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!

9 responses to Austrian School Economics

After reading a variety of material on MP Steve Baker's website earlier today, I ended up reading this summary of Austrian school economics. It's clear and well-written, although it gets a bit polemical at points and the engagement with potential objections at the end is pretty cursory. I am actually quite sympathetic to some of the ideas involved; it seems to me that the interaction of notionally "free" markets with regulation that is at the mercy of powerful lobbying interests is a pretty terrible combination. It also seems self-evident (especially now) that a crude mathematical model of human choice is badly flawed as a basis for monetary policy. And I hope that most right-thinking people can now agree that the inflationary economic policies of the last 50-odd years have finally passed their sell-by date. Nonetheless, I think this radically free-market economics is in many way just as guilty of utopian fallacies as the centralising socialism that it pits itself against. A few observations:

1. The assertion about monopolies being primarily a product of intervention seems extremely hard to verify. I'd like to see more genuine examples of monopolies being toppled without intervention. Even at a logical level: if the claim that governments can distort markets is true, how on earth can one claim that companies can't distort them? Surely the more one limits the government's power, the more likely it is the companies will be able to exert influence to distort?
   
   I think it's probably true that given time, a monopoly will either collapse or take over the world, but it seems that in practice this can take decades even in the absence of regulatory distortions, and much harm can be done in the meantime. Is that really an acceptable cost?
2. The moderate Austrians seem forced to turn a blind eye to the necessity and cost of providing a framework within which the market can exist. Defence spending is the classic example here. The government is just as much part of the market as everyone else. More recently, Net Neutrality highlights that the freedom in free markets depends on other sorts of infrastructure as well; if a company owns the means by which the market itself communicates, how can this not distort things?
3. The whole thing seems to be based on an entirely mythical notion of rational free agency. We are not free at all, we are programmed by our education and the collective cultural output of our society. Those with large sums of money have a disproportionate control over this programming process. This is the biggest distortion of all!
4. The model seems to be extremely poor at dealing with catastrophic future costs. Although massive environmental damage will ultimately have a huge impact on prices, current prices do not communicate this to consumers so they will not change their behaviour. In fact, in the short term, a free market penalises those who attempt to deal with long term issues since it makes them less competitive in the short term.
5. Free markets are inherently bad at aggregating universally held values that have a low impact on individual, local choices but a very serious impact at a wider level. This is because it is inherently difficult for every individual to factor in all such considerations to every choice that he makes (this is basically a modified version of the capitalist argument against socialist central planing). This is exactly the same problem as with First Past the Post voting systems - something can be an important but not decisive consideration in myriad individual choices, such that in aggregate it is a very, very significant factor in the collective consciousness, but it will be almost entirely unrepresented in the informational structure of the free market because the market only sees the winning result of each of the individual choices.
6. The theory runs that free markets are driven by what consumers want. Entrepreneurs have an incentive to offer new products that fit better with consumer desires to make money. But the same theorists also argue that capital isn't inherently self-replicating because the entrepreneurial investment of capital involves risk. You invest money on the assumption that, after a potentially long and complex process of production, you will get a good return. But there's a risk you won't. As a result, only a minuscule fraction of possible products are ever introduced into the market: the others "aren't worth the risk". But exploring even a small part of the complex space of consumer demand would require an enormous range of products to be introduced all the time in order to establish the right combination of attributes and price; and this just doesn't happen.
   
   For example, I want to buy food from an ethical, conveniently located supplier that employs local people and is locally owned; I'm not too worried about the price. There is no such option and there isn't likely to be. So I buy from Waitrose instead, sometimes even Tesco because it's the closest. The information about my values and preferences is being massively misrepresented in the market. In reality our current markets offer a pathetic illusion of choice which undermines the claim that they are likely to converge on what people really want; importantly, there is little incentive for those currently doing well out those markets to change that situation.
7. Free markets tend to maximise consumption. Is that really a good idea, particularly in view of the currently environmental situation? The idea that we should strive to satisfy as many of our desires as fully as possible is questionable, at best.
8. In the introduction I read by Dr Eamonn Butler, he tries to distance the economic model from the psychology underlying action. This seems deeply disingenuous for an economic model that emphasises the centrality of human choice. Markets have a profound impact on our psychology, they change the way that we decide, even when no deliberate distortions are involved. Subsuming all human choices to a simplistic pricing model is exactly the mistake Austrians criticise in mainstream economists, but in their own way they're just as guilty of it. Although they ditch the simplistic mathematical calculus of value where utility can be added and multiplied, we still have a marketisation of all our choices nonetheless, because the whole system still ultimately revolves around what someone is willing to pay. Yes, it's good that it's no longer a zero-sum game where you have to lose for me to win; but we're still trapped in this mindset of "everything I do must be for some return". I think we've got to recognise that the act of reducing all human interactions to part of a value bartering system comes with some very serious social consequences; the more you tell people that they're fundamentally selfish, the more you legitimise the individualist attitude, the stronger it grows. When the psychological reward for helping another is classified in the same way as a financial reward for the same action, eventually that psychological reward is devalued. The marketisation of our motivations is very real, and very damaging.
9. Economic liberals don't think it makes sense to engineer a particular social structure because the market gives people what they actually want. But people are notoriously bad at identifying what they really want. We have traditionally deferred authority (even in democracies) to society "elders" of some sort (be they Kings, MPs, witch doctors or whatever else) on the basis that they are likely to make better decisions about the wider interests of the community than we would ourselves. Genuinely free markets make that extremely difficult because they give ultimate power to the aggregate expression of our unconsidered desires. I'll accept that "elders" often get it wrong, and can themselves become entrenched etc, etc., but I think there's room for a balance here. Are we sure we want to devolve massively more power to the collective expression of our immediate desires than we already have?

A long pause, inevitably

So, shortly after leaving Prague last summer, my enthusiasm for blogging was replaced with an enthusiasm for having fun that didn't involve a computer. Suffice to say, it was a pretty amazing journey. Reggie did me proud (not a single hitch) and I met some crazy (and wonderful) people for some unforgettable experiences. I don't have the energy or the inclination to set it all down here at the moment. Perhaps one day I'll try and distill some of it, but for the moment it'll just have to filter through everything else that I say here in its own subtle way.

I've been doing a lot of reading, talking and thinking in recent months, and I've got a lot more to say about some of the ideas that we started exploring in Psy Chi last year. I'm hoping to start posting some of them here rather than just storing them in my head or arguing over email with people!