Hal Finney's optimal-production argument

From: Lee Daniel Crocker (lee@piclab.com)
Date: Tue Oct 30 2001 - 18:03:43 MST

Hal Finney postulated a scenario wherein it was possible to
enforce intellectual property laws perfectly. He asked if doing so
would create market conditions for optimal production of IP, and
supposed that it would. My initial reaction wasn't really adequate,
and it did take me a while to realize the flaw in the argument, which
I now think is quite simple: it presumes that one can measure an
"amount" or "value" of IP in the same way that one can physical
property, and this doesn't work.

People desire (and therefore value) physical goods because possession
of them increases the number of potential actions available to them.
There is no _inherent_ value in any physical thing; it is only valuable
because someone wants it, and people only want things that enable them
to take actions they want to take. If I have a house, I can escape from
the rain; if I have water, I can live longer; if I have a million dollars,
I can do uncountably many things that other people may not be able to do,
because they don't have a million dollars. It is not the paper that's
valuable to me, it is the potential actions I can take because I have
the paper.

People value the same thing differently either because (1) they value
the actions enabled by property differently (I might value a deck of
cards more than someone who doesn't enjoy card games), or (2) they
have abilities, knowledge, or other property that enables different
actions for them (a Pole values Zlotys more than I, because he has
the ability to buy food from the local grocer with them, while I
don't). This latter fact leads to "comparative advantage".

The problem addressed by free trade is this: a physical thing enables
me to do some things, and it might also enable you to do some things,
but it can't enable both of us at the same time. If the house is mine,
I can escape from the rain but you get wet. If I give or sell it to
you, you stay dry and I get wet. Property rights and free trade solve
the problem of efficient distribution by enabling us to use comparative
advantage: if you can do more things with the house than I can (say,
you enjoy the view more than I do, or you have a larger family that
the house is better suited to), then you will be willing to buy it for
more money than I, and I can use that money to buy a house that better
suits my needs (perhaps a smaller one), and have some money left over
to do other things I like. Property ends up in the hands of those who
can get the most use out of it, and the total amount of "usefulness"
in the world increases.

Now if we create and enforce property rights in information (say,
the text of a book as the archetypal example), the same conditions
apply. Those property rights enable me to take certain actions (like
selling the book, publicly performing it, selling derivative works,
etc.) that others cannot take (by law). If others could make better
use of those rights (such as a publisher who might be able to sell
more because he has beter marketing), he will buy those rights from
me and make more money than I would, and I will spend that money on
things that increase my abilities (say, staying alive and writing
more books to sell). The free market will indeed tend to produce
the optimal amount of _these property rights_. But that begs the
question of whether we should have created and enforced these rights
in the first place. Are these property rights the most valuable
thing about a book, or does a book itself enable more actions for
more people than does the property right?

Let's make the other assumption; that it isn't possible to enforce
these exclusive rights. Well, a book still enables actions that those
who don't have the book can't do: they can be entertained or informed
by reading it; they can inform and entertain others. They can do the
things the book teaches them how to do, and it can inspire them to do
even more things. In most cases when I want a book about something (or
to hear a tune, or to see a design for a machine, etc.), I'll download a
previously-written one that meets my needs; this increases my abilities,
and costs me and the "seller" next to nothing (download time, disk
space). It does not affect the producer at all--he neither gains any
ability he didn't have before (as he would had I paid him), but nor does
he lose any. Likewise, if I give the book (i.e., the information) to
someone else, I don't lose any abilities that I had before, and he
gains. This world, then, optimizes the total amount of those things
about a book that are valuable independent of exclusive IP. In our
excludable-IP world, the only people who would buy the book are those for
whom its value exceeds a certain threshhold, sufficient to pay the sellers
(who pay the producer). In this latter world, _everyone_ who would
benefit (i.e., whose repertoire of available actions would increase) to
even the slightest degree would download the book, and producers and
sellers don't really factor in at all.

So, in this latter world, what would get produced? First, those novel
works for which the value to a single consumer or group exceeds the
cost of production. If I want a book about building houses with all
the latest information, I can find an expert and pay him to write it
(perhaps collecting investments from others who also want such a book).
This will probably be a minority case: only those books (or tunes, etc.)
whose novelty or timeliness is extremely valuable will get created.
News, fashion, "hip" music, etc. will still get produced. What else will
be produced? Works whose cost of production is tiny: especially
derivative works. Maybe I can't afford to hire someone to write a whole
new book, but I _can_ afford some expert to look at the books available,
recommend one, or perhaps update it a bit, clarify some of it for me,
etc. Without IP, anyone is free to do that. The reputation of a good
updater/evaluator will be valuable: if I know that books from person X
are up to date and clear, I'll pay him a small premium for that; less
than the amount sufficient to finance production of new material, but more
than sufficient for him to search, edit, and update. I'll even pay a
small amount for people who are just good at _finding_ good books.

So, it appears to me that copyrights and patents encourage _novelty_,
i.e., they encourage the production of totally new information and
invention, at the expense of wide distribution of information and small
incremental changes and adaptations. Whether or not that's a useful thing
to do is certainly arguable. Do we really value "inventiveness" for
its own sake over "craftsmanship", and over universal distribution? If
we do, then perhaps IP is reasonable. I'm not so sure. I think
universal distribution is almost infinitely valuable, because it is
impossible to predict what access to information will enable or inspire.
And I don't think "novelty" and "inventiveness" are only valuable
when they are above the threshholds necessary for copyrights and
patents--and indeed I think it's impossible to rationally define
that threshhold, and encouraging only radical developments is
dangerous, when we could instead encourage gradual, incremental
development and universal access. In the long run, I think that
would lead to even more creativity in the world as a whole, it would
just distribute the creativity over more minds.

Lee Daniel Crocker <lee@piclab.com> <http://www.piclab.com/lee/>
"All inventions or works of authorship original to me, herein and past,
are placed irrevocably in the public domain, and may be used or modified
for any purpose, without permission, attribution, or notification."--LDC

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