I would have to say that laws creating intellectual “property” do in fact create artificial scarcity.
My problem with this is if the IP laws didn’t exist, the good wouldn’t exist to have an “artificial scarcity” of in the first place. It’s exactly analogous to music or other intellectual or creative property, and why I asked, “Are artists creating ‘artificial scarcity’ when they charge for their works, thus preventing those who can’t pay (or won’t) from enjoying them?”
Intellectual property law is artificial as it is a non-market force that prevents economic agents from freely using the resources they have, namely ideas.
I disagree. IP law is akin to property rights law. You say it prevents economic agents from using the resources they have, but I ask, whose resources? If I write a very popular book, is it “your resource” to use as you wish, up to and including re-printing it under your name?
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I'm posting this here, so we can try and have a more in depth discussion of the topic, taking points one by one if possible and not unnecessarily breaking up the conversation.
11 comments:
Looking at your first point: without IP laws, we wouldn't see the goods that IP laws protect.
If this is true, then you're certainly right that IP laws are necessary, i.e. this is an obvious winning point in and of itself. I think this point is not true, rather, there are some goods that IP now protects that we wouldn't see without IP, but there are some we would see.
Assumption 1 - what we're concerned with is maximum social welfare. This doesn't mean things like social equality, but rather total economic value in society. There are other concerns, but right now we're weighing the economic merits of IP law.
Assumption 2 - when we're talking about IP, we mean things like patents and copyright. Trademark seems much different that copyright and patents, as it is an issue of identity, in theory.
Historically, I think you'll find that people have produced art and technological innovation in the absence of intellectual property law. According to your assertion, we would never see professional singers, or painters, or actors, or playwrights, inventors, etc or any technological advancement aside from that occurring by chance. This is a very bold assertion.
You can certainly imagine a situation in which a car-maker could make some sort of technological adjustment that would give his product a competitive edge worth $A dollars. Value A is not zero, because his technological adjustment cannot be immediately copied by competitors. As long as the $B investment required to develop the technology is less than $A, we'll see him develop it, regardless of IP law. You can also imagine, then, the case where B is so high, that without patent protection, A would be too low to push the car manufacturer to develop the technology.
I believe this example breaks the strict assertion that we wouldn't see what IP protects if IP didn't exist.
It may be best to look at specific examples where we think literature,technology, etc. would be stifled by the absence of IP law, and see if that is indeed the case. Feel free to counter, though, however you think best.
alex,
It's not clear to me the claim of mine you're responding to.
As the quotes demonstrate, we were discussing your contention that IP laws create "artificial scarcity".
But the very first sentence in your response above recasts the discussion to something different, namely, "Looking at your first point: without IP laws, we wouldn't see the goods that IP laws protect."
Ok, so there appears to be some confusion here. Nonetheless, I can offer a few comments to your response.
Historically, I think you'll find that people have produced art and technological innovation in the absence of intellectual property law. According to your assertion, we would never see professional singers, or painters, or actors, or playwrights, inventors, etc or any technological advancement aside from that occurring by chance. This is a very bold assertion.
I don't actually assert this, and I'm sorry if that's the impression I gave. What I believe is that, without IP laws, we would see significantly less creative works in existence.
You can certainly imagine a situation in which a car-maker could make some sort of technological adjustment that would give his product a competitive edge worth $A dollars. Value A is not zero, because his technological adjustment cannot be immediately copied by competitors. As long as the $B investment required to develop the technology is less than $A, we'll see him develop it, regardless of IP law.
I'm not fully understanding your example here, so pardon if my following comments miss the mark a bit.
It's true that the technological advancement created by the car-maker cannot be immediately copied by competitors, but that's no reason to believe the car-maker would develop the advancement in the absence of IP laws. The reason is simple: it's far, far cheaper to copy or reverse-engineer an advancement than create it from scratch. If the car-maker calculates that it cannot recoup the investment made in the advancement through the additional sales the advancement allows, because competitors will be able to quickly copy the advancement and thus capture some of those sales themselves, then investment into the advancement will not be made. IP laws allow the recouping of the investment, along with a profit (i.e., incentive to produce), so that inventors are justified in making investments in the first place. This is not to say that no advancements will ever be made, just that there will be fewer of them in the absence of IP law.
You responded to my contentions on your site with two points. One was that without IP we wouldn't see products, so then obviously with IP there's not "artificial" scarcity. I was saying that if that were true, then IP is necessarily economically efficient, and discussion's pretty much over.
Since neither of us thinks we'd see no innovation, the question is if "without IP laws, we would see significantly less creative works in existence."
