Re: ECON: Intellectual Property Again

Michael Lorrey (
Thu, 28 May 1998 21:14:42 -0400

Daniel Fabulich wrote:

> Soory it took so long to reply to this one, but I was making up HTML
> documents with images to explain the graphs better. They're referenced in
> this e-mail.
> On Sun, 24 May 1998, Michael Lorrey wrote:
> > If I can demonstrate in court that the information is X percent congruent with the information I was
> > licensing (as the information content in and of itself is its own fingerprint), then I can still sue you as
> > an accessory to breach of contract, even if I cannot determine the original breaching agent. Keep in mind
> > that under a libertarian system, there is no right to refuse self incrimination. Since I would be backed by
> > my PPL which has a standard practice of using veradication technology on individuals testifying in court, I
> > doubt that you could escape prosecution.
> And if I bought the info from someone who had bought it from someone who
> had licensed it from you? Then I'm not even an accessory; I'm one step
> removed from any crime that took place. I'm also not bound by any
> contract to do anything for you; are you going to try to enforce terms on
> a contract I didn't sign?

Being in receipt of stolen goods is a crime no matter what your relationship or level of knowledge about its
source or the merchant you purchase it from. This is why art collectors who are now in posession of artwork
stolen from Jews by Nazi's and sold through middlemen can have their 'posessions' simply seized, as it was not
theirs, nor was it owned by the person who sold it to them.

In any event you DID sign a contract when you bought the illegal information from an anonymous seller: you waived
the seller, recognised that the seller made absolutely no guarrantees as it its accuracy, validity, or origin.
I.E. you bought into the implied caveat emptor contract that goes with any commercial trade as a base of

> In addition, you get even worse problems when the merchant is also
> anonymous. Suppose I post through anonymous remailers and a mail2news
> gateway that I have a copy of your manuscript available for anyone who
> sends me the price of a copy in anonymous cash. I don't know to whom I'm
> selling, and they don't know from whom they are buying. How are you going
> to prosecute me THEN?

a) Your customers, if caught with the illegal copies in their posession, will be arrested and prosecuted. Their
arrest and prosecution will be publicized in the media, thus generating a deterrent effect in the public that
will impinge upon your ability to do business.

b) nothing is totally anonymous. Anything on the net can be traced. As for your arguments about the cost of
enforcement, I can also say that the internet also gives IP enforcement agencies the ability to greatly reduce
the cost of IP enforcement, at least in regards to web commerce. I think that these costs will be reduced enough
that it will totally offset, and then some, your imagined 'efficiency' of having no IP.

> > IP law is merely a societal contract under which the government is delegated authority to enforce the
> > individual contract rights of all of its citizens. It does not matter if the government is a monopoly state
> > or a competetive PPL. The principle is the same.
> I disagree. Normally I cannot enforce the terms on a contract upon
> someone with whom I have not contracted; only through special IP laws is
> this possible.

If the person with whom you have contracted violates their contract with someone else with whom they contract,
and that third party passes along the information to a fourth party via another contract, the responsibility is
carried over.

You cannot enforce the terms of your contract with someone who has never come in contract with a party within
your contract chain. ANyone else can be bound.

> > I read that, which was what got me started on this whole thread. You still treat patents as monopolies,
> > while I treat them as competetive advantages in a competetive market. If you stop treating patents as
> > monopolies, then your argument goes away.
> I think on some level one must cede this definition, at least on the point
> that a copyright holder has a monopoly over copies of that particular
> piece of information.

But you are talking about a market. Markets are not markets of brand names, but of product types. The cola market
is not the Coca-Cola market, or the Pepsi market, but the cola market. Both have different recipes for cola,
which are protected by patent, both compete to satisfy the public demand for colas with different products. You
cannot say that Coca-Cola has a monopoly on the cola market. Thus my assertion that a patent is not a monopoly

> > With electronic duplication and transmission, the costs are almost nil.
> Yes, but it's that "almost" that would keep the market going, at much
> larger quantities than before, at a far far lower price. Water is almost
> free, yet it sells regardless. Since copies without IP laws are widgets,
> the analogy is apt.

