Why capitalism can't deal with intellectual property

It's almost a truism to say that our approach to intellectual property is broken. If you ask the copyright holders, they'll say that our laws and enforcement approaches are inadequate to protect the rights of creators in the face of technological advances; if you ask the reform advocates and the pirates they'll say that just toughening laws is exactly the wrong thing to do: the whole concept of intellectual "property" needs to be reconsidered to a greater or lesser extent. For what it's worth I'm at the (very radical) end of the second camp. But that's not the point at issue today. What I want to discuss in this essay is the fact that, right or wrong, the concept of intellectual property is completely incompatible with the logic of free markets. Or to put it another way, if you're a capitalist record industry executive (and let's face it, not many of them are socialists), you've got a lot of explaining to do. It's actually a pretty simple argument, and it comes in three steps.

The nature of value

The first point to recognise is what free market capitalists believe about value. If you're a strict Marxist, you believe that value is something that is produced by labour.  When people work, that creates value; the more they work, the more value is created. Value is something that can, after a fashion, be quantified objectively,  by measuring the amount of work done.

Capitalists think this is falsified by the reality of how people actually value things. In practice, value is in the eye of the beholder; different people make different value judgements about the same products; a single person may make different value judgements about a single product at different times. You can work for a decade writing your Christian sci-fi-rom-crime-thriller-mystery-action cross-over novel, but if you're absolutely talentless no one else is going to want to read it.  As a result, the collective assessment of the novel's value is extremely low. You may think it's enormously valuable, but pretty much everyone else disagrees. It's worth noting that there's an important asymmetry here: the creator, the labourer, is one; the potential consumers are many. Even with mass labour, for any given product, the number of people directly associated with its creation will be dwarfed by the number of potential consumers, so in any aggregate assessment of value on this model, the creator/producer's opinion is largely irrelevant. It's important to note that this is true even if the producer's opinion is purely a function of his costs in creating the product in the first place.

Price as communication

In this model, the perceived value of a good to the consumer is a function of his need and/or desire for that good. Furthermore, it is presumed (reasonably enough) that the higher the value that the consumer places on something, the more he will be willing to pay for it. From the capitalist's point of view, this is an enormously helpful phenomenon. As a society, our resources of manpower, energy, and physical materials obviously have limits; and consequently the products of these inputs must be limited. There are only so many diamonds/bread rolls/shoes to go round, and we need to have a system for distributing them. Rather than trying to centralise this distribution (which is inefficient and error-prone), free markets work by allowing people to indicate their need/desire for a product by means of how much they're willing to pay for it. Naturally, the more people who are competing for the same resource, the more that they're likely to have to pay to secure it for themselves; so in theory scarce resources go to those who are willing to sacrifice most in order to acquire them. The system has a lot of problems that I won't go into here, but one thing to be said in its favour is that it is highly effective as a means of communicating consumer need/desire extremely rapidly.

In order for this communication model to work, however, it needs to be unimpeded. This is the "free" in free market. As a model for allocating resources, it only works, it is only defensible, if it can genuinely reflect the realities of supply and demand. This is why capitalism places such a great emphasis on competition and the avoidance of monopolies. When the supply of a good is artificially constrained, or the pricing feedback loop is disrupted such that prices no longer reflect the relationship between supply and demand, the claim that the market is acting as an effective communications channel for the distribution of resources starts to fall apart.

All intellectual property is a monopoly

This is the big step. Intellectual property rights, such as copyrights or patents, grant to an individual or organisation the right artificially to constrain the supply of a fundamentally unlimited good. The form of language expressed in a book is not, in itself, in limited supply; it's an abstract idea, an organisational structure that can be realised in a potentially unlimited range of media. The reality of this has been brought home particularly in recent years with the advent of digital media. Previously, the unlimited nature of these abstract ideas was masked by the fact that the only ways they could be distributed had meaningful, physical costs associated with them. Even a cheap paperback book costs money to print. But the cost of making copies of an ebook is almost zero. Now that the media costs have been stripped away, we can see clearly that there are no real limitations on the theoretical supply of the underlying forms.

