KOL175 | “Rethinking Intellectual Property: History, Theory, and Economics: Lecture 4: IP Statutes and Treaties; Overview of Justifications for IP; Property, Scarcity and Ideas; Rights-based Arguments for IP; Creation as a Source of Rights” (Mises Academy, 2011)

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Kinsella on Liberty Podcast, Episode 175.

This is the fourth of six lectures of my 2011 Mises Academy course “Rethinking Intellectual Property: History, Theory, and Economics” (originally presented Tuesdays, Mar. 22-April 26, 2011). The first lecture may be found in KOL172.

Transcript below.

Youtube and slides for this lecture are provided below. The course and other matters are discussed in further detail at KOL172. The “suggested readings” for the entire course are provided in the notes for KOL172.

Lecture 4: IP STATUTES AND TREATIES; OVERVIEW OF JUSTIFICTIONS FOR IP; PROPERTY, SCARCITY AND IDEAS; RIGHTS-BASED ARGUMENTS FOR IP: CREATION AS A SOURCE OF RIGHTS

SUGGESTED READING MATERIAL

See the notes for KOL172.

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Transcript

Rethinking Intellectual Property: History, Theory, and Economics—Lecture 4: IP Statutes and Treaties; Overview of Justifications for IP; Property, Scarcity and Ideas; Rights-based Arguments for IP; Creation as a Source of Rights

Stephan Kinsella

Mises Academy, April 12, 2011

00:00:00

STEPHAN KINSELLA: … economics association groups, and Sheldon Richman is an anti-IP libertarian guy with the Foundation for Economic Education.  He’s editor of The Freeman.  He’s written some good stuff on IP as well, and he was there.  Roderick Long was there, who’s also good on IP, and some other people and also this guy named Adam Mossoff who I’ve mentioned before I think.  He’s an objectivist law professor at George Mason.  He’s pro-intellectual property, and he gives this typical Randian line for it.  And Sheldon was relating to me his interaction with this guy and how the debate went.  It was quite fascinating.

00:00:37

Apparently, Mossoff really didn’t like getting questions and didn’t really know how to respond to a lot of questions to defend the IP view.  So I think that spurred Sheldon to pose this morning a question for Randian IP advocates.  It’s already got a lot of comments on the thread.  Check it out.  He basically said I want to ask the Randians if you believe that their property rights come from getting property in things that you value, which is their theory, which we’ll go into later today or next class.

00:01:15

Imagine a simple society where there’s a tribe and there’s one guy who explores – does a lot of investigation trying to figure out the best kind of fruit to eat, and he discovers that there’s a lot of berries around and people eat them.  Sometimes they do better.  Sometimes they get sick.  And he discovered there’s one berry that is really good, healthy, and nourishing, and he also discovers there’s a few that you should not eat.

00:01:42

And according to the Randian theory, it would seem like he has an intellectual property right in that knowledge, in that technique.  And so the question is do the other people in the village who have observed what he’s doing and they see which berries he’s eating and not eating now, do they have the right to eat the berries they want to eat and not eat they berries they want to eat?  Or do they have to get his permission first?  So he asked them this question as sort of a test of their theory, and of course the answer is, according to their theory, he would not be able – these people need his permission, which is, of course, absurd, which is the point of the hypo, to make them uncomfortable.  I don’t expect any serious Randians that would attempt to address it, but it’s interesting.

00:02:23

I had a post this week on Mises, and C4SIF, “Let’s Make Copyright Opt-OUT.”  I think I mentioned this already to the class before that copyright would be better if it was opt-in, which means you don’t get a copyright unless you apply for it, register for it, which used to be the law in the US until ’89, 1989.  But when we joined the Berne Convention, we got rid of formalities, so it’s automatic now.  And it would be better if we could get rid of that because it would solve this so-called orphan works problem.