So you are for treating IP as a commodity. Any commodity market is going to trend toward an oligopoly situation,
as economies of scale push smaller producers out or up in the market. Why is this? Because in the case of
internet commerce, bandwidth is discounted for large users, and hardware like servers, routers, drive systems, CD
writers, etc. are all cheaper on a per kilobyte basis the larger capacity you go.

In this scenario, the small home grown inventor is discouraged from becomeing a player in the market, unless they
are a rich bachelor who expects to get ripped off by the big boys, playing it off as if they are great
philanthropists, humantarians, etc..., or ulness the home grown inventor sells out to the established players in
the market. You are not encouraging a free market, but encouraging oligopoly/mercantilism.

> > But I can go buy the Red Hat CD and reproduce it if I want. I have a CDR deck on my PC here, and I can get
> > CD blanks for less than $2.00. Where is Red Hat gonna be when I can sell copies of their CD for 10% of what
> > they sell it for, or even 20%? I could offer it on my web site for free transmission. Obviously Red Hat
> > has put some added value into their Linux offering, so how do they expect to recoup their investment if
> > everyone can freely reproduce their product?
> Beats me, but they do it anyway, and people DO put it up on their
> web sites. Trouble is, it's rather large; so large that it's often more
> efficient to earn $50 and buy a CD than it is to spend your time
> downloading Linux. But nonetheless, it's available online, and yet the
> CDs still sell.
> Weird, isn't it?

Yes it is weird, but your numbers for the present market are not worth extrapolating from as it still is less
than 0.1 % of the market, yet even if LINUX catches on in the market beyond the hobbyist or iconoclast, companies
like Red Hat will not make any decent level of revinue, until one of the established companies, like Microsoft,
comes along and modifies the OS into something which it can protect, LinOS II. They then will promote this, and
soak up the entire market, putting Red Hat out of business, or back in the hat closet.

> > Even if it slowly advances, since there is no longer sufficient incentive for most people to invent, since
> > they have to worry about feeding their families first, invention will again become merely the province of
> > rich bachelors who can't get laid.
> Whenever the free market rations anything, it rations it to the rich and
> to the exceptionally devoted. Fortunately for us, the exceptionally
> devoted are also in many ways the most productive. So it's a trade off.
> At any rate, if we gain economic efficiency as a result of this trade off,
> it's a good thing.

It would be a good thing. However I think that your expectation is wrong, and even if it does gain efficiency, it
will be because the commodity market for IP pushes invention supply into an oligopoly situation, which any self
proclaimed libertarian free marketer should abhor.

> > Its actually rather simple, though tedious. Its merely a measure of growth of sales of products bearing
> > chinese patent numbers. Just as today's economic growth here in the US is almost entirely in the high tech
> > sector. Kill IP in the US and you will have economic stagnation here.
> I think you misunderstood my point. Clearly, some of the decrease in
> invention came from the lack of IP, but I think you'd be hard pressed to
> argue that the planned economy had nothing to do with it. I was asking
> how one would go about discovering what part of the lost patents were due
> to a planned economy and what part was due to a lack of IP.

Considering that the economy is still pretty planned, with most industry still in the hands of Communist party
apparatchiks, I think that a) most of its economic growth is from externalization of western IP costs via
pirating of foreign owned IP properties, and the rest is b) from internal IP that is owned by state industries
and enforced by party apparatchiks with connections with police or army authorities, or c) small consumer
businesses, mostly in the service industries, that are privately owned.

> > Yes, this is rather indicative, isn't it??? A lack of ability to forecast productivity increases due to
> > technological innovation seems to be a rather huge gaping hole in a model which claims to be so accurate,
> > doesnt' it? Of course, they only give average accuracy numbers. I'd like to see how the accuracy numbers
> > have changed over time. Even Greenspan has noted how current economic models have totally failed to predict
> > the present economy, which is almost entirely due to increased industrial productivity derived from the
> > high rate of technological advancement. I'll bet that the accuracy of the model is far less now than it was
> > 20 years ago. I note that it is also restricted to a forecasting ability of only 4 years.
> Economic forecasting is not entirely unlike weather forecasting to that
> extent. However, fortunately for my argument, these are all macroecnomic
> forecasts, not microeconomic forecasts. My argument from microeconomic
> efficiency is not affected by the failures of macroeconomic models.

yet you claim with a wave of your hand that nicroeconomic efficiency is beneficial for the macro economy without
showing HOW it benefits the macro economy, WHO in the macroeconomy truly benefits, and refuse to measure the
effect in the macro economy of the disincentive to invent on the rate of invention, and reduction in productivity
that results from stagnated technological development.

