By Simon Grey, on January 31st, 2012
The anti-SOPA crowd argues that this is a matter of basic liberty. But it’s not. In a free society, you don’t have the freedom to steal your neighbor’s property. And that should include intellectual property. Moreover, it is the function of the state to enforce those rights. We don’t leave it up to civil litigation to protect property rights (although that is part of the solution). We give the state substantial powers to stop theft. Just as owners of tangible personal property have good cause to call for a police force and a system of criminal courts, owners of intellectual property have good cause to ask the state to stop those who would infringe on their rights.
It’s like he doesn’t understand the difference between copying and theft. If I have a book and someone copies it, they do not deprive me of the book (except for the time spent copying it). If they steal the book, I never see it again. If I write a song and someone decides to copy it, they do not deprive me of my ability to play it. On the other hand, if I have an apple and someone takes it, then they deprive me of what belongs to me. As Thomas Jefferson once said, “He who receives an idea from me receives it without lessening me, as he who lights his candle at mine receives light without darkening me. Also note that the supreme law of the land (the constitution, for MIT economics professors too stupid to familiarize themselves of the law under which they live) never refers to intellectual property in terms of theft. In fact, they refer to it primarily in terms of special monopoly privilege. Incidentally, this is why the constitution prescribes “exclusive Right” for authors and inventors for “limited times.” The founders never believed thoughts were real property, which is why they allowed these rights to expire. Thus, Mankiw’s assertion, which is nothing more than pious posturing, is verifiably false. SOPA is not a matter of preventing theft or protecting property rights. It is, like all other forms of intellectual property law, just another form of government-enforced monopoly. And like all other monopolies before it, it is just another way to reduce freedom.
By Simon Grey, on January 16th, 2012
Supporters of stronger intellectual property enforcement — such as those behind the proposed new Stop Online Piracy Act (SOPA) and Protect IP Act (PIPA) bills in Congress — argue that online piracy is a huge problem, one which costs the U.S. economy between $200 and $250 billion per year, and is responsible for the loss of 750,000 American jobs.
These numbers seem truly dire: a $250 billion per year loss would be almost $800 for every man, woman, and child in America. And 750,000 jobs – that’s twice the number of those employed in the entire motion picture industry in 2010.
The good news is that the numbers are wrong — as this post by the Cato Institute’s Julian Sanchez explains. In 2010, the Government Accountability Office released a report noting that these figures “cannot be substantiated or traced back to an underlying data source or methodology,” which is polite government-speak for “these figures were made up out of thin air.”
Of course, the main problem with the above “analysis” is that it assumes labor roles are static (i.e. people can’t find a new job). In a sense, it presents a false dichotomy between having a job that’s properly protected by IP or being unemployed. Since one can generally find or make a new job in the event of losing one, it stands to reason that the prior dichotomy is simply false.
Beyond that, though, there seems to be no accounting for the role technology plays in cutting down IP-related jobs. For example, iTunes and other digital file services have largely negated the need for the manufacture of compact discs, cassette tapes, and other forms of physical music media. Netflix, Hulu, and other video services have undermined the need for the production and distribution of DVDs and other forms of physical video media. IP rights are properly integrated into these business models, so any decline in media manufacturing jobs is due not to piracy, but to technology.
This, incidentally, is a good thing, since the decline in media manufacturing jobs now frees up some labor segments to do something more productive. Lowering the cost of production and distribution (while maintaining or increasing consumption volume) by cutting labor is how wealth is created. Freeing up labor to do something more productive is how wealth is created.
Finally, one other thing ignored by this analysis is the positive role that so-called “piracy” might have on the various IP-protected industries, particularly music. The costs and risks associated with purchasing entertainment (over time, the cumulative costs can be quite substantial, and there is no guarantee that you will like what you buy) discourages purchases. By offering entertainment for free, as is done in broadcast television, people don’t have to invest much to see if some type of entertainment will be valuable to them. If it is, they can support it more; generally by buying DVDs and tie-in merchandise.