What we mean by "works" needs to be specified a little more, I think. I believe that we would necessarily see more copies of works. What I mean by that is we would see more books printed, more cd's made, more DVD's etc. I take this to be higher economic efficiency, i.e. more value being produced.
I think we would also see more "works" in the intellectual sense as well, though I'm not as tied to that belief. To clarify, this sense of "work" means, for example, story, song, technological development, etc., as opposed to the material manifestation (which would be the sense of work above). If this distinction doesn't make sense, let me know and I'll try to clarify.
In brief, there are the works which are immaterial ideas, and there are copies of works, which are the material embodiments of the immaterial idea.
I'm saying we would probably see more of the former, and certainly more of the latter.
I think standard theory of monopoly applies: when there's a monopoly, we see less product produced, even though there are people who would be willing to buy the product at a price greater than the marginal cost to the producer. Likewise, when an innovator is given a monopoly over the innovation (note: this is and abstract work, as opposed to the material embodiment type of work), there is the market inefficiency of less product produced than would be with competition.
Returning to the car example, the fact that it's cheaper to copy (this isn't always true, but let's assume it is in this example) only means that the cost of technological advancement is lower for the copiers.
We can probably agree that the original car-maker will invest in advancement if his investment is lower than the additional profit he expects.
Let's look at what would happen in the industry. Assumptions: zero imitation time, more than one competitor, homogeneous product. Based on these assumptions, we can agree that the competitors would push price down to marginal cost, i.e. the marginal profits are pushed down to zero by competition.
Now, here's where I think the standard argument for IP law breaks down, i.e. that without IP everyone copies so developer can't make a profit and decides not to innovate. So the question is: if Company C1 makes a development that costs P1 for them to develop and implement, would Company C2 copy and implement the technology, at a cost of P2?
Based on our assumptions, copying by competitors would immediately remove any competitive advantage and drive all prices to marginal cost, eliminating all marginal profits. The problem with this is that if marginal profit was driven to zero for company C2, it would have an overall negative profit. Total marginal profit minus investment costs = total profit. If marginal profit equals zero, then necessarily company C2 will lose money if it decides to stay in the industry and copy the innovation. It would therefore choose not to copy, rendering the assertion that IP is necessary to prevent prohibitive copying.
alex wrote,
What I mean by that is we would see more books printed, more cd's made, more DVD's etc. I take this to be higher economic efficiency, i.e. more value being produced.
Lots of copies of a few works creates more value than fewer copies of lots of works? Just to be clear, is this your belief?
I think standard theory of monopoly applies: when there's a monopoly, we see less product produced, even though there are people who would be willing to buy the product at a price greater than the marginal cost to the producer.
I think here is where your reasoning fails. You say the innovator is given a monopoly over some abstract work, therefore less product is produced.
Assuming this is true, absent IP law, what incentive does the innovator have to create the abstract work in the first place? It seems to me you're taking it as a given that the level of innovation would be the same absent IP law as it is under it.
But the bigger error is believing this is how IP law works. Perhaps we don't share the same view about what constitutes an abstract idea. The abstract idea of a personal computer was (if memory serves) invented by IBM, but there was no patent on this idea, though there were patents on some specific components. None of this stopped the growth of the PC industry.
Based on our assumptions, copying by competitors would immediately remove any competitive advantage and drive all prices to marginal cost, eliminating all marginal profits. The problem with this is that if marginal profit was driven to zero for company C2, it would have an overall negative profit.
No, not really. If Company C1 has produced an innovation which is demanded in the marketplace (let's say, fuel injection), Companies C2, C3, etc, must introduce the same innovation if they are to avoid losing market share to C1. They may not make any profits on the innovation, and in fact they may lose some money due to P2, but that is preferable to losing a larger chunk of profits to C1, whose market share has expanded as a result of the innovation.
"Lots of copies of a few works creates more value than fewer copies of lots of works?"
- Yes, more economic value. If our criterion were the quality of art or how tiny we can get a computer, for example, regardless of quantity, as opposed to economic value, then IP would definitely be the way to go.
"what incentive does the innovator have to create the abstract work in the first place"
- That's the point I tried to make with the car example. The innovator obtains competitive advantage over other companies for a period of time. If that advantage is is worth more than the cost of investment, he will invest.
With this in mind, it's important to note at what rate innovation tends to progress: slowly, with relatively few bumps. People innovate in small steps. You might say it's a function of our human intelligence; we see something and make it better.
This makes it all the more likely that when people innovate, they can recoup investment before their competitors can implement the change, as the investment cost is much less than when trying to design something completely new.
