Re: Coase's Theorem and Intellectual Property
Tue, 22 Dec 1998 14:29:59 EST

Hal cites Coase's theorem in defense of intellectual property rights. That theorem states, in brief, that *in a world of zero transaction costs* the initial allocation of property rights has no effect on the efficiency of market outcomes. The notion is that parties will costlessly bargain to the same end-state, regardless.

Of course, no such world exists; bargaining always costs something and sometimes costs a great deal. That strikes the first blow against using Coase's theorem as a defense of intellectual property (IP). It costs a notoriously great deal to define and defend IP rights. Ask any attorney who has filed for a patent or who has litigated a fair use case under copyright law. IP has blurry boundaries; lawyers get paid to sharpen them--insofar as they can. Tangible property has much cleaner boundaries and, hence, transacting in it costs less.

Furthermore, IP has the distinct disability of rendering the sharp boundaries of tangible property less sharp. Absent IP, you can fairly well use your printing press as you see fit. Thanks to copyright, you can not be too sure about your rights to print. Patent, too, may lead to limits on your use of printing equipment. But you will in either case have to consult an attorney to learn more.

Furthermore, as Hal notes, Coase's theorem does not speak to the equities of allocation. It may in Coase's world be just as efficient to give one man all the property as it would be to divide it equally, but clearly these represent different moral cases. Likewise, IP raises serious questions of equity. Even supposing that we could costlessly define and defend a patent, why should we allow someone to wield it against an independent inventor, someone who comes up with a prior-patented idea without copying it? That it infringes on our rights to our heads, hands, and tools make IP look quite suspect.

[BTW, I should disclose that I have created and now own patents and copyrights. I regard those forms of IP as suspect, to be sure, but not entirely unjustified. My apology grows tiresome and complicated, so I set it aside.]

Hal wrote:

>[O]nce [IP] rights exist, Coase's theorem comes
>into play. The participants will act in such a way as to maximize
>the value of those rights. This will inherently involve finding the
>most efficient and productive ways to use those property rights. And
>everyone benefits from the resulting efficiency.

. . .

>[IP] allows a
>market to exist, prices to be set, and property rights to be exchanged.
>The invisible hand will once again lead to an efficient allocation of
>resources. The market works just as well for intellectual property,
>and other, even more abstract forms of property which we may create in
>the future, as it does for physical goods.

T.0. Morrow