Re: ECON: Intellectual Property Again

Daniel Fabulich (
Sun, 24 May 1998 03:01:00 -0400 (EDT)

On Sat, 23 May 1998, Michael Lorrey wrote:

> 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.

Ah. You are correct; we have been talking past each other. This poses
new and very different problems. For example, suppose you have licensed
your information out to a hundred people. Then, to your surprise, I,
someone with whom you haven't contracted, begin to market this information
publicly. You can't sue me, because there is no contract binding ME from
distributing your information. Indeed, the only people whom you CAN sue
are those to whom you have licensed information, and they all deny it. If
I have managed to remove the fingerprints you have added to your
information, then you have no way to recover your lost business.

(For the purposes of this example, suppose this information had been
distributed over something like TC May's BlackNet: I bought the
information from one of your licensees anonymously; I don't know whom I
was dealing with, and neither do they, nor can anyone prove that I knew
that I was buying the information from one of your licensees.)

Right now, we create IP laws in order to get around this problem: we pass
a law such that everyone is required not to use or distribute protected
information without paying royalties to the author. Without such laws, I
could make an exchange like the one listed above, leaving you SOL.
However, as you note, such laws are in no way grounded in "natural law":
they would only be created because the contract was *too difficult to
enforce otherwise.*

>From the perspective of a PPA, I doubt I could find a PPA who would
enforce a contract like that above at ANY price: cryptography over the
Internet makes it such that there would be no way to identify the
perpetrator. Whom do you prosecute?

> 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.

Well, suffice it to say that I endorse contract law, and NOT enforcement
of copyright beyond that. However, I don't think that will protect
inventors in any meaningful way; it would be as if IP did not exist at

> 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.....

But despite the fact that contract law IP would be ineffective, there
would STILL be an incentive to invent new technology; it would be smaller
than that available today, but not zero. I demonstrated this earlier this
month; see

> 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.

On the contrary; copies are cheap, but not free. However much they cost
to make, that's how much people will sell them for.

> > 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.
> [snip]
> 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.

As noted, technology would advance, only SLOWER. For evidence of this,
take a look at the Linux operating system. It's covered by the GNU Public
License: it is explicitly and forever available to be copied freely. It
advances slower than Windows, isn't as popular, but it's also available
for much less. Indeed, many people think that Red Hat 5 is BETTER than
Windows NT, thanks to the open source policy. It's also a hell of a lot
cheaper, but NOT FREE: you'll see the Red Hat CD selling for ~$50 most

Technology can and does advance without IP laws, only not quite so fast.
It is also much cheaper. This is just what my argument earlier would have
qualitatively predicted, strong evidence that it is actually true.

> 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.

As always, there are a hundred reasons why China's economy would go the
way it did. I'd say the biggest one is probably that they switched to a
planned economy, which is more than sufficient to kill growth in ALL
industries; invention would cease because there were no rewards for
increased efficiency AT ALL. The economy's planned, so what's the

If I'm right, IP was not the reason China had no inventions, but rather a
planned economy was the death blow to innovation. Can you separate these
effects into "real numbers?" If so, there's a Nobel prize in Economics in
it for you if you'll just tell us how.

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

<sigh> If you want, I can go seek out how large the software industry, the
movie industry and the book binding industries are, and tell you that they
would practically double in quantity as their prices dropped. But that's
really not enough information: we'd need to COMPARE this with the cost of
enforcing IP laws; except that copyright ISN'T enforced on individuals the
majority of the time; people copy video tapes, books and software all the
time; we'd REALLY need to compare it against how much it WOULD cost to
actually stop piracy.