00:02:55

I don’t know if you guys are familiar with the orphan works problem.  Let’s say there’s a work that’s 75 years old, 50 years old, and if you do the calculation, it’s still under copyright.  But you don’t know who the owner is.  I mean you might know who the author is, but you don’t know who the owner is because the author is long gone.  You don’t know if he had relatives.  You don’t know if he assigned it to some corporation.  You don’t know if he had relatives that inherited it.  You don’t know what the situation is.

00:03:18

So if you want to republish it, you don’t know who to contact, and so you don’t republish it because you’re afraid of getting sued by whoever the owner of the copyright might be.  A registration system would largely solve this problem because it would clear out a lot of copyrights, and you would know who to contact because you could look it up in the registry.  But the problem is we can’t even do this because of Berne.  We couldn’t impose a registration requirement again, but the point of my post was it’s not that we want to go to an opt-in system and we have an opt-out system.

00:03:48

We don’t even have an opt-out system because once you get a copyright it’s automatic, and there is no – there is really no way to get rid of the copyright.  So the idea is that at least the patent – the copyright law should be amended to make it easy to opt out, to just say, look, I have a copyright in this book that I just wrote, and I want to get rid of it or partially get rid of it or whatever.

00:04:11

Right now, people try to use Creative Commons and things like this, but it’s not clear that these are legally binding, and there’s no way to totally get rid of your copyright, but there ought to be.  So that’s the idea there.  Just allow us to opt out.  There’s a post I passed on: “Steal Like an Artist and Relax: Original is Relative.”  It’s another one of the series of posts.  I think just three or four.  We talked about it last time just giving example after example about how it’s very common in the arts for artists to not steal but to take information and use information from others and remix it and do something different with it.  So it’s just common and normal, and it’s not a bad thing.

00:04:48

00:04:51

I have a pretty long post, some interesting quotes I came across I wasn’t aware of before on David Hume.  And I think I might have mentioned to the class before.  If not, I’m going to go into it when we come to that point.  But one problem I have with the Lockian theory of labor – no, I think we haven’t gone into this yet.  Anyway, one problem I have with Locke’s theory of labor is that it says that you own your labor, and therefore, you own whatever you mix it with, and therefore, if you homestead some new – some unowned property, you own this resource because you mixed your labor with it and you own your labor.

00:05:29

Now, I think that doesn’t really make a lot of sense.  Your labor is just your actions, and to say you own your actions is either double counting, or it’s sort of non-rigorous, mysterious nonsense.  I mean to own means the right to control, but you own your body, and the right to control your body means you can perform actions with it.  So to say you own your actions is sort of like saying you own the ownership of your actions.  I mean it makes no sense.  And strangely enough, David Hume saw this way back in 17 – I want to say 70-something, or in the ‘50s.  And he said that this Lockian step of labor ownership is overly – he said it was overly metaphorical.

00:06:15

Well, he didn’t say metaphorical.  That’s my word, but he said it’s figurative, and we don’t literally own our labor.  And he said we own things just because you’re the first one to use it, and that establishes a link between you, and that’s exactly Hoppe’s argument, which we’ll get to later, and the one I adhere to and which makes it – the Lockian argument work without the necessity of the labor step.  The importance of that is when you have a labor step in the Lockian argument, you have what I call creationists, libertarian creationists, Randians, etc. use that to say, well, if you have the right to own whatever you labor on and create, then don’t you create a poem or an invention, so you should own that too?  So it gives rise to confusion there.  Anyway, we’ll get to that later in the course, but take a look at that post.

00:07:01

I reprinted – or I linked to a classic 1995 article by Roderick Long on intellectual property.  It’s really superb, so he’s one of the leading modern anti-IP thinkers, libertarian thinkers.  I also reprinted a few passages from Hayek showing that way back in the – I want to say – well, this is from – the quote I posted was from his Fatal Conceit, which I think was in the late ‘80s, but he had these ideas earlier on.

