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Copyright and Patents – What a Racket

March 16, 2013

Intellectual Property, Law

Intellectual Property

Growth comes from competition. Anything that stifles competition has a negative effect on the incentive to innovate. Protect a company completely from competition by giving it a monopoly, like the United States Postal Service, and stagnation is virtually guaranteed. The granting of monopolies and special privileges to certain people or corporations was popular under the system of mercantilism which dominated Western Europe from the 16th century to the late 18th century. This way of thinking eventually became discredited and virtually disappeared in all but one significant area – intellectual property (IP) in the form of copyright and patents.

Copyrights and patents are simply government grants of monopolies which have the same effect as any other monopoly, raising prices, inhibiting innovation and robbing consumers while rewarding special interests. For every person granted a patent because of an innovation another nine companies in competition are disincentivised. With nearly 200,000 patents issued every year in the United States, and half a million more in other countries, intellectual property poses a growing threat to society’s ability to innovate.

Because emulation is essential to competition the most innovative industries today are those lacking access to IP protection, such as fashion, design, architecture and perfume. The successful fashion collection available at upscale fashion houses is immediately copied as the high initial price sends a signal to producers to jump into the market. Next year the product sells at Walmart for one tenth the price. That’s how the free market works. If intellectual property protection was available for fashion items we would all be paying much higher prices for our clothes.

The best evidence that copyright and patent protection are not needed is that the most dynamic and innovative sector of the software industry, open-source software, has voluntarily given up using them. Furthermore, the most profitable and most innovative sector of the web, the porn sector, has no access to courts and IP enforcement because of the stigma associated with it. On the other hand just imagine the effect on innovation if the creators or Mosaic or Netscape had managed to patent the idea of the Web browser as they could today.

The authors of most classic works of literature never received one penny of copyright royalties. Notice also that Walt Disney, the great champion of IP protection, took the material for great productions such as Snow White and the Seven Dwarfs, Sleeping Beauty, Pinocchio, and Little Hiawatha from the public domain. But, you might ask, without a copyright law how will authors get paid? During the 19th century, anyone was free in the United States to reprint a foreign publication without making any payment to the author. Nevertheless, according to Michele Boldrin and David Levin in their tour de force Against Intellectual Monopoly, the amount of revenues British authors received up front from American publishers often exceeded the amount they were able to collect over a number of years from royalties in the United Kingdom. This worked because Americans were very impatient for good books and so English authors would sell American publishers the manuscripts of their new books before their publication in Britain. The American publisher who bought the manuscript had every incentive to saturate the market for that particular novel as soon as possible, to avoid the arrival of cheap imitations. This led to mass publication at fairly low prices.  Getting a book out first proved to be the best guarantee of making the most money and gaining market share.

IP destroys whatever it touches. It is impossible to develop software today without running into IP problems so companies feel pressured to build up a war-chest of patents for defensive purposes. In the pharmaceuticals industry there is plenty of evidence that IP does nothing to promote innovation and widespread availability and is largely responsible for the high prices of drugs that has driven the system toward socialization. This is an issue that cuts across party lines. If every new idea was locked in place and given a government monopoly the market economy would simply cease to exist because competition would disappear as competitors were prevented from learning from each other. IP has to go, not only because it leads directly to economic stagnation, but also because, at its core, it is incompatible with a free society.

_________________

“He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me.”  Thomas Jefferson, Selected Writings

“The history of patents includes a wealth of attempts to reward friends of the government and restrict or control dangerous technologies.”  James Boyle, The Public Domain: Enclosing the Commons of the Mind

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About Malcolm Greenhill

Malcolm Greenhill is President of Sterling Futures, a fee-based financial advisory firm, based in San Francisco. I write about wealth related issues in the broadest sense of the word. When I am not writing, reading, working and spending time with family, I try to spend as much time as possible backpacking in the wilderness.

View all posts by Malcolm Greenhill

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53 Comments on “Copyright and Patents – What a Racket”

  1. NicoLite Великий Says:

    I had never given IP that kind or depth of thought. Good insights there

    Reply

  2. yepiratehere Says:

    I totally agree with you. Copyrighting pharmaceutical and medical products is also totally unethical.

    Reply

  3. austinnicholson Says:

    Great observations. You really know what you’re talking about. I’ve never really heard this issue addressed before.

    Reply

    • Malcolm Greenhill Says:

      Thank you. There is lot more to this subject. My entire view of the history of innovation has changed from studying this subject. For example, the Wright Brothers are no longer my heroes. They cared more for their patents and team of lawyers than for flying.