I haven't heard of Chislenko's economic simulator, (nor could I find it in
a quick glance over Chislenko's web site,) but I somehow doubt that it can
predict the shape of the demand curve for microeconomic markets. In
general, we can only determine this based on approximations based on
marginal costs, quantity sold and prices over time; again presuming that
demand isn't CHANGING during those periods (which it obviously is).
Indeed, I'd guess that the simulator is a MACROecnomic simulator, which
uses numbers which are much easier to measure: inflation, total GDP, the
money supply, interest rates... Yale's got one, too; it's quite good.
Come take a look:

Unfortunately, you won't find the quantity of inventions, books or
software as any of the variables.

To conclude, I can show that the area inside one shape is bigger than the
area inside another shape without knowing how large either shape is.
Based on their RELATIVE sizes, I can show that one microeconomic strategy
would be superior to another; but even then I don't know how MUCH

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

Really? Care to name a program that uses one such fingerprint? ANY
program? I can basically guarantee you that if the program has sold more
than a thousand copies, someone out on the net has bothered to break its
copy protection. There are archives of cracks available specifically for
this purpose, with lots of reasonably competent programmers on BOTH sides
of the battle lines.

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

That's because I can't. Neither could you if our situations were
reversed, and you were arguing for the establishment of general (beyond
contract) laws. It's one microeconomic market; there is no equation which
will determine GDP based on the behavior of one market. It's like asking
me to predict how tall a growing child will be depending on whether they
drink milk today or not. They'll get some calcium, and as a trend the
child will get taller as a result. But how much taller, and how tall in
the final outcome? I can't say.

> 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.

Not at all; rather I assert that if this were the only protection
inventors had against copyright infringement, they would have no
protection at all, and that this would be economically superior to a
system under which these contracts were supplemented by intrusive IP laws.

> 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.

Actually, I can be quite certain that it WOULD be 0.5Q. See, the way I
came across this was by the economic principle that in order for a
monopoly to increase the quantity sold, it must lower the price twice as
fast as a competitive business. As a result of this effect, the marginal
revenue curve WILL strike the P=0 line at 0.5Q. Obviously, then, it would
be false of me to claim that the market would fall by 50% unless the price
was actually 0; I left myself a 10% margin for error.

> 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
> technology.
> 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).

The inventor gets no EXTRA time to recoup losses. And I agree, by
externalizing, the pace of technological growth will slow, but it will not
"stagnate." The inventor will gain a percentage of the new market; if
that percentage is larger than the cost of invention, then the inventor
will invent. If not, then they won't.

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

Would you care to qualify this statement? Could you give an example where
microeconmics predicted something that empirically did not happen?

> > 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.

Yes, but you never try to make a covenant with multiple people for the
same piece of real estate; when the lease is broken, you know precisely
who broke it. Nor can real estate be copied. That makes this an
excellent arrangement for real estate, but an inferior one for

Indeed, what could you do to me if you DID lease land to me, and then I
copied it and returned the land to you? Even if this were forbidden by
the lease, how would you know who had broken the contract if someone else
started selling copies of your real estate who had purchased it from an
anonymous seller? After all, it could be me, or any of the other hundreds
of customers you've serviced.

> 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.

Agreed; this is how governments view property today; I think we're agreed
that this understanding is inferior to the libertarian system described

> 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.

As noted, I'm all in favor of this; except that I think you will find
these contracts useless in the face of anonymous commerce.

> > 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.

Remind me never to contract with you unless the terms of enforcement are
made explicit. ;)

And again, I must agree with you here; only whom will you nuke when third
parties start offering copies of your goods? You don't have any contract
over THEM.

> > 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
> basis.
> > 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.

The purpose of my parallel was to demonstrate that even if we accept a
libertarian understanding of property rights, ANY economic analysis must
make policy decisions based on net wealth; this is not wealth owned by
society, but wealth owned by individuals. I don't consider it in any way
opposed to libertarianism to do so. If arguments from net wealth are not
collectivist, then arguments from net utility ought to be no more so.

> 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.

I say that it will not, and I therefore cede to you that we ought to
enforce IP in contracts, but not as a law stating that no one may use
protected information.