00:07:31

But even Hayek saw he was not real explicit about it, but if you read between the lines you can see that he was extremely skeptical of the coherence of the entire – or the necessity of the idea of patent and copyright.  So he was pretty far ahead for – and he was one of the best Austrians on this I think.  Mises was a little bit less decisive on this issue.  Mises sort of pointed out the pluses and minuses of having patent law or not having it.  So if you have it, you have this result.  If you don’t have it, you have this result.  So he didn’t really come up to a conclusion, but he at least recognized that it wasn’t clear.  It was automatic that we should have it.

00:08:08

Oh, there’s an interesting thing.  There’s a new book apparently by Paul Allen, the co-founder of Microsoft, and there’s an excerpt in one of the magazines, which I linked to on this – on page three here, the Microsoft’s co-founder link, second-to-last link.  And he was talking about how, when they created – I guess it was DOS or maybe Basic or something, how they were just borrowing code from others left and right and how that’s the culture of software.  And of course he sees nothing wrong with it, and there is nothing wrong with it, but he seems not to see the inconsistency between the strong pro-copyright stance that at least Bill Gates and Microsoft have taken in the ensuing years.  Now, they would never let someone borrow from their software even though the original software was borrowed and I guess is a derivative work.

00:08:59

Finally, this last post – it’s kind of ironic.  There’s a song called “Death of ACTA.”  It’s a rap song.  And it’s been taken down because of a copyright claim, one of these DMCA notices, because he sort of does a riff on or borrows this Jay-Z song, and maybe it’s based on someone else’s.  I can’t remember the details, but it’s a little bit ironic that a song making fun of the anti-counterfeiting trade agreement, which is an international agreement to enforce strict DMCA-type copyright takedown notice standards on the world, has been taken down by just such a claim.  So check that out.

00:09:39

Before we go on to the next part – oh, this is from the last time I taught this course.  This is an older post, but I thought I would keep it in.  I took out the older one, the other older ones because they’re not current.  But just look at some of these fairly recent patent litigation facts – patent litigation facts.  So the cost to defend a high-stakes patent lawsuit is about $10 million, so if you get sued in a significant suit, you need $10 million to be able to defend yourself.  And of course, most companies have nowhere near this extra cash – most small companies have nowhere near this cash sitting around, so what do they do?

00:10:17

They either avoid the area, or they cave in.  The median damages awarded in patent infringement cases last half a decade were about $3.8 million.  There are about 500,000 patent applications filed in the US, 2009, and about 200,000 were issued.  That means they become enforceable patents.  There are about 2700 patent infringement lawsuits filed every year, and the hourly rate charged by top patent litigators is $1000 per hour.

00:10:49

Now, of these patent cases, about 100 go to trial every year, and about 57% are won by the patent holder.  And another fun fact is it takes about roughly three years to get a patent.  So the day you file it to the day it issues is about three years, which is why I keep saying the patent term is about 17 years.  Remember, patent term is 20 years from the day of filing, but it doesn’t start until it issues, so if you file it on day one, you take three years to prosecute it, and it issues, then you have 17 years left of patent term.

00:11:26

By the way, we won’t cover this later, so let me just mention this too.  The way the patent system works is when the patent issues, three and a half years after the date it issues, you have to pay your first maintenance fee, which I think is around – maybe $3-400 for a small entity.  That’s anyone smaller than 500 people, maybe twice that much for a larger entity, but it’s $4-, $5-, $600.  Three and a half years after that – and if you don’t pay this, your patent expires.  Three and a half years later, you have to pay the next one, which is maybe – I don’t remember, maybe three times as much.  It’s like it rises exponentially.  And then three and a half years later, you have to pay another maintenance fee, and then you’re talking – it’s another $2- or $3-, $4,000 level.  I mean it goes up exponentially each time.  That’s sort of to weed out these patents that are not being used.

