royalties without copyright--the historical case

david friedman (
Wed, 26 Mar 1997 11:40:52 -0800 (PST)

Pat Fallon writes:

"Functioning markets existed for foreign authors in the U.S. in the 19th
century. The free market paid royalties to British authors even though
those authors received no copyright protection in the US until the
extension of copyright protection to foreigners in 1891. The American
publishers paid the royalty in order to obtain advance galleys, even
though they themselves had no legal protection against competitors who
could legally copy their new releases and sell them. In the absence of
state protection the authors and publishers used several voluntary and
contractual arrangements for the internalization of externalities."

There is an important difference between the situation then and now. With
19th c. printing technology, there were large fixed costs and sizable time
lags. The authorized publisher, who got the manuscript in the U.S. before
it was published in Britain, could pay his fixed costs out of the early
sales. A pirate would have to duplicate those fixed costs. The authorized
publisher could then issue a "fighting edition"--a low cost second edition
priced low enough so that the pirate would never make back his costs.

With current printing technology, absent copyright, the pirate's costs are
much lower than the original publisher's, since he can use photo offset or
something similar to free ride on the original publisher's layout,
proofing, etc. So that method doesn't work.

As this example suggests, whether alternatives to IP protection work, and
how well, depends on details of the associated technology. Certainly there
are alternatives. But I don't think one can say, a priori, whether relying
on them will produce plenty of intellectual property, an inefficiently but
not catastrophically low level, or practically none--it depends.

On the subject of first mover advantages, my favorite quote is from
Kipling's "Mary Gloster," possibly his best poem:

"They asked me how I did it and I gave 'em the scripture text
'You keep your light so shining a little ahead of the next,'
They copied all they could copy, but they couldn't copy my mind,
And I left them, sweating and stealing, a year and a half behind."

On the economics of IP protection, people might be interested in my Dayton
Law Review article on Standards, on my web page, and in the discussion of
IP in the lecture notes for my L&E course (current and last quarter's
course visiting at Stanford), also on my web page.

Lee Daniel Crocker writes:

"But as Friedman and others have
shown with more detailed economic analysis, the net gains are
always less than the net losses, because a subsidy changes the
relative value of the commodity subsidized, leading to inefficient
trades in every business affected by that commodity."

It's tricky in the copyright case. You get an inefficiently low level of
production and consumption of those books that are written, since the price
includes royalty although the marginal cost to the author of having one
more copy sold is zero. But you move the number of books written closer to
the efficient level, because you raise the reward to the people who bear
the fixed cost of producing books (author and publisher) closer to its real
value to the users. So you are losing on one margin and gaining on the

In another post he writes:

"I explained that quite clearly many times: if you sell me a product,
then I use the ideas to create a similar one and sell that, then the
government will step in and prevent me from doing so /at my expense/.
Protecting a market at public expense is no less a subsidy than just
writing checks from the public coffers or regulating prices."

I think it is worth distinguishing two features of IP law--the fact that it
protects certain things that may or may not seem like property, and the
fact that enforcement is in part paid for by the government.

Suppose we ignore, for a moment, the question of enforcement cost, and just
ask whether the enforcement itself is a bad thing. One obvious answer is
that IP is a substitute for contractual arrangements that most of us would
approve of if it were practical to enforce them. An author could, after
all, sell his book with an explicit shrink wrap license, binding the buyer
not to reproduce the book, not to permit others to reproduce the book, and
making the buyer liable for damages to the author if his copy does get
reproduced, with or without his permission. If that contract could be
enforced, it would be very much like copyright law. The practical problem
is that when pirate copies get out there is usually no way of proving whose
copy got pirated (a problem that may be soluble for some digital works,
incidentally), and the guilty party, if located, may be judgement proof. So
if one approves of the results that would be produced by such a contractual
regime, if enforceable, it is hard to see why, from a consequentialist
standpoint, one should reject the same results when produced by IP law.

Now bring back in the issue of enforcement cost. Some of that is paid by
the state under the current regime, but not much, since IP is almost
entirely civil, meaning that the enforcement is done mostly at the
plaintiff's expense, although possibly in a subsidized court. But that is
equally true of ordinary property at present, so it isn't a special
argument against IP.

Someone resonding to someone quoted and wrote:

>> Ah you show that you do not understand the economics of it. First off,
>> "fair use" has been declared legal, as is personal use, which is why you
>> can make as many copies as you want, so long as you gain no commercial
>> satisfaction from them.
>It's your understandiing that's faulty here. Lack of commerical use is
>absolutely no defense.

You don't automatically have a right to copy something for your personal
use. But whether something counts as "fair use" depends on a bunch of
different criteria, and a personal use would be more likely to pass the
(very fuzzy) test than a commercial use. So it is some defense, just not by
itself a sufficient defense.

Damien R. Sullivan writes:

>Religion is bloody real; how do economists
>account for it?

My friend and colleague at Santa Clara, Larry Iannaconne, specializes in
the economic analysis of religion; you might want to look for some of his
articles. I don't know if he has looked at the question of why religion
exists, but he has looked at economic explanations for why religions have
some of the characteristics they do.

Incidentally, I am reading the filtered list provided by the Low Golden
Willow (no relative of Golden Lotus, I hope), so people who want to get
back to me should probably cc me.

David Friedman

David Friedman
Professor of Law
Santa Clara University