"It seems to me you're taking it as a given that the level of innovation would be the same absent IP law as it is under it."
-Absolutely not. This is the same as the first point. Better lots of computer software, if at a lower level, than less software at a higher level. Quantity(no ip) x Quality(no ip) > Quantity(with ip) x Quality(with ip).
"But the bigger error is believing this is how IP law works. Perhaps we don't share the same view about what constitutes an abstract idea."
-I'm not sure exactly where we differ here, or with your IBM example. I think ideas are by definition abstract; they're not tangible.
"Companies C2, C3, etc, must introduce the same innovation if they are to avoid losing market share to C1."
-The flaw in the standard argument is that C2, C3 etc will lose money by investing, so they would choose not to invest, and instead bow out of the market, cutting their losses. Sure, they lose complete market share, but that's better than losing money on an investment that won't make them any profit (as competition drives marginal profit to 0).
alex wrote,
- Yes, more economic value.
I suppose we'll have to disagree. I see a greater choice of goods as more valuable than a few, primarily because of the increased marginal utility to consumers that greater choice entails.
With this in mind, it's important to note at what rate innovation tends to progress: slowly, with relatively few bumps. People innovate in small steps. You might say it's a function of our human intelligence; we see something and make it better.
But it's also true that a lot of innovation requires years of unrenumerated investment. Drugs are a good example.
This makes it all the more likely that when people innovate, they can recoup investment before their competitors can implement the change, as the investment cost is much less than when trying to design something completely new.
But simply copying the change (or new innovation) is cheaper still, meaning that recouping the investment without IP laws is far less likelier.
-Absolutely not. This is the same as the first point. Better lots of computer software, if at a lower level, than less software at a higher level. Quantity(no ip) x Quality(no ip) > Quantity(with ip) x Quality(with ip).
I think you missed something. The question I asked previously is important: "Assuming this is true, absent IP law, what incentive does the innovator have to create the abstract work in the first place?" From what I gather, you'd say, the incentive is the chance to reap some profits before competitors copy the innovation. But you cannot assume profits would always, or even usually, recoup the initial investment. What's more, there's a tremendous degree of uncertainty. How does the innovator know how easily his product could be copied and put on the market? What if his calculation is that it would take about 3 years turned out to be wrong by a factor of 10? *Poof*! There goes his investment, and his competitors have just reaped a windfall. It could be enough to put him out of business.
I think ideas are by definition abstract; they're not tangible.
Yes. But the point is, abstract ideas are not protected under IP law. Thus, your argument that "when an innovator is given a monopoly over the innovation (note: this is and abstract work, as opposed to the material embodiment type of work), there is the market inefficiency of less product produced" is a strawman.
Sure, they lose complete market share, but that's better than losing money on an investment that won't make them any profit (as competition drives marginal profit to 0).
Companies would rather lose complete market share than lose some money on a good that won't make them a profit?
Goodness, no! Companies do the exact opposite of this all the time to gain market share. Just look at the market for video game consoles. Do you know how long Microsoft's Xbox division ran in the red before finally turning a profit?
"I see a greater choice of goods as more valuable than a few, primarily because of the increased marginal utility to consumers that greater choice entails."
-Can we agree that your not using economic valuation? I'm saying that there will be greater production of value, and your saying there will be more choice, correct? And in that case, why don't you favor IP laws that have no expiration date? Why should anything ever go into the public domain, when otherwise people will be forced to create new options?
"But it's also true that a lot of innovation requires years of unrenumerated investment. Drugs are a good example."
-sure. This just brings us back to the point above, though. Some drugs probably wouldn't be cost efficient, others would. I say better more people buy drugs that are less advanced, than fewer people buy drugs that are more advanced. i.e. the formula: Quantity(no ip) x Quality(no ip) > Quantity(with ip) x Quality(with ip).
"But simply copying the change (or new innovation) is cheaper still, meaning that recouping the investment without IP laws is far less likelier."
-If copying is cheaper, that only means that the time that the innovator has competitive advantage is lower. Again, as long as cost of innovation is recouped during that time, innovation can still occur.
"But you cannot assume profits would always, or even usually, recoup the initial investment."
-This is true of any investment. Uncertainty is true of any investment. These issues are in no way unique to investment for the purpose of innovation. By this logic you should support monopoly of every industry, otherwise some businesses will fail. I'm assuming we both support free markets in general. If not, we probably disagree on issues far deeper than IP.
"But the point is, abstract ideas are not protected under IP law."