00:12:22

So I actually think that’s a not-terrible feature of the patent system.  I wish there was something like that for copyright, which is why a registration system would be so useful for copyright, to weed out all these copyright claims like used to be the case before ’89.  Oh, and before we go on, I just – I didn’t actually blog about this.  I didn’t have time to, but I just got this from a blog post on someone else’s site.  There’s a recent dispute.  It’s called “Did Texas Pizza Joint Rip Off Brooklyn Brewery Logo?”

00:12:52

Now, if you look at these logos, I mean I looked at them today.  I suspect that this company in Texas named Eno’s Tavern had probably hired some guy to do it, and he had somehow seen the Brooklyn Brewery logo because it does look like he borrowed some aspects of it.  But they’re not – I don’t think they’re confusingly similar, and they’re different states.  One’s a pizza joint, and one’s a brewery, so they have nothing to do with each other.  But the point of this is just to show that the instant reaction of the owners is to be angry, so the founder of the brewery said you would think they would understand you just can’t take someone’s logo.

00:13:27

Well, they didn’t it actually.  I mean the Brooklyn Brewery still has their logo, so they didn’t actually take it.  So you notice they use the language of stealing.  When you take something, you take it from the person, and they don’t have it anymore.  That’s why they usually object.  In this case, the guy just doesn’t like the fact that there’s Eno’s Tavern that has a somewhat similar logo.  He just doesn’t like it.  And this other guy comments, calls it ripping – they’re ripping him off.  It’s like, well, what’s ripping them off about it?

00:13:53

I mean there’s a different color scheme.  One’s an E.  One’s a B.  So they’re the same font.  So what?  They’re both concentric circles.  So what?  One’s black and white, and one’s – or monochrome, and one’s color.  Anyway, this is just an example.  People have been taught to think that they’re being ripped off if someone borrows their ideas, whereas in normal life, if someone emulates you, it might even be a compliment or healthy competition otherwise.  But if you start combing your hair a certain way and you – and everyone thinks it’s cool and you see other people catch on to that, they’re not ripping you off.  They’re just being influenced by what you do, and there’s really nothing wrong with it.

00:14:34

00:14:38

Slide six.  So where we left off, we were talking – we went over in pretty much detail the modern patent and copyright law and the schemes that we have.  I just wanted you guys to get an idea of what an intertwined international system we have, how legislation-based it is, and how complicated and sort of – I won’t say rickety, but how almost convoluted it is.  So you see what we’re dealing with.  These are where these rights come from.  They all come from statutes and international treaties.  So today we’ll go over an overview of arguments for IP, and if we time, we’ll get to property, scarcity, and ideas.  If not, we’ll talk about that next time.

00:15:25

00:15:29

Okay, so let’s start off.  Let’s talk about – and I’ve already hinted at it in various comments leading up to this.  But it’s important to get a foundation for understanding what the IP rights are that are under debate, which I think we’ve done now.  And by the way, I wouldn’t mind pausing here.  If anyone has any questions about what we’ve talked about today so far or even in the lecture – in the course so far about the law, what IP rights are, etc. I’d be happy to answer it.  Oh, you did.  I actually did not see that.  I must not be enrolled in that question forum to get automatic – and I didn’t – I thought I was enrolled in it.  I must not be, so I apologize, Gwen.  I didn’t see it.  If it’s – well, maybe it’s in my inbox.  I don’t know.

00:16:15

Feel free to cut and paste it here if it’s relevant now, or we can – you can paste it at the end of the lecture.  If you think it’s relative to what we’ve discussed in the first three lectures, go ahead and paste it here.  I’ll keep talking for now, and you can handle it however you like.

00:16:30

00:16:36

So I just – this slide is a little bit lighthearted.  I just wanted to kind of start off by mentioning three arguments I’ve heard for IP.  Okay, I’ll take a – I’m going to pause here and answer Gwen’s question.  Gwen posted a question regarding Wendy Mcelroy’s article “Contra Copyright.”  I’m confused by the seeming dichotomy between the protection of ideas, which is characterized as wrong due to the non-scarce nature of them, and the protection of what is traded with the idea of tangible works such as a book, picture, or song.