This is also true of music. If people can acquire music for free, they can see if they like it. If they do, they might be inclined to purchase tie-in merchandise or go to live shows (where the bulk of bands make the bulk of their money anyways).
Thus, it can be said that protecting IP by enforcing monopolistic policies actually hurts media producers because it discourages people from ever sampling new media, which in turn kills the sales of tie-in merchandise and other forms of related sales. This is just a theory (based on personal experience); there is no data supporting this view.
Anyhow, the point in all this is that there is absolutely no evidence that IP piracy hurts the economy in general, or even fields that enjoy the most IP protection. In fact, it may be that IP piracy is beneficial. At any rate, the idea that the united states’ economy needs stricter IP laws is simply ludicrous.
By Simon Grey, on January 5th, 2012
You don’t have to shell out hundreds of dollars every year to watch your favorite shows. This year, consider canceling your cable and taking advantage of several free and low-cost entertainment services. The website Hulu, for instance, lets you watch a variety of hit shows for free such as Glee, The Office and Modern Family, plus movies and documentaries. Or for $7.99 a month, you can take advantage of Hulu Plus, which gives you access to all of the selections on regular Hulu, plus more shows and movies.
You can also watch many shows for free on the network’s website, or pay $7.99 for Netflix, which provides access to unlimited movies and TV episodes.
The reason why cable is so expensive is because ad revenue alone is insufficient to cover both production costs and distribution costs. Cable and satellite networks are expensive to build and maintain, and content creation can often be pricey. As such, cable providers have to charge customers in order to be profitable.
The problem internet-based entertainment services face is that they are causing a significant portion of data transfer (i.e. the amount of data transmitted across the various data networks) but aren’t paying for any of the network upkeep and maintenance. Essentially they are paying only for content creation and distribution rights. This, incidentally, is why Hulu+ and Netflix subscriptions are so cheap (that, and Hulu is pretty well-connected to the NBC and Fox family of networks).
More importantly, it is the data service providers who have to pay for the creation and upkeep of data networks, and these networks have data transfer limits known as bandwidth. Essentially, there are limits to how much data can be transferred across a network at any given time. As more and more people begin to use online video content providers, there will be even more at being transferred at any given time, pushing up against physical network limits.
Data service providers will then have two options when this inevitably happens: increase bandwidth or cap data transfers. Most data transfer providers have relatively tight margins, so upgrading a network is not particularly feasible, nor will it be particularly widespread. Thus, the more common choice will be to cap data. Data caps (whether in terms of bandwidth usage or total data downloaded) will significantly curtail entertainment options, and so whatever profitability online video sites may have now will be either significantly reduced or completely eliminated, unless they decide to raise their fees.
Quite simply, the internet is not yet ready to replace cable. The network is not sufficiently built up. More importantly, the producers and aggregators of online content are not paying for the distribution of their content, and those who distribute content (data service providers) don’t have much reason to upgrade their network.
Ultimately, there is a strong chance that the market for online videos will eventually come to resemble the subscription television market. The separation of content providers and content distributors provides a problematic incentive structure that won’t be easily remedies unless content aggregators/producers have a financial stake in distribution, and vice versa.
Note: one thing that complicates this discussion immensely is the role of IP. If there were no IP, there would be many more aggregators of videos, and their subscription costs, if any, would be minimal since it would be considerably easier to find advertisers for pre-existing content, thus leading to an easy method of third-party funding. On the other hand, the amount of original content would diminish, and would probably become more low-brow.
By Doug Gentry, on December 5th, 2011
The pharmaceutical giant, Pfizer, watched its main source of revenue and profits, Lipitor, lose its patent protection this week, and now faces competition from generic equivalents. In 2010 Lipitor was the second highest selling prescription drug with $5.2 billion in sales in the U.S. alone. (source: Drugs.com). Now, in the next year, prices of the generic drug, Atorvastatin, should drop dramatically. The Lipitor saga gives us an opportunity to see market forces in action, but it also points out the problems when insurance coverage is involved.