-I'm using abstract in a different sense. What is an idea, if not abstract? Something is either material, or abstract, yes? So if I have a design for a new type of car, that is an idea. If I have it on paper, then the idea is embodied in that piece of paper (in which case we don't need IP to protect it, laws for theft, etc. prevent it from being taken). When someone looks at that paper, or at the new car itself, and comprehends the design, it has become an idea in their mind. IP law prevents them from using that idea. Only I can use that idea. That is monopoly.
When people say that IP doesn't protect "abstract ideas," I think that means it doesn't protect things like theories, i.e. I can use some new theory of physics when designing my car, even if someone else wrote the paper on the theory.
"Companies do the exact opposite of this all the time to gain market share."
-In the model of two companies, though, there's no hope of turning a profit, as competition drives marginal profit down to 0 (i.e. marginal cost = price). Remember, we're assuming homogeneous goods. This isn't an exact model, of course, of reality. Model's never are.
To make the bring the model into reality, let's look at a possible Microsoft example. Microsoft develops a new gaming system called the ZBox. It ships out the new systems to all its distributors (i.e. Best Buy, etc), and the first time a competitor (let's use Nintendo) sees the ZBox is when a Nintendo employee goes to Best Buy and gets one. Where do you see the need for a patent to protect Microsoft?
alex wrote,
-Can we agree that your not using economic valuation? I'm saying that there will be greater production of value, and your saying there will be more choice, correct?
I'm saying that we don't agree what will produce the greater economic valuation. It seems to me that sheer quantity doesn't necessarily equate to this. A few goods, though widely available, are only valuable to...a few people. Which is why I think greater choice leads to greater total economic value. The marginal utility of an increased choice in goods produces greater total economic value.
And in that case, why don't you favor IP laws that have no expiration date? Why should anything ever go into the public domain, when otherwise people will be forced to create new options?
Because this does not serve the goal of encouraging new innovations, and thus, greater choice.
I say better more people buy drugs that are less advanced, than fewer people buy drugs that are more advanced. i.e. the formula: Quantity(no ip) x Quality(no ip) > Quantity(with ip) x Quality(with ip).
I understand this is what you believe, but it's an assertion, as is your formula. I can merely change the > to a <. Who's to my formula is invalid?
-If copying is cheaper, that only means that the time that the innovator has competitive advantage is lower. Again, as long as cost of innovation is recouped during that time, innovation can still occur.
Innovation doesn't occur merely to recoup cost, but to recoup cost and make a profit. Thus, we're speaking of a longer time frame. IP law aims to ensure that investment in innovation covers this time frame.
Uncertainty is true of any investment. These issues are in no way unique to investment for the purpose of innovation.
Yes, but under your regime, the investment is riskier. If there's more risk, other things being equal, there will be less of it.
IP law prevents them from using that idea. Only I can use that idea. That is monopoly.
No more of a "monopoly" than if the idea was a song, a book, or a piece of art. Why should you not reap profit from the product of your idea?
Microsoft develops a new gaming system called the ZBox. It ships out the new systems to all its distributors (i.e. Best Buy, etc), and the first time a competitor (let's use Nintendo) sees the ZBox is when a Nintendo employee goes to Best Buy and gets one. Where do you see the need for a patent to protect Microsoft?
First of all, the first time a competitor would see the Zbox would likely NOT be in the store. Second, even if it was the first time, much depends on the innovations developed for the new Zbox. If MS had developed, say, a unique graphics architecture that meant 10x more realistic graphics over competitors, but was easily reverse-engineered, I would say such an innovation could very well fall under IP.
The bottom line is this: advocates of the free market, which includes the both of us, have not settled this issue. But I think we can both agree that current IP law has shifted too far to the benefit of producers.
"I'm saying that we don't agree what will produce the greater economic valuation."
-We certainly don't agree on what will produce the greater economic valuation, that's what the debate of IP is about, right? We're looking at definition here.
"It seems to me that sheer quantity doesn't necessarily equate to this."
-This is why I included the equation. It's not just a matter of quantity. Quality x Quantity = value.
"The marginal utility of an increased choice in goods produces greater total economic value."
-Choice is only important if it increases quantity or quality. I'm not sure what the "marginal utility of choice" is, but I can't imagine it being realized unless some transaction takes place - so I guess an increase in quantity.
"Because this does not serve the goal of encouraging new innovations, and thus, greater choice."
-This response doesn't make sense. Maybe the way I worded the question was confusing, or at least why I was asking it.
What your saying is that IP creates more choice for consumers by preventing competitors from copying. But as we know, IP doesn't last forever. My question is, if the choice it creates is good, why not have it last forever and always create more choice?
