Re: ECON: Intellectual Property Again

Michael Lorrey (
Sat, 23 May 1998 17:58:36 -0400

Daniel Fabulich wrote:

> On Fri, 22 May 1998, Michael Lorrey wrote:
> > Yes, the act of writing a novel is a service. The resultant manuscript is a product. Do you see
> > the difference? One is kinetic and the other is static.
> I wholeheartedly agree. Now, suppose someone BUYS your manuscript
> (static, rightfully owned) and uses this manuscript to make another
> manuscript. They have stolen nothing; they have rightfully purchased
> everything that is static. The only thing that changes is the
> organization of THEIR ink and paper and energy, something which YOU don't
> own, nor have a right to control.

No, however, when they purchase a copy of my product, they are agreeing to not copy that product
beyond what I allow them. I don't have to sell my product to anyone who does not agree to those
conditions, and anyone who does is in breach of contract and can be sued. In order to buy my product
you must agree that it belongs to me and that you are only purchasing a right to use it, a lease, per
se, rather than purchasing all rights to the product. I am quite comfortable with this distinction,
and it has nothing to do with IP as a concept of 'natural law'. IP as a concept of contract law is
quite sufficient. I think that where we are talking past each other is that you look at IP as a
consequence of natural law, and I look at it as a consequence of contract law.

> > This is why it is most important to enforce property rights on it. This is why the word is COPY
> > - RIGHT, or right to copy, get it?
> I know perfectly well what it is, and think that it should not exist.
> Would it be too much to ask that we maintain a higher level of ettiquette
> here? I don't insult YOUR intelligence every chance I get.

Sorry, I just don't understand how someone who claims to be intelligent could come to such a nutty
conclusion. I hear your arguments all too often from many people, and they invariably turn out to be
cheapskates who want to get something for nothing. As you can tell by my sigline, I don't have much
respect for such people, and if I have transferred that disrespect toward you by association when it
may be unwarranted, accept my apologies. However if it does turn out to be warranted, please don't
take it personally....I'm an equal opportunity hater.

> > It is important because information is very easy to reproduce, while much more substantive
> > products are not so easy to reproduce. Especially with software, if there is no way an
> > individual or company can hope to get paid for its software, if the first person to buy a copy
> > goes out and gives away copies to everyone, then there will be no incentive to produce software
> > and the industry will die, or at least become severely retarded.
> On the contrary; all this means is that the price of copies will plummet,
> and as a result more people will buy the product who wouldn't before.

If there is no incentive to produce new technology, then economic growth will come to a screeching
halt. If everyone can copy whenever they want, then the product will no longer be bought, but
shared. it would be interesting to see the welfare lines in Silicon Valley after that happens.....

> (This is the 40-50% of the copy market to which I have been referring.)
> The market [for copies!] will GROW, not shrink, because the law of demand
> dictates that when prices fall, quantity demanded increases. Meanwhile,
> the number of new inventions will decrease; I argue that the copy market,
> coupled with the cost of enforcement, will outweigh this loss.

However, when prices fall beyond a certain point, it is no longer profitable for a producer to
produce a product and will go out of business. When a product can be freely copied, there is no
longer a market for the product.

> > So you admit that it is a severe disincentive against invention, if an inventor is guarranteed
> > to have his invention stolen the minute it goes public. How many people will be able to devote
> > their lives unselfishly to producing software when they have no hope of being compensated for
> > the undertaking? Far Far fewer than those at present.
> It's not stolen. He's selling copies. People are doing whatever they

You still dont' seem to understand it. I do not sell you total rights to ownership of my product, you
own the right to use the copy I produce for you.

> And YES, I'm aware that incentive will decrease and that invention will
> decrease. However, we will ALSO see an explosion in the copy market, and
> we will all save, as taxpayers, the cost of enforcing this law. These two
> effects will OUTWEIGH the decrease in invention...

This is the central, incredibly outrageous hogwash of your entire argument. An economy cannot grow
without advancing technology. With an increasing population and without rechnological advances to
increase resource utilization efficiency, economic stagnation will quickly result, bringing us back
to the dark ages.