> > How do you expect to demonstrate their relative sizes without knowing how large either shape is??? If you
> > can do that its you that should get the nobel.
> The men who have done so have ALREADY won Nobel prizes; I stand upon the
> shoulders of giants when I follow their work.

All bow down in praise.

> As to how I can determine
> relative sizes without knowing the size of either shape, we use
> calculus and the supply and demand graph to tell us a lot about economic
> efficiency; for example, since monopolists represent the entire market,
> their marginal revenue curve decreases twice as fast as the demand curve.
> Since firms will produce up until the point where marginal revenue equals
> marginal cost, the quantity produced by a monopolist will be less than
> that produced in competition.

I would love to see links or book refs to anything that shows that you can determine the relative size of two
shapes without knowing the quantitative size of either shape. Sounds like magic to me.

> Unclear? I've made graphs.
> I've just demonstrated that the monopolist's quantity will be less than
> that produced in competition, despite the fact that I don't know how many
> would be produced in competition or how many the monopolist would produce,
> verifying my earlier claim that I could find relative sizes without
> knowing absolute sizes.

Yet you show no quantified relative size. Also, since you only count marginal costs, not fixed costs, your chart
is absolutely meaningless, especially in an IP marketplace, where almost all costs are fixed costs (i.e. R&D),
while the marginal costs of reproduction are nil. Additionally, your measure of efficiency, i.e. the quantity
made available in the marketplace, is wrong. The efficiency differential is measured as the change in price
times the change in quantity.

In addition, you also only use straight lines in your graph, which any microeconomist can easily tell you are
simplistic and inaccurate of a real market. The demand, cost and monopolist market line all will tend to be
S-curves of one degree or another, depending on the product, the state of the art at that time, consumer
confidence and utility, etc. In a market with such S-curves, the efficiency gained can be reduced or amplified
over your straight lined graph, depending on how the lines intersect.

> > SUch schemes are not currently used as the cost is currently greater than the cost of IP enforcement at
> > this time, due to the sufficiently widespread respect for IP protection. If this were to change, then such
> > schemes would then become cost effective. One such scheme takes advantage of passive boot sector virus/worm
> > technology to monitor tampering. If write attempts are made to specific hidden read only files, the virus
> > or worm built into the software will corrupt enough data to foil the tampering attempt, making the software
> > unusable.
> A priori, I cannot show that it would be cost effective to protect
> software in a secure way; I can do so using market numbers, however.
> According to the Software Publishers Association, "Few other industries
> lose as much revenue to theft, estimated at $13.2 billion; nearly 1 out of
> 2 copies of software is illegally installed."* In light of this, I find it
> hard to believe that eliminating piracy would be unprofitable, even if it
> is thanks to piracy in other countries.

Because it is thanks to piracy in other countries, it is unprofitable. Since a piracy enforcement agency, whether
a government or a PPL, cannot operate in a monopoly state jurisdiction without the expressed approval of that
state monopoly, and must operate within the legal guidlines set by that jurisdiciton, any state that wishes to
shelter piracy can make it unprofitable to enforce IP rights. Just as most terrorism and guerrilla warfare is not
successfull without the shelter and support from states outside the zone of conflict, IP piracy is only sucessful
with the direct participation, shelter and support of state monopolies.of power. Dont' make me label you a

> On the contrary, the reason software companies don't use this particular
> scheme is that it wouldn't work: Just set up a copier that emulates a
> computer, that records the program rather than executes it, and you've got
> a fully functioning warez machine. Nintendo game copiers operate on
> precisely this principle; if you weren't aware, there is a thriving warez
> market for pirated Nintendo and Super Nintendo games, both of which come
> on ROM chips soldered into the game cartridges. A "tamper-proof"
> cartridge would do you no good: All I have to do is read the game off of
> the cart, and I'm golden.