      Reply

      • austinnicholson Says:

        The overuse/misuse of patents is one thing, but aren’t copyrights on things like music and books fairly important? I feel like at least those two areas of IP encourage creativity rather than hinder it — they just protect against plagiarism and using someone else’s music as your own

        Reply

        • Malcolm Greenhill Says:

          “they just protect against plagiarism and using someone else’s music as your own”

          I wish copyright did just this. Unfortunately what copyright is really about is defending the interests of the large media companies who receive huge royalties from the works of long dead artists. Because these companies are scared of their cash flow being cut off once the copyright period is over, they have successfully lobbied over the last century to double the length of copyright as well as strengthen the protection by making the penalties of copyright violation a criminal as well as a civil offence. If copyright was really just about protecting against plagiarism then one would expect a doubling of the copyright period and an increase in penalties to have encouraged the per capita registration of additional literary works. Unfortunately this has not been the case. The length of copyright and the penalties for copyright violation have had no bearing whatsoever on the amount of literary works registering for copyright protection.

  4. Michael Says:

    Austin,

    Mozart wrote 27 piano concerti and 41 symphonies with no copyright protection. How many symphonies did Lady Gaga write? QED.

    Reply

  5. unfetteredbs Says:

    Great post Malcom.

    Reply

  6. aaforringer Says:

    Hmm, something to think about.

    So I should not worry about someone stealing my stories and presenting them as their own, what is my protection as an author just starting out with no one to defend my rights but myself? Will people only hunger for the real stuff from me if it is good enough. (when you are talking about British writers are you referring to some of the battles Charles Dickens had, at least that is what I recall.)

    Sorry if that is a selfish, self serving question.

    Reply

    • Malcolm Greenhill Says:

      Most of the worlds great literature was produced without the benefit of copyright. Would you really stop writing if copyright protection went away? How terrible would it be if, by getting rid of copyright, we choked off creativity returning to the dark ages of the 18th and 19th centuries when we had to make do with mere scribblers such as Wordsworth, Swift, Defoe, Austen, Bronte, Hardy, and Keats?

      Reply

  7. Dapper Dan Says:

    Really interesting topic that I’ve never thought much about. Thanks for the introduction.

    Reply

  8. Sheldon Richman Says:

    An excellent succinct statement of the case against IP, Malcolm. We advance largely through imitation-cum-modification. If we inhibit imitation, we stifle progress. Moreover, the exercise of IP “rights” necessarily violates the right of people to apply the contents of their minds to their physical property.

    Reply

  9. Richard William Posner Says:

    Your logic regarding copyright/patent is unassailable.

    I think, however, that growth may or may not come from “competition”. And, whether or not it does, growth is not always and automatically a good thing.

    Growth of a cancerous tumour isn’t something one is likely to celebrate. I think a cancerous tumour is a good way to describe capitalist globalisation.

    It should be abundantly clear by now to anyone with eyes that the capitalist perception of growth, endless, infinite and unlimited, is not only unsustainable but actually very dangerous and potentially fatal.

    Profit requires taking more from a closed system than is put back in. This defies the most basic laws of physics. Such systems are physically unsustainable.

    Furthermore, any system wherein usury is practiced is also and equally unsustainable. The entire for-profit system is based primarily upon the usurious, privately controlled banking system.

    The only purpose of profit is to ensure the dominance of those who take it over those from whom it is taken.

    For-profit economies, no matter what ism is applied, inevitably promote monopoly and plutocracy. The more unrestrained such a system, the faster those conditions are attained.

    “Competition” is basically a euphemism for war. In competition, as in war, the objective is to eliminate your adversary, ergo; end the competition. This can be achieved in several ways but the results will always be the same. The last one standing is the winner.

    What could be more monopolistic?

    Just my opinion.

    Reply

    • Malcolm Greenhill Says:

      Richard, thank you for these detailed comments. You make so many different points that I will try to answer each in turn:

      “Growth of a cancerous tumour isn’t something one is likely to celebrate. I think a cancerous tumour is a good way to describe capitalist globalisation.”

      A tumor in a body is a zero sum game. The growth of the tumor is at the expense of the body. With voluntary trade both parties gain, otherwise the exchange would not have been made in the first place. The law of comparative advantage ensures that global trade benefits all parties concerned, although not to the same degree.

      “It should be abundantly clear by now to anyone with eyes that the capitalist perception of growth, endless, infinite and unlimited, is not only unsustainable but actually very dangerous and potentially fatal.”

      It is certainly not clear to me that growth is unsustainable. However it is very clear to me that if we do not grow we relegate most of the world’s population to permanent poverty which definitely is “very dangerous and potentially fatal”.

      “Profit requires taking more from a closed system than is put back in. This defies the most basic laws of physics…”

      I have no idea what this sentence means but presumably, by the same logic, making losses is good as more is kept within the closed system and so the larger the losses the better off we are?

      “Furthermore, any system wherein usury is practiced is also and equally unsustainable.”

      So if I borrow $50k to add another room to my thriving restaurant and pay back the loan over a five year period this is, in some way, an unsustainable practice?