 Lipitor Brand  Generic Lipitor Like most first world countries, the United States uses the patent system to encourage research and development. If a pharmaceutical company can develop a new drug, they can maintain a government approved monopoly on the sale of that drug for up to 17 years. Monopolies drive higher prices, which helps the inventor, Pfizer in this case, recoup their research costs, and return a handsome income to their shareholders. Once the patent runs out, other manufacturers can apply to produce the drug. This increased competition then quickly drives down prices. So far, this is a classic example of market forces at work.
Pfizer has been planning for this day for a number of years, and with annual sales figures like those in 2010, this is vital to the company’s fortunes. The company has triggered a number of legal and regulatory efforts to delay the arrival of generic equivalents. For a compilation of news articles on Lipitor, see this page in The New York Times.
Two particular strategies twist prescription drug coverage in favor of the brand name. Many prescription drug plans have incentives to encourage patients and their physicians to use generic drugs. Often this is done with a lower co-payment on the part of the patient. The lower co-payment provides an incentive for the patient to accept a generic equivalent, and the insurance plan saves money by paying the lower, generic price. Pfizer (and other drug companies facing similar out-of-patent challenges) is trying to subvert this incentive. Here’s a hypothetical example.
These figures are illustrative – made up – but make the point.
Typical Brand vs. Generic Comparison for a Drug Plan
Brand: Patient Copay: $30 – Total Cost of Drug: $200 – Insurance Pays: $170
Generic: Patient Copay: $10 – Total Cost of Drug: $50 – Insurance Pays: $40
Now Pharmaceutical Company Offers a Copay Discount
(Pfizer discounts its price of the brand drug to cover reduced copay)
Discount Brand: Patient Copay: $8 – Total Cost of Drug: $178 – Insurance Pays $170
With this discount arrangement the patient is happy, the drug store doesn’t lose any money, but the insurance company still pays the larger cost. This puts upward pressure on insurance premiums.
Another strategy – Pfizer offers a significant discount on the price of brand name Lipitor to pharmacy chains as long as they agree to not provide generic equivalents. The chains save money, and can pass some of that on to patients, but the insurance plans that pay for the drugs don’t enjoy any savings.
Is this legal? The second, discounting strategy with pharmacies, smells a lot like restraint of trade/anti-trust concerns to me. The earlier example, offering a discount on copays, seems legal. Are either of these good social policies? Not a chance.
These creative approaches illustrate one of the problems that insurance introduces into a market. In healthcare, patients have enough discretion that they can alter their buying behavior, based on prices they face. Yet the patients don’t see or feel the full price of their purchase decision. In a regular market the patient balances the benefit of the purchase against the price, and makes a good decision on allocating resources. That good decision helps society. With insurance the patient sees only a small fraction of the total price, and may make a decision that is not socially optimal. This breakdown in market forces is one of the challenges our healthcare reform goals face. Ideally we would like patients to be full partners in the decisions made about their care. Insurance blunts that participation.
By Simon Grey, on September 21st, 2011
President Obama today signed into law the Leahy-Smith America Invents Act (H.R. 1249) a bipartisan, bicameral bill that updates our patent system to encourage innovation, job creation and economic growth. Both Houses of Congress overwhelmingly supported the proposal, which was sponsored by House Judiciary Committee Chairman Lamar Smith (R-Texas). The House of Representatives passed H.R. 1249 by a vote of 304-117 earlier this year. The Senate passed the bill by a vote of 89-9. Senator Patrick Leahy (D-Vermont) partnered with Chairman Smith on the legislation. Congressman Smith led the House efforts on patent reform for more than six years.
Much-needed reforms to our patent system are long overdue. The last major patent reform was nearly 60 years ago. The House patent reform bill implements a first-inventor-to-file standard for patent approval, creates a post-grant review system to weed out bad patents, and helps the Patent and Trademark Office (PTO) address the backlog of patent applications. This bill is supported by local companies as well as many national organizations and businesses.
I’m not sure what to think of this.