> > And I replied that I think that you are out of your hat to think so...
> ... and you have yet to provide an economic argument which counters that.
> Indeed, you completely FAILED TO RESPOND to any of my previous points,
> arguing that you wanted to see real numbers. Well, as I'm sure you're
> aware, these numbers don't and CAN'T exist, because this is a
> MICROeconomic argument, not a macroeconomic argument; while I argue that
> enforcing intellectual property will hurt GDP, I'm not saying that a
> country with IP protection will have less GDP growth than another nation
> that doesn't. Indeed, the best I can say is that ONE nation with IP will
> do better if it stops protecting IP; because the behavior off one market
> cannot ever explain the behavior of the whole economy.

Of course a nation that stops protecting IP will perform better, because it will be reducing its cash
outflow to pay for intellectual property rights held in other nations. Thus, it is externalizing its
costs to increase its net domestic product. It does not expand its gross domestic product except by
the capital savings that result. In this case, your argument will only work if ONE or SOME nations
fail to protect IP, as they then are externalizing their IP costs onto the economies of those that do
respect IP. When ALL nations fail to respect IP, then technological development will halt and
economic depression will result.

> I'd like to prove this more vividly. Let's take welfare for example.
> Welfare sucks. It hurts the poor more than it helps them, and drags down
> our macroeconomy. This can only be demonstrated through a MICROeconomic
> argument: that it reduces efficiency thanks to distorted incentives which
> lead to deadweight loss. How much deadweight loss? No one, not even the
> best macroeconomist anywhere can tell you exactly how much. It is NOT
> simply the dollar value of government expenditures on welfare, adjusted
> for inflation. It's actually much much larger than that. Can you
> demonstrate this? Can you show it using "real data?" (hint: any attempt
> to do so must necessarily use theoretical data, in other words "uninformed
> guesstimates," by your account.)
> If not, then a liberal could say to you: "I don't need to show that
> welfare is more ecnomically efficent than laissez-faire capitalism; the
> current state of our macroeconomy is my proof: we're doing EXCELLENTLY.
> Now, how to fix Social Security..."
> Since we agree that welfare is bad, yet our economy is doing well, then it
> is plausible, a priori, that IP may be bad, EVEN THOUGH our economy is
> doing well. And the ONLY way you can show this is with a MICROeconomic
> argument, which you think you can gloss over. Well, you can't. I've
> provided my microeconomic argument using sound market theories which WORK.
> Care to provide your own?

Yes. We can compare nations that respect IP and those that don't. Excepting the IP which those
nations steal from other IP protecting nations, we can measure the economic growth which results from
domestically developed IP. China is an excellent example. During its cultural Revolution, there were
virtually no inventions developed in China, there was also zero economic growth. Once they opened
their economy, they started stealing IP from western nations. We can extimate as a result that most
of China's economic growth in the past 30 years is not due to domestic IP that is not protected, but
by foreign IP which is stolen and are therefore externalized costs that boost the Chinese economy.

> > You have yet to quantify any of your claims, probably because you cannot quantify those
> > claims.... come back when you get real data...
> I have left myself a WIDE margin of error with 40%, using strong economic
> principles which are completely valid in this example. You'll never get
> better data than that; nor could you provide such numbers if we DIDN'T
> have IP and you were arguing for its creation. One market cannot explain
> the entire economy.

Don't give me percentages, give me numbers. I'll bet that Sasha Chislenko's economic simulator will
easily disprove your arguments.

> > I work in the software industry, and it is easy to create fingerprints in data and in software.
> > The problem in the software industry is a refusal on the part of nations like china to enforce
> > the laws they already have, because the pirates are top officials in the Communist Party.
> No, the problem is that even if we DID have those fingerprints, (which
> many products already do!) we'd have to monitor people's computers in
> order to actually FIND THEM. Couple that with the fact that a reasonably
> competent programmer can disable fingerprint protection with a crack, and
> you've got a situation where in order to find the pirates, you'd have to
> raid houses at random, violating our rights and wasting our time and
> money.

A reasonable competent fingerprint will make software not work at all if it is tampered with.