      “The only purpose of profit is to ensure the dominance of those who take it over those from whom it is taken.”

      So when you pay your accountant next month for your tax return you would prefer him or her to set the price so that he makes a loss. This way you would feel he is not exercising his ‘dominance’ over you?

      “For-profit economies, no matter what ism is applied, inevitably promote monopoly and plutocracy.”

      So non-profit economies such as the former Soviet Union did not promote monopoly? Isn’t competition the opposite of monopoly? Isn’t competition characteristic of market economies or what you call “for-profit” economies?

      “Competition” is basically a euphemism for war. In competition, as in war, the objective is to eliminate your adversary, ergo; end the competition.”

      Exactly right except for the very minor point that in war people lose their lives and in competitive market economies, losing parties go out of business and try something else. If competition was really just a “euphemism for war” you would be indifferent between fighting in a real war and being involved in a competitive struggle, say between Microsoft and Google. Are you really indifferent to that choice?

      Reply

  10. Jon Sharp Says:

    Good post Malcolm.
    Much to be said for reviewing patent law relating to software and pharma and what really constitutes “innovation” in a number of fields including copyright. But I fear the internet era has spawned a generation who expect to get information, music, news, entertainment etc for free. But the reality is that it cannot all be paid for by advertising. If we want high quality artistic creativity, news and entertainment in society then someone is going to have to pay because Kings, Princes, Aristocracy and the Church can no longer bankroll the modern equivalents of Bach, Handel, Haydn, Vivaldi, Mozart et al. As a “working” musician I can assure you that getting paid is one of the trickier aspects of the profession. The ease with which content can be ripped today makes me think that the removal of copyright would be disastrous. Does anyone believe that the ability to replicate the entire website of “The Economist” for example and make it freely available to anyone who wants it would improve the quality of news distribution long term? On the other hand, modern technology enables innovative ways for artists to get projects funded (e.g. http://www.kickstarter.com) and for music promotion and distribution for emerging talent outside of the mainstream studios and recording agencies. So some review of the sclerotic rules surrounding patents and copyright is probably in order. But abandonment? I don’t think so.

    Reply

    • Malcolm Greenhill Says:

      “If we want high quality artistic creativity, news and entertainment in society then someone is going to have to pay because Kings, Princes, Aristocracy and the Church can no longer bankroll the modern equivalents of Bach, Handel, Haydn, Vivaldi, Mozart et al”

      Corporations, wealthy individuals, government agencies and kickstarter type companies today seem more than a match for “Kings, Princes, Aristocracy and the Church” in terms of ability and willingness to sponsor musicians. I don’t say this is easy but presumably it wasn’t easy then either. Copyright was unknown in the world of music until around the end of the 18th century. Consequently a large proportion of classical music was produced without the benefit of copyright protection. Boldrin and Levin argue that the quality of English music actually declined after the introduction of copyright. They go on to say:

      “We see that the number of composers per million declined everywhere but it declined considerably faster in the United Kingdom after the introduction of copyright than it did in Germany or Austria, and at about the same rate as did Italy. So there is no evidence here that copyright increased musical output.”

      Another point they make is that one of the greatest bars to the outpouring of new innovative music is copyright protection of old music which prevents the creation of great new music by modifying wonderful old music. As I understand it live music concerts are not protected by copyright but I know that does not stop you and other musicians from performing at such events. You are also assuming that under the current system the money from the copyright monopoly goes to the musicians rather than to pay the legal, agency, and marketing costs of supporting the system of copyright itself. There is plenty of evidence that the latter explanation best describes where most of the money actually goes.

      Finally there is more to publishing one of the finest news magazines in the world than putting up a website with ripped-off text pages. The Economist successfully excludes non-subscribers from accessing premium content and so is quite capable of protecting their own online content. Even if Economist Knock-Off Publication succeeded in producing a copy of the print version it would reach newsstands much too late to be of much use. Also, because it would lack the credibility of The Economist it would never be a trusted source of news like the real McCoy.

      Reply

      • Jon Sharp Says:

        Thanks for the thoughtful response Malcolm, but I remain unconvinced. IMHO copyright is not about increasing musical output (even if I take as read the data on number of composers per million – which I don’t – did the authors take a look at You Tube and Vimeo before compiling their numbers?). It’s about professional artists getting paid for their work in a digital era where copying music, photographs, novels, films, news reports etc. is as easy as pushing a button. The BBC’s wonderful dramatisation of the first performance of Beethoven’s Eroica (third) symphony gives a very clear idea of how hard it was to copy music in 1805. If you wanted a piece of music composed, it had to be paid for. If you wanted it performed, you needed to pay a publisher to prepare all of the parts by hand, get a group of musicians together and pay them to play the piece for you. You didn’t need copyright in an age where the barriers to entry were huge. Incidently, live performances are covered by copyright, but I would still do them regardless after all, music is meant to be performed!
        Cheers
        Jon.