On the one hand, this streamlines the patent system, which I begrudgingly support. The first-to-file standard makes resolving multiple claims dead simple: Who got to the patent office first. And weeding out bad patents is also good, especially in light of the standards (distinct, non-obvious, etc.).However, this legislation could very well increase the occurrences of patent-trolling. This would actually discourage invention and innovation in the long run because inventors would more than likely seek to avoid paying royalties to produce their own inventions, so they would have to create modifications to their own product in order to sell them. I imagine this effect would be more prominent among large corporations than among individual inventors because corporations tend to be more susceptible to industrial/commercial espionage.
At the end of the day, though, the simplest and most effective reform is to simply abolish the patent system altogether.There’s little evidence that the costs of the patent system outweigh the benefits thereof.
By Simon Grey, on September 14th, 2011
Ima Fish alerts us to the appeals court ruling which upheld the lower court and seems to endorse the creation of a wholly made up new form of intellectual property right that has no basis in the law. The court clearly says that this is not a copyright case, so copyright law doesn’t apply. So what right exactly is WIAA granting to its broadcasting partner? That’s not clear at all from the ruling. If it’s not copyright, it appears to be something entirely made up by the appeals court, which might be loosely defined as “the right to make up restrictions if it makes money.” I’m not joking. The court repeatedly focuses in on the idea that the WIAA needs to make money, and that somehow makes it okay to grant a single company an exclusive license. [Emphasis added.]
Fundamentally, IP is based on the silly notion that someone should be rewarded for coming up with a good idea. If you think of something useful and people use your idea, you deserve to get paid for it. This is nothing more than jealousy.
And it’s stupid. You DO NOT deserve to get paid simply for coming up with a good idea. I have dozens of good ideas every day, yet precious few of them are lucrative for me because I generally fail to follow through on them. Sometimes I lack know-how. Sometimes I lack capital. Sometimes I lack initiative. Sometimes the idea just doesn’t hold my interest for more than a couple minutes. At any rate, I’ve wasted hundreds of good ideas.
I do not deserve to get paid for any of my good ideas, and the same is true for everyone else who has good ideas. Good ideas, by themselves, are worthless. Plans and ideas must be put into practice for them to be valuable, and even then there is no guarantee that others will find one’s plans or ideas useful and thus deserving of purchase. Conceptualizing the iPod, for example, is pointless if one never actually manufactures, distributes, and advertises it.
The great problem with IP, then, is that it enshrines ideas and while ignoring their implementation. In so doing, it hamstrings those who are actually productive, forcing them to either pay people whose only contribution to the market is a willingness to launch a lawsuit or to come up with a different way of attaining the same result. What good is a system that encourages people to register their ideas instead of implementing them?
By Simon Grey, on August 23rd, 2011
Stephan Kinsella details just how much trouble one can get into because of IP laws. Please note that this doesn’t even include file-sharing:
In his paper Infringement Nation: Copyright Reform and the Law/Norm Gap, law professor John Tehranian explains how the normal activities (see pp. 543-48) of a typical Internet user–he takes an “average American, …take an ordinary day in the life of a hypothetical law professor named John”–someone who does not even engage in P2P file sharing–could result in up to $4.5 billion in potential liability annually, for copyright infringement. The acts include:
-having his email program “automatically reproduce the text to which he is responding in any email he drafts. Each unauthorized reproduction of someone else’s copyrighted text—their email—represents a separate act of brazen infringement, as does each instance of email forwarding….” (twenty emails in an hour: $3 million in statutory damages);
-distributing in his Constitutional Law class copies of three just-published Internet articles presenting analyses of a Supreme Court decision handed down only hours ago;
-absentmindedly doodling a sketch of the Guggenheim museum on a notepad during a boring faculty meeting, i.e. making an unauthorized derivative work;
-reading a 1931 e.e. cumming poem to his Law and Literature class, an unauthorized public performance;
-emailing to his family five pictures his friend took of a local football game–his friend owns the copyright;
-having a Captain Caveman tattoo and revealing it while swimming at the local university pool: violating Hanna-Barbera’s copyright by the reproduction and public display;
-singing Happy Birthday to a friend at a restaurant and recording it on his smartphone videocamera, an unauthorized public performance and reproduction of a copyright-protected work–as is the painting on the wall of the restaurant that is captured in the video footage; and
-reading on his email a magazine that itself has clips of interesting items from other publications, a contributory infringement leading to up to $7.5 million of liability.