The problem with this is that it still takes effort for someone to create the original template, the form of words, the musical composition, in the first place, and that someone probably wants to be rewarded for their effort. And this is where capitalism is stumped. As we noted earlier, the capitalists reject the idea that value arises from the effort of the creator - it's in the eyes of the consumer. But the mechanism by which that value is expressed and communicated is the give and take of supply and demand; when you're dealing with a good which has a logically infinite supply, the price should naturally fall to zero. What do you do? The only solution that we've come up with so far is to break the free market: to grant people state-sponsored monopolies on their creations for a certain period of time, to make up for the fact that the capitalist model can't actually reward them for their effort. And once you have such monopolies, the principal defence of a capitalist model evaporates, since almost by definition, prices no longer reflect the natural relationship between supply and demand. Capitalism and intellectual property are incompatible. QED.

Objections

I can see a number of potential objections to this line of reasoning that I'd like to try and address:

Free markets don't have to be completely free.

The capitalist position I've been describing is a radically free-market version of capitalism after the Austrian model. Most recent economic policy has in fact espoused a significantly weaker form of capitalism in which the market is regulated to try and ensure it runs smoothly. We do things like protecting consumer interests and regulating commercial practices; and we carve out special exemptions for socially significant areas like health and defence. We should it be a problem to carve out another partial exception for IP?

I think there are two problems with this. First off, I think that this "weaker capitalism" has been significantly discredited in the last few years. Attempts to regulate the markets through central bank control have miserably failed to deliver economic stability. To the extent that capitalism remains credible, I think the Austrian school has by far the most convincing explanation of and response to the crises that have afflicted our economies in the last few decades - and it is precisely the excess of regulation and manipulation that is to blame. For capitalism to work effectively, it has to be able to reflect the realities of demand without distortion.

The second problem is that IP is nothing like health or defence. No matter what the music or film industry lobbies would have you believe, the maintenance of IP is not a socialised benefit that we must all sign up to pay for. If that were genuinely the case, IP would be unnecessary - the government would fund intellectual endeavour from taxation for the greater good; private enterprises/personal ownership of intellectual "property" would be completely redundant. IP is only necessary precisely because this isn't the case; creativity could be funded effectively without IP - it's just that no one would be in a position to get enormously wealthy off the back of it. So if the content creation industries want to argue for IP, I think arguing from a "social benefit" position is deeply disingenuous

Competition exists - you just need to recognise what the comparable goods are.

It is argued that music labels and publishing houses compete with one another. They all release works to fill genres, and if you don't like the latest chick-lit offering from Penguin, or think it's overpriced, you can always buy one from Harper-Collins instead. The fact that either publisher has a monopoly on the supply of any given book doesn't prevent there from being competition. Well, after a fashion, this is true. Not every running shoe is identical, but we still believe that Nike competes with Adidas. It is argued by hard-line capitalists that even entrenched monopolies like the American railroad monopoly can be (and were) broken with the advent of a new, different, competing product (such as cheap air travel) without external interference. But I think that if this is true, it puts creative endeavour into the same bracket as commodities. If it's true that Penguin's latest best-seller is a drop-in for HC's, that hardly says much for the quality of the writing. What we value about creative thought is precisely its individuality, it's uniqueness. What we value in a commodity is its ability to serve a simple function. To argue that books, or music, or inventions are subject to commodity competition is to devalue them far more than even the abolition of IP ever could - because it says that the very act of creativity is itself worthless.

Regulation of physical supply is just reflecting the reality that the intellectual supply is limited.

It is true that the supply of any given intellectual work is essentially unlimited. But it is also true that the original production of such works in general is very much limited by the ability of their creators to craft them. It takes significant time and effort to write a good book, even if replicating it is nearly free once it has been written. By granting copyrights and patents we are simply ensuring that the longer-term realities of supply are reflected in an otherwise free market.

But this is not a sound argument for intellectual property. It's an argument for creating a market in ongoing creativity, because that's where the genuine limitation of supply is, not in the replication of existing works. To see why this distinction matters, I think one only needs to look at those artists who are profiting from work that they created 50 years ago but have created nothing of any interest since. In what other industry would it be acceptable to cease production and still demand payment for decades afterwards?

I'm not sure where this leaves us. For my part I'm not convinced by either IP or capitalism. But I'm pretty convinced that at least one of them needs to give!