00:17:15

Ideas may be non-scarce and people have lots of them all the time, but the talent and skill required to turn an idea into a tangible reality is scarce.  And the ability to make a tangible product of value that the market will pay for is even more scarce.  Isn’t the protection on the tangible and the valuable good and not on the non-scarce idea that has not ever been made real?

00:17:41

Well, okay, so let me just say I’ve been building up to the point where we can discuss arguments for copyright and patent on a utilitarian and a more principled or rights basis, which involve what you just mentioned, and the – what I view as the proper Austrian and economic and libertarian way to view rights and then to apply that to the conventional perspectives and to these issues and see the right way to handle it.

00:18:09

So I’m going to get to all that, but let me just give you a snapshot answer, and I’m not sure I understand all your question because you seem to be going back and forth here.  So first thing I’ll say is opponents of IP will say that it’s not about protecting ideas.  Of course, they’re equivocating I believe because an idea is just knowledge that you have, and knowledge – one way to represent it is a pattern of information.  So these things are all similar.  It’s just knowledge that you have or information that once you have it, you can use it to guide your actions.  Again, I’ll talk about this later.  So the role of knowledge is to guide your actions, but your actions use scarce means to achieve certain ends.

00:18:51

Okay, so the idea is that in order to create something, you have to transform an existing scarce resource.  So let’s say you take a – let’s say you own a canvas.  You say you’re a creator, and let’s say you own a canvas, and you own paint.  So you already own these things, and these are scarce resources.

00:19:14

Now, you use information and creativity in your brain, your mind to paint something.  I don’t know where you got the ideas from, but they came from somewhere.  Maybe you made them up completely.  Maybe you have ideas from things you’ve seen in the past.  Maybe you’re trying to duplicate another painting you’ve seen, whatever.  You make a painting.  Now, you own that painting because you already owned the canvas and the paint.  I mean you don’t – there’s no new thing there to own.  There is just a transformed thing, and you already owned the thing before.

00:19:47

So the reason you own it is because you already owned it.  You have to own it to be able to transform it.  Now, it’s created what’s called wealth.  Wealth just means you value it more.  It’s more valuable to you.  But you already own the thing that’s more valuable, so you’re already protected in owning it.  The problem is if you want to go out in public and reveal this information to other people, then you can’t expect them not to use it.

00:20:17

If you have a secret like – that you have, I don’t know, some bizarre – let’s say you have a – you’re missing a toe or something and no one knows it, and if you tell someone I’m missing a toe, well, they can tell other people now.  And that fact can get out there, and then people might learn that and then they can act on that knowledge if it’s somehow relevant.  So if you don’t want people to know what you know, don’t tell them.

00:20:49

But this is what – as a creator you want to sell your painting, or you want to show people, so that’s your choice.  The price you pay for revealing it to people is that you reveal it, and then you gain whatever else you want to gain by doing that.  So now you say you’re feeling conflicted because, as a creator and you like that someone isn’t supposed to just appropriate your work and put their name on it.  Well, this is a bit of a digression, but it’s okay at this point.   What you’re talking about is plagiarism.  Plagiarism is not the same thing as IP infringement.

00:21:26

IP infringement means when you duplicate or copy or use someone’s idea without their permission.  It doesn’t mean that you – like if I copy a movie like the latest Brad Pitt movie and I want to give it to a friend or resell it, I don’t put my name on it.  I don’t pretend like I did it.  I’m not denying the fact that it’s the latest Brad Pitt movie.  I mean that’s why people want to get it from me.  So there’s no plagiarism at all in most cases of IP infringement, so rules that stop IP have nothing to do with plagiarism.