Obviously, some of the scenarios are a little more far-fetched than others. However, the very first item is very concerning: copyright violations occur when you reply to an email?! Are you serious?
Now, I realize that a lot of people view the opposition to IP as simply a bunch of nerdy white guys wanting to get out of paying for music. And while this typecasting is undoubtedly true in some cases, it doesn’t change the fact that IP is a gargantuan monopoly system that presents a large number of problems for ordinary citizens who act in good faith. Most people aren’t trying to rip someone off by responding to their emails, yet the laws in place operate under this very assumption.
It is obvious, then, that something needs to change. You don’t have to support file-sharing to make a coherent objection to the current system. Given that the laws ensure that every American is a lawbreaker, a good response would be to simply say that certain things shouldn’t be given automatic copyright protection (like email replies, for example). Better yet, one could argue that copyright should be opt-in, which would minimize most people’s liabilities. There is simply no sense in having a system that makes everyone a lawbreaker in order to further the economics interests of an elite, politically-connected few.
By Simon Grey, on August 10th, 2011
Consumers are watching as many – if not more – films than ever for less money and time than ever, for a third of the cost. The money that had been spent on (now unneeded) overheads can go on other things. Be sure to avoid the broken window fallacy – the saved money will go into other productive things that people want. As Blockbuster falls, something else people want will rise. And, at the margin, lower costs mean that there should be more movies made per dollar spent.
I think this pattern might hold elsewhere, too. Since getting a Kindle e-reader in June, I’ve read more books than I did in the entire year up to that point.
Although costs aren’t falling yet – it’s a proprietary Amazon device, and they’re keeping the costs high while subsidising the cost of the device itself – the shift to e-readers means that authors will eventually be able to bypass publishers and significantly increase their profit-per-purchase. Like the rise of Netflix, this will probably mean less money spent on overheads and more spent on actual content.
Recall that those who defend copyright laws on utilitarian grounds argue essentially that the purpose of granting creators a temporary monopoly license is to ensure that people have an incentive to create. This being the case, one reasonable proposal to be offered to the utilitarian sect of copyright defenders is to decrease creators’ state-granted monopoly powers as technological innovation increases.*
Technological growth reduces publication and distribution costs for creators, enabling them to not only sell directly, but to increase their profit margins while decreasing prices. As such, monopoly protections are less necessary (if not altogether unnecessary) in the face of technological growth because technology makes it easier for creators to turn a profit, which, it should be remembered, is the whole point of having copyright laws in the first place. Thus, if creators can make a profit without doing much to protect their product, then it seems obvious to conclude that copyright is largely unnecessary, and certainly does not draconian enforcement.
Note: Software is a nebulous entity that is somewhere between copyrightable and patentable in terms of classification. As such, it is not covered under this proposal because it would drive this proposal. If it absolutely must be given IP status, it should be considered its own entity with longer terms than patents but shorter terms than copyright. Furthermore, it should also have the novelty prerequisite of patents. Given the complexity of this subject, though, this discussion is best reserved for another post.
By Simon Grey, on August 1st, 2011
In the rare story that ends with George Lucas not getting money, George Lucas has lost a copyright case before the British Supreme Court in which he sought to stop his former Star Wars prop designer Andrew Ainsworth, who came up with the original iconic Stormtrooper helmets, from selling replicas of his most famous work online. Lucas had successfully blocked Ainsworth from doing business in the U.S., arguing that profiting from a decades-old George Lucas creation should be the sole province of George Lucas. However, while the British court recognized that selling the helmets in America would be a copyright violation, according to the judgment there, it ultimately decided that ruling shouldn’t also apply in the U.K., as the props were considered functional, rather than artistic works.
