Quick Point on Intellectual Property

The anti- intellectual property (IP) argument generally relies on the assumption that ideas aren’t scarce and therefore aren’t economic goods and shouldn’t be protected through intellectual property rights. While I think there is a case in the argument that the delineation of intellectual property should be left to the market — actually, this is something I strongly believe in —, I’m not a big fan of the absolutist’s case against IP. First, attempting to define property by looking at some common characteristics of what we widely accept as property today is a backwards-looking method. Property is an ever evolving concept. Second, ideas are scarce, which is why people pay so much for quality knowledge.

I’ll start with the second critique first. Ideas are synonymous with knowledge, and knowledge is unambiguously scarce. If it weren’t, we’d be omniscient beings. The value of ideas is that they add to our knowledge, making us more productive. Not everyone is equally as bright, so there is incentive to search for or lure in idea-producing people. If ideas weren’t scarce then they would have no price. There would exist an infinite quantity of all knowledge, and it would be impossible for anybody to sell their intellectual product. One could argue that IP laws create an artificial scarcity, but even without these laws there’s still an interest in paying for good ideas. This alone should make people second guess the assumption that knowledge isn’t scarce. Finally, if ideas weren’t scarce it wouldn’t pay to keep others from using them, because there’s no cost to giving away knowledge beyond that which satiates your utility (because its value is zero).

People who make the above argument against IP are mistaking, I think, non-scarcity for non-excludability and non-rivalry. Some quick definitions,

  1. Non-excludability: The inability to internalize the benefits of a product, because the producer can’t exclude non-paying users;
  2. Non-rivalry: A rivalrous good is one where its use by one person excludes its simultaneous use by another.

The supposed “non-scarcity” is actually non-excludability and non-rivalry, and to this extent few people will disagree that IP is unlike many other economic goods. But where some, wrongly, see a free good, most others recognize IP as being a public good. Just in case, public goods have nothing do with government, apart from the belief that government ought to subsidize public goods because these will suffer from underinvestment — you don’t need to accept the role of the state to recognize the legitimacy of the strictly public goods argument. But, public goods have value: ideas are capital goods, and their value is imputed from the final product. Imputed values are often difficult to recognize, because without a pricing process we don’t know what they are, but the value is there.

The problem with IP laws as they exist is that they’re somewhat arbitrary and they’re subject to the knowledge problem. The way they teach IP to undergraduates, commonly in a law and economics course, goes something as follows (and, of course, you can change the details by changing the model of the market, writing different functions, et cetera),

IP Monopoly

Basically, you recognize the cost of IP rights, which is issuing the firm monopoly rights on their idea (and the product it helps produce) and the higher price and restricted output that comes with it. You have to compare the welfare costs of issuing the monopoly with the consumer gain that comes with the idea being produced at all (since public goods are underfunded). While this is a great theoretical exercise, its value in the real world is suspect, because (as F.A. Hayek make clear in “Economics and Knowledge“) we don’t have all the necessary data to construct these models. Further, since data tends to change constantly, any model we make is bound to be obsolete by the time it’s implemented.

This knowledge problem is why market solutions are generally preferable. This doesn’t mean that a market solution already exists or will arrive instantaneously. It has to come about spontaneously, through trial-and-error. And solution is probably a poor choice of terms, because market solutions — like any solution derived from a cognitively limited brain (or group of brains) — are imperfect. Despite these imperfections, the fact is that government solutions are also imperfect, and, since they aren’t disciplined by the same forces as markets are, they tend to be even more sub-optimal. This was one of the most important points R.H. Coase made in “The Problem of Social Cost.”

There is an incentive for market agents to “fence” their ideas. People want to internalize the benefits of their production, and this includes internalizing the benefits of their ideas. It’s just that the scope of these solutions would be much more restricted than government IP laws. One way to do this is to sell your idea to large firms, who have the capacity to put your idea to use and produce quickly enough to earn enough profit to cover costs before the idea is more widely implemented. But, there are surely an infinite amount of alternative ways of internalizing the benefits of knowledge, many of which are left unexplored because it’s easier to exploit the availability of excessive government protection.

Finally, when I wrote that defining property rights by looking at common characteristics of things that are commonly accepted as property is backwards-looking I had in mind attempts to use things like Lockean homesteading theory. Property rights aren’t absolute. They change over time. People can parcel their rights and sell them (what are generally called Cosean solutions). Property rights have to adapt, because the optimal extent of these rights change with the type of good and with the environment. With regards to IP, I suspect that much of this evolution never took place, because IP protections were introduced by governments relatively early. So, IP rights are an unexplored area, and exploring it is best left to the market, because society can arrive at solutions (without overarching rational guidance) by exploiting local knowledge.

I think this trade-off perspective is much better than the absolute position, largely because it adheres to the reality of the human condition. It’s also based on a more modern economic theory, one that looks at “rights” as goods themselves. They’re benefits people want, with attached costs, and so the evolution of rights is largely a process of trade-offs. While this turned out to be longer than a “quick point,” I thought it worthwhile to voice my concerns with the extreme anti-IP position, which I don’t find tenable (even if I’m closer to it than most others).

3 thoughts on “Quick Point on Intellectual Property

  1. Pingback: On Non-Rivalrous Goods | Economic Thought

  2. Pingback: Ronald Coase (1910–2013) | Economic Thought

Leave a Reply

Your email address will not be published. Required fields are marked *