A recurring question in discussions of digital copyright is how creators and their investors (that is, labels, movie studios, publishers, etc) will earn a living in the digital era.

But though I've had that question posed to me thousands of times, no one has ever said which creators and which investors are to earn a living, and what constitutes "a living".

Copyright is in tremendous flux at the moment; governments all over the world are considering what their copyright systems should look like in the 21st century, and it's probably a good idea to nail down what we want copyright to do. Otherwise the question "Is copyright working?" becomes as meaningless as "How long is a piece of string?"

Let's start by saying that there is only one regulation that would provide everyone who wants to be an artist with a middle-class income. It's a very simple rule: "If you call yourself an artist, the government will pay you £40,000 a year until you stop calling yourself an artist."

Short of this wildly unlikely regulation, full employment in the arts is a beautiful and improbable dream. Certainly, no copyright system can attain this. If copyright is to have winners and losers, then let's start talking about who we want to see winning, and what victory should be.

In my world, copyright's purpose is to encourage the widest participation in culture that we can manage – that is, it should be a system that encourages the most diverse set of creators, creating the most diverse set of works, to reach the most diverse audiences as is practical.

That is, I don't want a copyright system that precludes making money on art, since there are some people who make good art who, credibly, would make less of it if there wasn't any money to be had. But at the same time, I don't think that you can judge a copyright system by how much money it delivers to creators – imagine a copyright system for films that allowed only one single 15-minute short film to be made every year, which, by dint of its rarity, turned over £1bn. If only one person gets to make one movie, I don't care how much money the system brings in, it's not as good as one in which lots of people get to make lots of movies.

Diversity of participation matters because participation in the arts is a form of expression and, here in the west's liberal democracies, we take it as read that the state should limit expression as little as possible and encourage it as much as possible. It seems silly to have to say this, but it's worth noting here because when we talk about copyright, we're not just talking about who pays how much to get access to which art, we're talking about a regulation that has the power to midwife, or strangle, enormous amounts of expressive speech.

Here's something else copyright can't and won't do and doesn't do: deliver a market where creators (or investors) set a price for creative works, and audiences buy those works or don't, letting the best float to the top in a pure and free marketplace. Copyright has never really worked like this, and it certainly doesn't work like this today.

For example, it's been more than a century since legal systems around the world took away songwriters' ability to control who performed their songs. This began with the first records, which were viewed as a form of theft by the composers of the day. You see, composers back then were in the sheet-music business: they used a copying device (the printing press) to generate a product that musicians could buy.

When recording technology came along, musicians began to play the tunes on the sheet music they'd bought into microphones and release commercial recordings of their performances. The composers fumed that this was piracy of their music, but the performers said: "You sold us this sheet music – now you're telling us we're not allowed to play it? What did you think we were going to do with it?"

The law's answer to this was a Solomonic divide-the-baby solution: performers were free to record any composition that had been published, but they had to pay a set rate for every recording they sold. This rate was paid to a collective rights society, and today, these societies thrive, collecting fees for all sorts of "performances" where musicians and composers get little or no say. For example, radio stations, shopping malls, and even hairdressers buy licences that allow them to play whatever music they can find. The music is sampled by more or less accurate means and dispersed to artists by more or less fair means.

Fair for all?

Of course, some artists argue that the sampling and dispersal are unfair, but it's a rare artist who says that the principal of collective licensing is itself a form of theft. No one wants to get a phone call every 15 minutes from some suburban barman who wants to know if playing their 20-year-old hit on the karaoke machine is going to cost 15p or 25p in licence fees.

There is an ancient copyright agreement that Victor Hugo came up with called the Berne Convention that most western nations are parties to. If you read the agreement closely, it seems to make this whole business of blanket licensing illegal. When I've asked international copyright specialists how all these Berne nations can have radio stations and karaoke bars and hairdressers and such playing music without negotiating all their playlists one at a time, the usual answer is: "Well, technically, I suppose, they shouldn't. But there's an awful lot of money changing hands, mostly in the direction of labels and artists, so who's going to complain, really?"

Which is by way of affirming that grand old Americanism: money talks and bullshit walks. Where the stiff-necked moral right of a copyright holder to control usage rubs up against the practicalities of allowing an entire industry's capacity for cultural exchange and use, the law usually responds by converting the moral right to an economic right.

Rather than having the right to specify who may use your works, you merely get the right to get paid when the use takes place.

Now, on hearing this, you might be thinking: "Good God, that's practically Stalinist! Why can't a poor creator have the right to choose who can use her works?" Well, the reason is that creators (and, notably, their industrial investors) are notoriously resistant to new media. The composers damned the record companies as pirates; the record labels damned the radio for its piracy; broadcasters vilified the cable companies for taking their signals; cable companies fought the VCR for its recording "theft." Big entertainment tried to kill FM radio, TV remote controls (which made it easy to switch away from adverts), jukeboxes, and so on, all the way back to the protestant reformation's fight over who got to read the Bible.

Given that new media typically allow new creators to create new forms of material that is pleasing to new audiences, it's hard to justify giving the current lotto winners a veto over the next generation of disruptive technologies. Especially when the winners of today were the pirates of yesteryear. Turnabout is fair play.

So the best copyright isn't the one that lets every creator license every use of her work piecemeal. Instead, it's the system that allows for such licensing, except where other forms of licensing – or no licensing at all – makes sense. For example, in the US, which has the largest, most profitable broadcast and cable industry in the world, the law gives no compensation rights to rightsholders for home recording of TV shows. There's no levy on blank cassettes or PVRs in exchange for the right to record off the telly. It's free, and it has conspicuously failed to destroy American TV.