I have two questions, one each for those who defend IP on ethical grounds (i.e. those who claim IP is a natural extension of natural rights) and for those who defend IP on utilitarian grounds (i.e. those who claim that IP is necessary to encourage innovation).
For the former: How much of the original idea is owned by Lucas and how much is owned by Ainsworth? (Note: there appears to be no clause in Ainsworth contract indicating that Lucas owned the copyright on the specific appearance of the helmets produced.) Lucas certainly came up with the concept of stormtroopers and presumably came up with an idea of how their helmets should look, but it was Ainsworth, ultimately, who came up with the specific design and idea of what the helmets would look like. How do you split natural ownership in this case?
For the latter: Given that Lucas has a net worth of over $3 billion, is collecting licensing fees from Ainsworth really going to inspire him to be more creative? Remember, the whole point of IP is to encourage creativity. Would Lucas really be more creative if he got paid a fee for every Star Wars tie-in? If not, what modifications should be made to the law to make it less detrimental to consumers?
By Simon Grey, on July 26th, 2011
Similarly, the kinds of innovation activities and intellectual property rights that make sense depend on available institutions and technologies. I’m happy to admit that today intellectual property (IP) is not obviously a good idea. Such property can create large “anti-commons” transaction and enforcement costs that greatly raise the cost of combining old ideas into valuable new ideas. Such costs often outweigh the social benefits of the incentives to create IP, in order to sell it. Today, it is often better to rely on other social incentives to innovate, incentives that don’t require such expensive support.
But if true, this is a sad fact about our limited abilities, not a fundamental natural law or right. You have no fundamental right to enjoy the innovations produced by others without compensating them. You owe them, at least your gratitude. Yes for now it may be best to let you take innovations freely without paying, since the alternative seems too expensive. But you have no right to expect that situation to last forever, any more than ranchers had a right to expect they could forever let their animals trample nearby farms.
The problem with Hanson’s comparison of IP rights to real property rights is that intellectual production is not tangible whereas real property is, and one can adapt another’s idea without in any way diminishing its usage by its originator. As Jefferson aptly observed centuries ago, as it is possible to use another’s candle to light one’s own without diminishing the other’s flame, so too can one use another’s idea as one’s own without diminishing the other’s usage of their idea. Taking another person’s ideas and using them does not any way prevent him from using his own ideas in whatever way he sees fit. Since using another’s ideas does not trample upon his rights, it is absurd to compare this to cows trampling a neighbor’s fields. Using an idea is not inherently deprivatory in the way that using property is, and so the comparison is false.
At any rate, since ideas are not tangible, there is no conceivable limit to their spread save for demand. Basically, demand, not supply, is the limiting factor for the production of any given idea and, as such, there is no need for prices or any other limitation of ideas. Prices indicate scarcity relative to demand, and attempting to attach prices to ideas is essentially an attempt to attach scarcity to ideas. Since there are an infinite number of ideas and production costs of ideas are close to nil (or at least so close to infinity and nil respectively that the upper bound makes a price schedule impossible), the only effect that bringing costs to ideas would be to limit something that is naturally unlimited.
Also, note that Hanson’s claims that “you have no fundamental right to enjoy the innovations produced by others without compensating them” and “you owe them, at least your gratitude” are both spurious. The first is false, but only because of how he qualifies it. He is correct in saying that no one has the right to enjoy the innovations of others. No one has the right to anything save for life, liberty, the pursuit of property, and any derivatives thereof. But it does not stand to reason that anyone deserves to be paid for what they produce, whether it be an idea or a physical object. Quite simply, no one has a right to an income of any sort. If you wish to be paid, convince consumers that you deserve it, whether it be on the technical merits of your product or whether it be on the ease of purchase relative to the cost of piracy. In keeping with this, if one does not have a right to income for producing something, then one certainly does not deserve gratitude either. Again, if a producer wants something from consumers, he must make or do something that causes consumers to respond favorably.
As can be seen, Hanson’s argument is riddled with plenty of intellectual errors, leading to erroneous conclusions. He would do well to simply acknowledge that IP is a myth, and that no one is inherently deserving of anything just because they happened to produce something.
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