono, for Disney’s “Mickey Mouse” trademark). This is in addition to the draconian copyright protections, described above, already in force under general law. But copyright protection is no more necessary for artistic creation than patents are necessary for invention. There are many businesses, in the open-source world, that manage to make money from auxiliary services even though their content itself is not proprietary. For example, even though Red Hat cannot restrict the copying of the Linux software it distributes, it does quite well customizing the software and offering specialized customer support. Phish has actively encouraged fans to share its music free of charge, while making money off of live performances and concessions. Radiohead offered a recent album for free download, collecting only voluntary contributions via what amounted to a glorified PayPal tip jar.

The Radiohead model is especially interesting in its implications for making a living off open-source production. Since, as we have already seen, the cost of the physical capital necessary for recording and sound editing has imploded, the overhead costs which must be serviced by an open-source music distributor are miniscule. And since the listeners themselves bear the cost of physical reproduction (i.e., they burn their own CDs), whatever revenue stream comes in from voluntary contributions—even it averages only a dollar or two per listener—belongs to the artist free and clear. And even if the content provider charges a price for the download, there is a significant rent entailed in the cost of setting up a rival download service and selling the same content for a lower price. So for all but the biggest blockbuster music groups and publishers, if the content provider charges a low enough price, the transaction costs involved in going through a file-sharing network, or setting up a competing download service just to sell the content for fifty cents instead of a dollar, probably exceed the likely returns. Unless the content providers attempt to price gouge in the way that record companies have done in recent years, or they are forced to service the overhead costs from supporting corporate management and shareholders, they are likely to benefit more than suffer from free culture.

Since IP is not necessary to encourage innovation, this means that its main practical effect is to cause economic inefficiency by levying a monopoly charge on the use of existing technology.

In any case, for those whose libertarianism follows from the principles of self-ownership and nonaggression, whether “intellectual property” is necessary for those engaged in certain forms of economic activity to profit is beside the point. The same argument is used by protectionists: certain businesses would be unprofitable if the weren’t protected from competition by tariffs. So what? No one has a right to profit at someone else’s expense, through the use of force. In particular, no one has the right to make a profit by using the state to prevent others from doing as they please with their own pen and paper, hard drives, or CDs. A business model that isn’t profitable without government intervention should fail.

The following example is instructive, as a lesson in double standards. David Noble, in Progress Without People, recounted an incident in the early 1970s when the Washington Post was adopting computerized cold type technology which rendered pressmen obsolete. The pressroom was invaded after hours by pressmen who systematically took apart the machines with the technical expertise of a Jack the Ripper. [86] So why is it bad for “Luddites” to smash machines that put them out of a job, while technology that puts capitalists out of a job (or out of profit, rather) violates their “property” rights? If the same newspaper publishers whose adoption of new technology rendered skilled workers obsolete, now find themselves threatened by cutting and pasting and hyperlinks—well, it couldn’t happen to a nicer bunch of guys. And if the record companies’ management and shareholders now find themselves redundant in the face of home sound editing, filesharing, and other forms of new technology, then let them eat cake. If workers don’t have a property right in their jobs in the face of new technology, then neither do capitalists have a property in the accrual of profits from a business model rendered obsolete by new technology.

“Intellectual property,” finally, hinders innovation in another way we have not yet considered: it increases the cost of putting and keeping one’s own ideas in the public domain, for those who prefer to do so. The content originator or inventor must take defensive measures to prevent his idea, which he leaves in the public domain, from being copyrighted by someone else with the intent of depriving him of its use.

This is not such a problem for copyright. Copyleft, the GNU General Public License and the Creative Commons license all presuppose strong copyright laws, and piggyback on standard copyright. Such licenses allow virtually unlimited reproduction and circulation of material under a broad range of circumstances, on the condition that the secondary user make his own use of the material publicly available under the terms of the same license. Copyright protection is simply retained in self-defense, to prevent material in the public domain from being copyrighted by secondary users. Were there no copyright laws in existence in the first place, there would be no need for the GPL or CC license. Patents, however, raise far more difficult issues. Vinay Gupta’s account of his experiences with the hexayurt, an open-source form of cheap emergency housing for refugees living in shantytowns and tent cities, is instructive in this regard.

Look, the problem is this: GPL enforceability rests on strong copyright law.

Hardware, however, is typically not covered by copyright, leaving patent.

Patents are expensive.

So you can patent-with-open-license if you can afford it, or you can publish and it drops into the public domain (i.e. is no longer patentable) and some other bastard can patent things around or enclosing your invention, and then you’re an unhappy camper.

Been through this with the Hexayurt and there’s no good answer right now. I strongly tend towards the public-domain-and-pray approach, personally. [87]

One cannot simply choose not to patent an invention and entrust it safely to the public domain. It is necessary to pay the enormous expense of obtaining a patent in order to enforce the continued public domain status of one’s own invention, and keep it from being stolen by corporate pirates.

In Summary…

“Intellectual property” is theft. Smash the state.

Notes:

78. Yochai Benkler, The Wealth of Networks, pp. 36-37.

79. Soderberg, Hacking Capitalism, p. 116.

80. Rothbard, Man, Economy, and State, pp. 655, 658-9.

81. Chakravarthi Raghavan, Recolonization: GATT, the Uruguay Round & the Third World (Penang, Malaysia: Third World Network, 1990), p. 118.

82. Rothbard, Power and Market: Government and the Economy (Kansas City: Sheed Andrews and Mcmeel, Inc., 1970,

83. Scherer testimony, Hearings on Global and Innovation-Based Competition. FTC, 29 November 1995 <http://www.ftc.gov/opp/gc112195.pdf>.

84. Chris Lewis, “Public Assets, Private Profits,” Multinational Monitor, in Project Censored Yearbook 1994 (New York: Seven Stories Press, 1994).

85. Benjamin Grove, “Gibbons Backs Drug Monopoly Bill,” Las Vegas Sun, 18 February 2000 <http://www.ahc.umn.edu/NewsAlert/Feb00/022100NewsAlert/44500.htm>.

86. David F. Noble, Progress Without People: New Technology, Unemployment, and the Message of Resistance (Toronto: Between the Lines, 1995), p. 42. 1977), p. 74.