> > its more a matter of prosecuting those in the breach. An easy way for, say, Microsoft to
> > enforce its own copyright is to require that all resellers of Windows perform license checks on
> > software on customers computers when the coputers are sent in for maintenance. I don't see any
> > reason why Apple, Microsoft, and IBM don't get together and adopt that as an OS industry
> > standard practice.
> Now, from here on we have a real interesting phenomenon. Here's where I
> provide my argument from microeconomic efficiency, and explain the
> difference between the microeconomy and the macroeconomy. You just ignore
> it. Funny that.

You only make a microeconomic argument. You do not show anything about the macroeconomic systemic

> > > > Granted they have gone up in
> > > > recent years, but only because we have opened our economy wide to the Chinese, who have
> > > > no respect for intellectual property, nor any other type of property or individuality, it
> > > > seems. Rather than looking at pirating as a positive externality, look at the cost of
> > > > enforcement as an externality created by pirates that everyone has to pay. If trade with
> > > > pirate economies were cut off, our cost of intellectual property enforcement would go
> > > > down again.
> > >
> > > Your logic is dizzying: the more the positive externality happens, (which
> > > this is, by definition,) the more we have to pay to stop it from
> > > happening! Of course, if we weren't trying to pay for IP's enforcement,
> > > then we would circumvent that part of the problem entirely.

If people merely acted in compliance with the contracts they sign, then there would be no IP
enforcement costs. This goes back to my previous statements about subjectivity eroding respect for
contract law. You are proposing that people who produce intellectual property should not be able to
protect their interests with contracts, or that people should not be bound by such contracts. Once
again you have exposed your subjectivist, post modern underbelly.

> > >
> > > > You have to date, only guessed. Since the current situation is one where intellectual
> > > > property is respected and enforced, I think that the onus is on YOU to prove your point
> > > > with real numbers. Until you do, all we can think of your ideas is that they are quaint
> > > > fantasy with no basis in fact.
> > >
> > > Guessing? Only so as to provide extra precision. If you'd like I can
> > > stick to being very general, based on what we already know. We already
> > > know that the cost to an individual of producing another copy of a piece
> > > of information is low, and that it does not increase significantly when
> > > lots of people are producing lots and lots of copies. Therefore, we know
> > > that the production of copies is nearly completely elastic. (HOW near is
> > > what I was trying to guess.) Since the marginal revenue curve for
> > > monopolies is half of the demand curve, we know that it will strike the
> > > P=0 line at 0.5Q, where Q is the quantity demanded when P=0. If the
> > > marginal cost curve were completely elastic, then the market for copies
> > > would shrink by 50% thanks to monopolization. Again, since it is only
> > > nearly completely elastic, deadweight loss is is only nearly 50%; I
> > > guessed 40%, which gives me a large margin for error.

If the curve is not a line, but truly curved, then it will not be 0.5Q, but some other number. It may
be higher, it may be lower. In a commodity market, the curve makes this number very high, while in a
monopoly market, the curve can be rather low. You are only using a standard 1 for 1 slope on the
curve, which is inaccurate, disingenuous, and false.

> > > Oh, there's no question that the rate is affected. I agree: when the
> > > incentive goes up, invention goes up, and when incentive goes down,
> > > invention goes down. That's not what I'm on about. What I'm saying is
> > > this: we know both that the market for copies is slashed by at least 40%
> > > when IP is enforced, and that the cost of enforcement is non-trivial. Is
> > > monopolization's deadweight loss plus the cost of enforcement GREATER than
> > > or LESS than the deadweight loss due to decreased invention? I say
> > > greater; you know why.
> > >
> > > > Considering that you have refused to respond to my refutation of your assertion that an
> > > > invention is a monopoly, your argument does not stand. Any engineer will tell you that
> > > > there are always many many ways to solve a problem. Only problems are unique. Invention
> > > > is not a monopoly market.
> > >
> > > We must assume that the engineer's ability to route aroun IP is not a
> > > significant effect, otherwise IP has NO economic effect at all: whenever
> > > you try to patent your idea, I invent another one just like it and you
> > > gain nothing. If this is true, then the only difference in costs between
> > > enforcing IP and not enforcing IP is the cost of enforcement; and that's
> > > in MY favor, not yours.