        Reply

        • Malcolm Greenhill Says:

          “IMHO copyright is not about increasing musical output”

          Jon, actually this is exactly what copyright is about. The U.S. Constitution allows copyright only to promote the progress of science and the useful arts:

          http://en.wikipedia.org/wiki/Copyright_Clause

          If copyright does not do this there is no legal basis for it.

          “It’s about professional artists getting paid for their work in a digital era where copying music, photographs, novels, films, news reports etc. is as easy as pushing a button.”

          Boldrin and Levin address many of the points you raise. For example, it’s always tempting to think that we live in a new age where everything is different as a result of instant copying and file sharing. However at the turn of the 19th century most music revenue came from the sale of printed sheet music, which was carried out worldwide. In Britain alone about 20 million copies were printed annually. The family owned businesses that dominated the industry colluded quite successfully to drive up price to 14 pence a script, until the spread of “piano mania” and the development of photolithography increased the demand for musical scripts by orders of magnitude, incentivizing the “pirates” to enter the market and drive down the price to two pence each. “Authorized” publishers had difficult defending their monopoly power despite organizing raids on “pirate” houses to seize and destroy “pirated” copies. Entire warehouses filled with “pirated” copies of sheet music were burnt down. This led in 1902, to the approval of a new copyright law. Eventually, in 1905, the king of the “pirates” was convicted of conspiracy and the leader of one of the music publishers’ associations, and the man who had invented the raids, launched a new sixpenny music series. Expensive sheet music never returned.

          Imagination is the only limit to artists capitalizing on their first mover advantage. For example, people prefer originals, signed copies and early versions that are in scarce supply over more widely available versions. In music, live performances will remain scarce, no matter the price of electronic copies. Movies will be produced as long as the profits of the first showing are sufficient to cover production costs, no matter how many copies are given away over the internet for free. Authors or inventors can earn money by going on the talk-show circuit. A number of online comic strips have found it a profitable business model to give their strip away for free and sell T-shirts. Product placements are quite common in movies and television and there is nothing to prevent creators from embedding advertisements as an integral part of their story so they can’t be eliminated by “pirates”. Freedom works. It’s just that we have forgotten how it works.

    • Stephan Kinsella Says:

      The constitution SAYS it’s about promoting the progress, but I am skeptical that this is so. But copyright is not even purportedly about promoting the progress of the useful arts–that is what patents are allegedly for. Copyright is for promoting the progress of science (science used to mean creative works like writings).

      Reply

  11. Rucksack Foodie Says:

    Informative insight, nicely written!

    Reply

  12. Jason Says:

    I was really inspired by your article, because your opening two sentences are pure genius, and really cuts to the heart of the matter. “Growth comes from competition. Anything that stifles competition has a negative effect on the incentive to innovate.” Inspired, I wrote my own article, referencing yours, here: http://silverstockreport.com/2013/monopolies-are-bad.html

    Reply

    • Malcolm Greenhill Says:

      Jason, thank you for your kind words and for referencing this post in your article. How wonderful to have your precious metals stores in the heart of historic gold country. I hope to look in one day when I’m visiting the area.

      Reply

  13. Tim Starr Says:

    If copyright had anything to do w/ artists getting paid, copyrights would expire when the artists died, except perhaps when it came to inheritances to their wives/children. They don’t, therefore it doesn’t.

    If there wasn’t any money in making music that’s in the public domain, no one would ever perform/record/sell music written before 1900, including all those symphonies, operas, concertos, etc. And, of course, much of that music is based on folk songs that weren’t copywritten; if they had been, that music would never have been written.

    The main function of copyrights is to funnel the profits from the creators of art to its publishers, who can afford to game the legal system in their favor. Fortunately, technology is disintermediating this; MP3s made record stores obsolete, and Amazon Kindle’s doing the same to book publishers/stores. There are downsides to this; I liked bookstores & record stores, but time marches on.

    Reply

    • Malcolm Greenhill Says:

      Tim, thank you for these succinct but powerful arguments against IP.

      Reply

      • Tim Starr Says:

        My favorite argument against patents is the US aerospace industry. After WWI, aerospace was deemed too important to be monopolized, so a patent pool was formed in which all aerospace patents were shared by members of the US aerospace association, which didn’t cost very much to join. This lasted until about 1970. During that time, the US aerospace industry came to dominate the world, and still does. Nixon abolished the patent pool out of an ideological commitment to intellectual property rights.

        Reply

  14. A Woman and Her Pen! Says:

    Wow, great information…….thanks so much for posting.

    Reply

  15. edwardohare Says:

    A man after my own heart.

    Reply

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