00:22:03

And plagiarism is not a big problem.  I mean no one’s going to – no one but marginal people are going to do that.  I mean do you really hear of people publishing books of photographs taken by other people and pretending like they’re the photographer?  I mean no, because they would be laughed out of town.  They would look like jerks, and no one would buy the book, and it would just be seen as fools.

00:22:28

I mean you could publish tomorrow any book that’s in the public domain with your name on it.  You could take all these books that the Mises Institute is publishing that are public domain.  You could take one and copy it and put your name on it.  I mean why don’t people do that?  Because it’s ridiculous.  Anyway, I don’t know if that’s answered all your questions.

00:22:50

If you want to ask a follow-up later, feel free to, but let me go on now and talk about some of these arguments for IP that I have literally seen – I mean they seem ridiculous and I’m making fun of them.  But I mean I’ve seen people make this argument.  One is an argument by actually a libertarian or free market economist named William Shughart.  And he wrote this on the website of the Independent Institute, which I – it’s a great group, and one of my best friends works there, Anthony Gregory.  And they’re great, but this guy, Shughart, posted an article there, and he was arguing for IP.

00:23:25

And said that Charles Dickens because he was British, and there was a time when we didn’t – America didn’t respect foreign copyright.  So for him to make money over here, he had trouble selling his books at a higher price because there was competition now.  So he had to make money by giving public readings of his work for a fee.  And this guy said that that led to his untimely death because he was so exerted by this speaking tour.  So I mean he’s almost arguing that one problem with not having a copyright system is that famous authors like Dickens might have an early death because they have to give speaking tours.

00:24:08

I mean it’s a bizarre argument.  Matt just said with the internet it’s easier to ascertain the original author or work.  I agree.  I mean I think plagiarism nowadays is almost no problem.  I just don’t think plagiarism is a real problem.  It’s copying.  I think Gwen is concerned about copying her work and maybe not getting attribution.  But even that’s not the big problem.  Gwen, that’s a good point about the web comic artists.  They’re really exhausted.  Sure.  This is just life, right?

00:24:41

He also had a comment.  He paraphrased an economist named Joan Robinson, and he said the reason we need patent and copyright is they slow the diffusion of new ideas to ensure there will be more new ideas to diffuse.  Now, we can disagree or agree on whether or not slowing down the diffusion of ideas actually helps to increase the total amount of ideas that we have.  But he’s admitting that this is the goal that these guys have.  They want to slow down the spread of knowledge.  I mean they really do.  It’s insane.

00:25:16

Oh, there was an argument by this patent attorney named Gene Quinn who I’ve tangoed with before.  He’s just a patent attorney trying to promote his practice, so he has a lot of arguments with people just trying to get his name out there for search engines I really believe because he knows almost nothing about economics or philosophy or doesn’t even know how to argue.  He’s really a buffoon, but someone had pointed out – I think it was David Koepsell that there was a time when Switzerland and the Netherlands, like 40, 50 years had no patent system, and they had tons of innovation anyway.  That’s an example that you don’t have to have a patent system to have innovation.

00:25:55

And Quinn came back and said, well, it’s a good thing that they had a patent system – Switzerland had a patent system by the time of World War II because they gave Albert Einstein a job as a patent clerk – or patent examiner in the patent office.  Now, this is supposed to be a serious argument that the patent system is justified because it’s a [indiscernible_00:26:15] program for potential geniuses.  I mean this is just not even serious.

00:26:19

And the last one here on page seven, there was a guy on a – one of the Mises blog threads, and he literally argued that if you’re not in favor of intellectual property, you really would have no objection to pedophilia.  He had some complicated argument that they’re somehow linked.  So basically you better be for IP.  Otherwise, you basically have no objection to pedophilia.  Gwen says he got that idea from Frank Herbert, the Bureau of Sabotage.  I read Herbert – Dune and other books, but I don’t remember that and what the relevance is.  You mean the idea of Einstein getting a job?