A patent is worth more if it is as broad as possible. The most broad patents are concept patents,
while the most narrow are design patents. Even in design patents, an engineer will try to include as
many designs as possible, to shut out competition from routing around his property very easily. Even
then it is usually only a matter of time before someone does. The main advantage that a patent gives
an inventor or the company he licenses is product to is time enough to establish market presence and
fine tune production systems. Once you have established brand name presence in a market and have
refined your production system, usually, there is competition on the market using alternative

The purpose of the patent is to give the inventor (individual or corporation) the time to recoup the
capital costs of research and development, as well as the capital costs to establish a production
capacity. Failure to allow an inventor to recoup these costs is externalizing the costs from the
consumer to the inventor and producer and therefore stagnating technological development.

In an expanding population, with stagnant economic growth and zero technological development, the
resource base shrinks steadily (since technology is no longer increasing resource utilization
efficiency or reducing resource acquisition costs).

> > >
> > > However, if we assume that IP cannot be so easily routed around, as we
> > > must if we think IP will have any effect, then we must observe that IP is,
> > > by its very definition, granting the inventor monopoly rights over copies
> > > of their idea. This is how we define IP; there isn't any argument to be
> > > made here. And, since in this market copies are cheap and supply is
> > > elastic, the market for copies suffers at least 40% losses thanks to
> > > monopolization.
> > >
> > > > I don't need to. The present economy is my own proof. YOU need to come up with proof that
> > > > economic growth would be higher without such protections. That the US has one of the
> > > > highest levels of intellectual property protections, along with among the top 3 or 4 per
> > > > capital incomes/standards of living, and among the highest economic and productivity
> > > > growth rates for a nation at its state of development (a third world with a 50% growth
> > > > rate doesn't mean anything if they are starting from nothing.)
> > >
> > > I'm making a MICROecnomic argument, not a macroeconomic argument. As you
> > > well know, there are hundreds of thousands of effects which have positive
> > > and negative effects on the economy, many of which are present in the US
> > > and not in other areas (or vice versa). The only macroecnomic argument
> > > which I can present is that microeconomic efficiency, as a trend, leads
> > > towards greater GDP. However, the behavior of one market can never be
> > > used to predict the behavior of the economy as a whole. Microeconomic
> > > markets tend to clear and/or equilibrate; they have no business cycle.
> > > The macroeconomy is practically the antithesis of this model.

Unfortunately, static microeconomic models are no good at all at predicting the impact of changes in
technological advancement.

> > >
> > > If I am right, then IP is just one of the galaxy of factors which hold
> > > America back from greater growth, none of which alone could possibly
> > > explain our growth rate.
> > >
> > > > No, theft is when someone benefits from someone else without that persons permission or
> > > > acquiescence.
> > >
> > > If there are no IP rights, and the inventor invents despite knowing this,
> > > then the inventor has, by necessity, acquiesced.

If the inventor has invented and has only licensed use of his product to others, and those others
violate the terms of that license contract, then they are stealing. He has asquiesced to nothing.

> > >
> OK, we're back.
> > > Well, how does this sound: I declare that individuals have a right to
> > > their physical property and energy, and that anyone has the right to
> > > organize their property in any way they want, even if they organize their
> > > property just like someone else's property.
> > >
> > > Doesn't sound very collectivist to ME.
> >
> > How does someone else know exactly how someone else organize their property?? If they haven't
> > paid for the product (i.e. the information about the other person) then they cannot organize
> > their property the exact same way, can they?
> Too true! So I had best BUY a copy of your manuscript, and then, using my
> property, organize my property just like the copies that belong to you.
> You own the manuscripts and all of the words written on them; but if you
> sell a copy to me, then I own a copy, with all the words written on it. I
> can do with my property whatever I please, including organizing my
> property just like your property.

If I sell you the right to use my copy. You can use my copy to organize your own property any way you
want, however you cannot sell copies of the copy I sold you to anyone else. If you sell the copy I
sold you to someone else, and delete all copies of that copy that may reside anywhere in your own
property, then it is not theft....since if you sell the copy to someone else, you are selling them
your right to use that copy.

You cannot say that this sort of arrangement is not used in any other market, as real estate deed
covenants are widely used.

> >
> > Duh, in sum is society.
> I think we're using different words to say the same thing. Society
> doesn't have the right to own property.