There are whole classes of creation and copying that fall into this category: in fashion, for example, designs enjoy limited or no protection under the law. And each year's designer rags are instantaneously pirated by knock-down shops as soon as they appear on the runway. But should we protect fashion the way we do music or books?

It's hard to see why, apart from a foolish consistency: certainly, every currently ascendant fashion designer who'd benefit from such a thing started out by knocking off other designers. And there's no indication that fashion is under-invested, or fails to attract new talent, or that there is a lack of new fashion available to the public. Creating exclusive rights for fashion designers might allow more money to be made by today's winners, but these winners are already making as many designs as they can, and so the net diversity of fashion available to the world would fall off.

It's all about balance

Back to the question: what does a good copyright look like?

Well, it's got to be both evidence-based and balanced. For example, if architects come forward with the claim that they need to be able to control photos of their buildings or no one will invest in an architect's education, they'd better have some pretty compelling evidence to back up that claim. On the one hand, we have the incontrovertible fact that today, prospective architects spend a lot of money on professional training without any such guarantee.

Of course, it's easy to imagine that more people would enroll in architecture schools if designing a building gave you a copyright in its likeness – everyone who wanted to photograph a public road would have to pay you a licence fee for the use of "your" building. But given that there's no evidence that architecture programmes are wasting away for want of students, and given that architects seem to be thriving as a trade everywhere, the evidence suggests that we don't need to give architects these rights.

That's evidence, but what about balance? Well, say that tomorrow, the number of architects did shelve off radically, and no one could find anyone to draw up plans for a new conservatory or mansard roof anymore.

How could we save architecture? Well, we could give architects a copyright in the likeness of their buildings, and essentially put architects in the rent-collecting business: rather than devoting all their time to designing buildings, architects would spend most of their time sending legal threats to sites like Flickr and Picasa and TwitPic whenever some poor sod uploaded a picture of his flat's exterior Christmas decorations and inadvertently violated the architect's copyright.

This would certainly make more money for some architects (especially ones whose buildings were situated near public webcams – everyone who operated one of those would have to stump up for a license!). But the public cost would be enormous. Instead of the mere absurdity of coppers going around ticking off tourists for photographing public buildings (as though bombing was a precision undertaking, requiring that terrorists photograph buildings in detail before wandering into them with bombs under their coats and blowing themselves up); we'd have vast armies of private security guards representing the far-flung descendants of Christopher Wren and that miserable bastard who designed the awful tower-block at the end of my road in 1965 or so, hassling anyone who took out a camera to snap a picture of the car that just ran them over, or their kids adorably eating ice-cream, or their mates heaving up a kebab into the gutter after a night's revels.

Google Street View would be impossible. So would holiday snaps. Amateur photography. Fashion shoots. News photography. Documentary film-making.

Essentially, the cost of recording your life as you live it, capturing your memorable moments, would go to infinity, as you had to figure out how to contact and buy licences from thousands of obscure architects or their licencees. Surely in this case, the costs outweigh the benefits (and yes, I'm perfectly aware that certain European countries were stupid enough to give architects this right – there are also places in the world that prohibit women from driving cars, where they chop down rainforests to graze cattle, and where the used car adverts feature florid men wearing foam cowboy hats screaming into a camera – if everyone in France jumped off the Eiffel Tower, would you do it too?).

Making copyright work right online

So a balanced and evidence-based copyright policy is one that requires creators to show a need for protection, and also that the protection sought will deliver more benefit than the cost it implies.

How would this apply to the internet? Take music downloads. By the music industry's own account, the pay-per-download systems only capture a minute fraction of the music traded on the net. But a blanket licence that ISPs could opt into that entitled the ISP's customers to download and share all the music they wanted would deliver evergreen profits to the record industry – without necessitating spying, lawsuits, and threats of disconnection from the internet.

If the price was right, practically every ISP would opt into the system, since the cost of the legal headaches attending the operation of a service without such a licence would be more expensive than getting legit. Then we could focus on making the collection and dispersal of fees and the sampling of music downloading as transparent as possible, bringing 21st century metrics to bear on making sure that artists are fairly compensated (rather than spending vast sums figuring out which music fans to send legal threats to this month).

Now, take $300m CGI summer blockbuster films: if the producers of these things are to be believed, the ongoing capacity to produce glitzy, big budget productions demands that services like YouTube be shut off (see, for example, Viacom's lawsuit against Google over YouTube).

If this is true – I'm no movie exec, maybe it is – then we need to ask ourselves the "balance" question: YouTube's users produce 29 hours of video every minute and the vast majority of it is not infringing TV and movie clips, it is independently produced material that accounts for more viewer-minutes than television. So, the big studios' demand amounts to this: "You must shut down the system that delivers billions of hours of enjoyment to hundreds of millions of people so that we can go on delivering about 20 hours' worth of big budget film every summer."

To me, this is a no brainer. I mean, I love sitting in an air-conditioned cave watching Bruce Willis beat up a fighter jet with his bare hands as much as the next guy, but if I have to choose between that and all of YouTube, well, sorry Bruce.

The rejoinder I hear from the film industry in these discussions is downright bizarre: they cite the fact that all those billions of hours' worth of material on YouTube cost very little to make, and consequently, YouTube is able to pay very small sums of money in ad revenue and still get all that video. To hear an industrialist damning a competitor because he's figured out a way of making a competing product that costs a lot less is just weird. There is no virtue in spending a lot of money.

Anyone can do it. Spending small sums of money to make something great – well, that's just magic.