And it is just as easy to have programs written on a CD which automatically run when the CD is accessed. This is
how viruses get away with their mischeif. While AV software may be able to wipe a virus on a floppy, a) on a CD
there is plenty of room for multiple copies to watch over each other, and b) a CD cannot be overwritten that

> *
> > However, you can predict the change in incentive to invent, and determine the utility value of invention
> > for inventors. This gives you the invention supply curve.
> Beg your pardon? By precisely how much will the incentive to invent
> change?

It can be measured by the percentage of patents issued which are brought to market with the help of measureable
capital investment. Since capital invested in such a risk investment will demand a given return on that
investment, if the total on investment is reduced by the lack of IP protection to the point that the given rate
of return on investment demanded by the capital market will dictate that the amount of money an inventor can
raise from investors for a given invention will decrease below the point required to bring the given invention to
market, then the inventor will not bring that particular invention to market. I don't have any data right now, so
I am not making any blind guesses (unlike you).

> My argument has been qualitative, arguing that the incentive to
> invent would decrease, but not specifying absolutely by how much.

Which is simply a cop out.

> > Then correlating rates of patents being issued
> > with productivity growth in an economy, all other factors being equal, you can predict how change in the
> > supply of inventions will change the productivity growth.
> The whole point of my argument is that all other factors would NOT be
> equal: the market for copies would greatly expand if copyright were
> eliminated, and not having to pay for enforcement would lead to a
> non-trival income effect. You can't just leave these out of your
> calculations.

And I say that since the supply of inventions will contract markedly, your pricing will not change much, until
consumer demand outstrips supply, due to population growth and limited resources, and no change in resource
utilization efficiencies do to stagnated tefhnological growth. At which point you will have inflation and
economic stagnation.

> > While I assert that current IP is merely a matter of monopoly government acting as a PPL in protecting the
> > IP licenses of its contracted (i.e. patents granted) citizens. If I were in a libertarian society, I would
> > have a free choice of PPL agencies to contract the protection of my IP with, and would only engage in IP
> > trade with indviduals that were customers of the same PPL or with competetive PPL's with which my PPL had
> > IP agreements with.
> A PPA which tries to enforce contracts on those who have not agreed to
> their terms will probably not be economically efficient; similarly, it
> will be impossbile to catch your intended victims over the Internet when
> they are selling anonymously.

Yet any web server/router/backbone owner will have a contract with an insurance company to protect their assets,
especially if they have capital leins on the equipment. In a libertarian world, any sane insurance company will
require that the network asset owner subject himself/herself to the authority of their contracted PPL. Most or
all PPLs will have interlocking contracts of enforcement. Thus you will be able to track anyone on the net that
vilates your IP contract, and you are covered by your IP protection clause in your insurance policy. Anyone you
license your property to will have to subject themselves in your license agreement to ajudication and enforcement
of your self licensed IP rights, ergo your PPL can do a network audit on your customers networks, on their ISP
routers, etc. In an internet world, the cost of IP enforcement will go down remarkably.

> > I find it difficult to follow your charts due to the problems with lining up the characters. If you can
> > produce either graphics or excel compatible charts I would appreciate it. Feel free to send these via
> > personal email at In any event, I see something which you may not. If a competetive
> > business only has to lower its price half as much to increase its market share as a monopoly does to
> > increase the entire market, then obviously it is more efficient to have a monopoly provide a product. If it
> > wants to increase its market size it must lower its price twice as much than if it were a competetive
> > business. That tells me that the comsumers benefit twice as much from a monopoly than from a competetive
> > business. I for one don't beleive that.
> Do you still have misgivings after looking at the analysis on my web site?

No I just saw that. See my remarks above....