I dunno, the state owns plenty of property. As a sovereign government, in theory it holds original
right to all real property in its domain. People only own real property (i.e. real estate) as granted
by the sovereign in granted deeds. The sovereign holds right to reclaim those deeds under emminent
domain, provided the deed holder is refunded the original license fee, plus interest and compensation
for any improvements to the property.

In a theoretical libertarian society, where every man is sovereign, and is vassal to no state,
emminent domain would not exist per se, however IP will still exist in contract law. If you wish to
benefit from my product, you must agree to not reproduce my product. If you break that contract, you
are in breach and can be prosecuted in civil court by my PPL. Others who benefit from your breach can
also be sued, ad nauseum. It may take some precendent cases in a libertarian society, but IP will
probably be better respected in such a society then it even is currently here.

> Individuals do. The sum of the
> wealth owned by individuals is not the property owned by society, but the
> simple sum of the property owned by those individuals. I think we're
> agreed on that.

Yes, however you forget the origination of those properties. In the example of real estate, the
sovereign holds all original rights to all real estate in his or her or its domain. all other land
holders posess their land by granted deed.

In an information economy, I invented widget A, or software B. I hold original sovereign rights to
that widget or that software. I will only grant others the right to use copies of that widget or
software if they agree to the terms in my granted deed to use that property. If they do not, I hold
the right, by deeded contract, to prosecute their breach as I see fit. I could simply sue them in
civil court, have it 'corrected' by a contract 'fixer', or simply go and nuke the bastids.

> In light of that, your statement above is not correct: otherwise we are
> forced to say that the sum of the property owned by individuals IS proprty
> owned by society. However, we both agreed that society HAS no rights,
> especially not the right to own property, only the individuals have these
> rights. Therefore, the sum of the property owned by individuals is NOT
> the property owned by society.

That society may hold property as a sovereign government, if individuals in that soceity are not
sovereign individuals, with some or all rights delegated to the state, then the state can own
property in trust for the benefit of all society. THis is how things are presently. In a libertarian
society, individuals would only delegate those rights which they choose to delegate on an individual

> Similarly, I assert that we should maximize the sum of the utility for
> each individual; NOT the utility of the society, which is not a brain and
> therefore has no utility. If I were arguing that society DID have
> utility, THAT would be collectivist. THAT would be Borg-like.
> Fortunately for the both of us, I'm not saying that at all.

Yes you are. You are measuring the utility of IP protection as a sum set, i.e. for all soceity. You
are not measuring it on an individual basis.

> > Destroying the incentive to invent destroys the utility of every thinking mind. Destroying the
> > value of the thinking mind makes a human nothing but another animal that can be penned,
> > harnessed, and slaughtered at will....
> Slaughtered at will, eh? This is either some weird hyperbole, some
> obscure attempt at a reductio ad absurdum proof, or a gross
> misunderstanding of my argument. Obviously, I do NOT think that
> individuals ought to be slaughtered at will. Nor do I think it's OK to
> take away static property. I don't believe IP exists, or to put it
> another way: I don't think that we should enforce the concept of IP,
> because it does not maximize the sum of the utility of the individuals in
> society.

You are talking about society again.....

> > > Monopolization objectively leads to deadweight loss. I have argued that
> > > the law is bad for this reason. Now it's time for you to show how the
> > > deadweight loss under my system is bigger than the deadweight loss under
> > > your system as well plus the cost of enforcement.
> >
> > I don't need to. I have the present system as my proof. Since your system is the new one, you
> > need to do the quantification comparing the two. Rough percentages and uninformed guesstimates
> > do not cut it.
> If you would REPLY to my argument, rather than gloss over it, then I could
> show you that my argument is NOT uninformed, but rather leaves a wide
> margin for error. If you had only read what I had said about
> microeconomic vs. macroeconomic arguments, you would understand that the
> current state of the economy is NOT evidence that IP is working, any more
> than it proves that welfare and social security are working (and they sure
> as heck aren't).

I agree with the CONCEPT of your economci argument. I think that your numbers are completely wrong.
Failure to protect IP will lead to the downfall of technological society.

   Michael Lorrey
------------------------------------------------------------ Inventor of the Lorrey Drive
MikeySoft: Graphic Design/Animation/Publishing/Engineering
How many fnords did you see before breakfast today?