"I understand this is what you believe, but it's an assertion, as is your formula. I can merely change the > to a <. Who's to my formula is invalid?"
-The reason I repeat this formula is because we couldn't seem to agree on a definition of value. As I mention above in this comment, I think Quantity times Quality is value. I'm not sure how you define value (it probably should be able to be expressed in a formula of some sort), but if we agree, certainly you would be asserting a "<".
"Yes, but under your regime, the investment is riskier. If there's more risk, other things being equal, there will be less of it."
-Exactly, other things are necessarily not equal. Other companies will be able to compete and produce more product. This is practically my whole argument - we will see some reduced investment, but the increased supply (that is otherwise limited by IP) is increased economic value.
"No more of a "monopoly" than if the idea was a song, a book, or a piece of art. Why should you not reap profit from the product of your idea?"
-You're exactly right. IP (which includes copyright) does create monopolies on songs, books, artwork, so many things. You should reap the profit of what you do with idea.
When you say "your idea" - what makes it "your"? It's that you have it in your mind, not that you learned it first.
You and I can both have the same idea in our head (a song for example). Just because I wrote the song, doesn't mean I should be able to prevent you from being paid for singing it.
"The bottom line is this: advocates of the free market, which includes the both of us, have not settled this issue. But I think we can both agree that current IP law has shifted too far to the benefit of producers."
-Fine. We can certainly agree on this. If I may recommend a book to take a look at as we end this discussion: Against Intellectual Monopoly. You can guess the argument it's making.
You'll find that it's not written in the typical academic tone, but that may make it an easier read.
It's published by Cambridge University Press, but (no surprise) it's available online: http://levine.sscnet.ucla.edu/general/intellectual/againstfinal.htm
alex wrote,
-Choice is only important if it increases quantity or quality. I'm not sure what the "marginal utility of choice" is, but I can't imagine it being realized unless some transaction takes place - so I guess an increase in quantity.
Perhaps my phrasing is a bit off, but my meaning is this. A given range of goods will only be useful to x number of people, depending on a variety of factors such as taste, price, physical limitations, etc. An iPod is useless to a deaf person, for example.
When the range of goods (not to be equated with sheer quantity) expands, the total utility to consumers expands as well. An iPod with a special attachment that allows deaf people to hear is no longer useless to a deaf person. That special attachment is a good which expands total utlity.
What your saying is that IP creates more choice for consumers by preventing competitors from copying. But as we know, IP doesn't last forever. My question is, if the choice it creates is good, why not have it last forever and always create more choice?
What I'm saying is that IP laws with-limited-duration is the regime which creates the greater choice. When a good's patent expires, for example, competitors are free to offer alternative products (effectively increasing quantity) or slight modifications of the product (effectively increasing choice).
Exactly, other things are necessarily not equal. Other companies will be able to compete and produce more product. This is practically my whole argument - we will see some reduced investment, but the increased supply (that is otherwise limited by IP) is increased economic value.
Yes, I understand this is your argument, but I simply don't agree that it will result in increased overall economic value. I think the greater quantity is insufficient to counter the loss in choice.
When you say "your idea" - what makes it "your"? It's that you have it in your mind, not that you learned it first. You and I can both have the same idea in our head (a song for example). Just because I wrote the song, doesn't mean I should be able to prevent you from being paid for singing it.
Oh come now. The "same" song? How many people had "FreeBird" in their heads before Lynard Skynard put it first to music? You should and are prevented from performing "FreeBird" for your own profit absent some agreed renumeration to Lynard Skynard. Or do you believe you should have that right?
Thank you for the book recommendation, and the food for thought!
Here's what I mean when I say that two people can have the same idea - that they can have it in their head at the same time. I don't mean that they came up with it independently, that one didn't have it first before the other. Rather, it's most likely that first one person has it, and then the idea is spread (by publication, for example).
So of course "FreeBird" didn't originate in people's minds apart from whoever wrote in Lynard Skynard. But when we say it's "theirs", we mean that they were the first to come up with / publish the "idea".
I believe that people should (generally) be able to do what they wish with what they have in their minds. In fact, it seems wrong to me that the law should prohibit people from taking advantage of the ideas that are in their head. Now, given the fact that Lynard Skynard wrote the song when IP law was in existence, and therefore with certain expectations about "rights" etc, I'm not sure that it would be right to all of sudden put it into the public domain.
This is off topic (so if you want to discuss it, I'll start a new topic), but I wonder legally how copyright doesn't constitute an infringement of the right to free speech.
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