> > If the inventor has to recoup his research, development, and production refinement costs and his
> > competetors do not, then he is at a competetive disadvantage to invent. Better to let some other schmuck
> > take those costs and steal his inventions from him. In such a situation, the incentive to invent will be
> > negative, and invention will stagnate.
> Again wrong. Competitive disadvantage only takes place when MARGINAL
> costs are higher, not when sunk costs are higher. For an analysis of
> this, look at:
> The cost of invention is sunk, which means that it doesn't change the
> shape of the supply curve. Competitive disadvantage only takes place when
> your supply curve is higher than the other guy's supply curve, so this is
> clearly not the case. Instead, we see from the graphs that invention is
> only profitable if the increased revenues from invention outweigh the sunk
> cost of invention; this incentive is smaller than that under a monopoly,
> but not zero.

I think that this is a totally bogus claim. You are completely off your rocker here.

> > If it were so, then why are all of the economists totally flabbergasted at today's economy? None of their
> > models have predicted the huge increases in productivity which are what is driving our economic growth.
> MACRO, not micro. Give me an example of where MICRO has failed us.

Simplistic, basic microeconomic charts, any skilled economist will tell you, have ABSOLUTELY NO RELATION to any
real world microeconomic scenarios. To make generalizations from a generalization like you are doing is the
height of ignorant arrogance.

> > If the person who bought my land from me signs my covenant, one clause in my covenant is that the buyer
> > must agree that anyone he sells the land to is bound by the same covenant. Thus while you cannot reproduce
> > the land (except as seen below), you also cannot change the minimum terms of sale to your customers, and
> > their customers, etc. I can add additional terms, but the origianl terms cannot be recinded.
> True, but again, say you license to Alice who illegally sells a copy to
> Bob. Bob has broken the law, but now suppose he sells a copy to Carol. Is
> Carol liable under the terms of a contract she's never signed? Now what
> if she sells a copy to me? As you can see, you quickly reach a point
> where it would be absurd to prosecute me under the terms of your contract:
> I've never seen it, have never agreed to it, and am not obligated to do
> anything to help you recover your loss; unless there are special IP laws
> which require me to do so.

However by purchasing from Carol, you have made an implicit contract of conspiracy to defraud. You signed it with
your money.

> Similarly, if Alice sells me a copy anonymously over the Internet, and I
> start reselling it anonymously, how will you ever catch me?
> > While anonymous money may make a significant impact on electronic commerce, I don't think that anonymous
> > production of IP will make any significant headway.
> Not production, but RESELLING. I expect you see the potential NOW.

No I see a serious retardant effect on technological advancement due to piracy losses. It is causing a serious
amount of lagging between advances in hardware and advances in software, which is why we have such bloat
problems. If software IP were effectively enforced, productivity gains around the world would skyrocket, and we
would be bringing the singularity that much closer to reality. Killing off IP protection will kill any hope of
acheiving the singularity.

> > No, but they have contracts with their PPLs, and I have contracts with my PPL. Any reasonable PPL will
> > recognise the validity of a claim upon an individual who has received stolen goods, even if the original
> > perpetrator cannot be found. As long as the stolen goods can be proven to posess a significant congruence
> > with the goods of the claimant which are documented prior to the receipt date of the stolen goods, then a
> > case and claim can be made.
> If I am correct about the economic efficiency of IP laws, then it is more
> economically efficient NOT to recognize such a claim than it is to do so:
> it would be costly to prosecute all of those people, espeically when they
> use cryptography, and it would also destroy a thriving copy market without
> adding enough to the incentive to invent to make this worthwhile. And if
> Friedman is right about PPAs not enforcing economically inefficient laws,
> then PPAs won't hear such claims.

Only if they are not economically efficient. I think your claims are baseless and totally wrong.

> > Then you cede to the existing law. As IP law is prosecuted as civil offenses, rather than criminal offenses
> > (except when it involves transportation across state or national borders), you agree to most of current IP
> > law as practiced.
> Er, no: I don't agree that IP law should be enforced on resellers, but
> rather on those who broke the license in the first place; if this has
> happened at all, I have not heard of it.

Since customers are implicit conspirators in the piracy of the products they buy, they are as guilty as the
original theives.

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