00:27:02

00:27:08

Anyway, I’ll wait for your answer.  Now, let’s go to some more – the more conventional or serious arguments for IP.  So the way I think of it is – so there are basically two types of arguments.  One you could say is natural law, but it’s not always natural law.  And the other is utilitarian, but it’s not really always utilitarian.  The natural law was more of a rights-based or deontological or a principled approach.  You’re trying to say that the author has some kind of right to this.

00:27:45

The utilitarian approach is more saying that we should tweak policy to maximize some goal, typically wealth, overall societal wealth, and in particular, the wealth caused by innovation or with innovation as a proxy for wealth.  So basically it’s just a policy tool by the state to achieve a given result that you want to achieve, which is to encourage or stimulate innovation or to encourage or stimulate inventors to disclose their ideas.

00:28:20

So let’s talk about the utilitarian approach, which again, that’s just a kind of overall label.  You could call it consequentialist.  You could call it law and economics.  You could call it wealth maximizationist.  But the basic idea that you’ll hear from most people is they will say the purpose of these laws is to maximize the incentives to innovate and produce useful ideas and creation, creative and artistic ideas, and also to disclose ideas.

00:28:53

Now, why do I say that?  If you look at the patent clause in the Constitution, it says – well, actually, not the patent clause.  If you look at the patent law, the patent law says that we will give you a monopoly, a patent grant on a given invention.  But you have to disclose your invention, and we are going to publish it and make it public.  So the literal bargain is that if you disclose, then we’ll give you a monopoly privilege for a certain amount of years.  So on the face of it, it looks like they’re trying to encourage disclosure, and of course they are.  But they’re also trying to encourage innovation.  They’re saying that you get a reward too, so they think more people will innovate.

00:29:43

00:29:53

Everyone follow that so far?  So the idea of – the sort of utilitarian idea is we need to give people an inventive to create.  Now, one problem with this, by the way, is that – I think I might have mentioned this already.  If I did, you could stop me, but one problem with this is that it seems like most disclosures that we get from the patent system are not – we would have gotten anyway.  Let’s say you come up with a new mousetrap, and you want to sell this mousetrap.

00:30:32

Well, you’re going to have to reveal the way it’s made to people if you want to sell it, and so they’re going to learn how it’s made, and you’re probably going to promote those features on the advertising.  So people are going to learn about it anyway.  There’s a few types of inventions you could keep secret but not all of them.  So basically these people are getting a reward for revealing something they would have revealed anyway, so it’s like a waste.

00:31:00

And on the other hand, there is a class of people who don’t have enough resources or interest in filing for patents, but they have innovation and products, and they’re afraid of getting shut down by a patentee later who might independently even later invent the same thing.  So they engage in what’s called defensive patent publishing, so they will go ahead and publish their otherwise trade secret information that they would otherwise keep secret and give it to the world just to provide what’s called a statutory bar, that is, a defense against someone else getting a patent on it.

00:31:35

So what the patent system does encourage is a disclosure that would have been made already by patentees it’s giving a patent to in exchange for the disclosure they would have made anyway.  And it’s encouraging innocent companies who might be victims of the patent system to reveal their secret information just out of fear of being sued, and that’s actually not fair because they’re not getting a monopoly for that.  They’re just getting a possible defense against a monopoly being asserted against them.

00:32:02

Anyway, now, a lot of the more knee-jerk or extreme or un-nuanced advocates of IP will say, well, you have to have patents and copyright to stimulate invention and innovation and creation, and you wouldn’t have it without it.  I mean they’ll say it that bluntly sometimes, which is absurd.  I mean you cannot say that it’s necessary that patent and copyright are necessary for creation.  I mean you could argue that it’s necessary to have a current level of innovation.

00:32:36

In other words, you could say that without patent, we would have less innovation.  Without copyright, we would have less artistic creativity.  But then your argument has to be that we need this extra amount that the IP system stimulates and that the value of it is far greater than the cost of the system in the first place.  See, that’s how they should argue, but they don’t do this.

00:33:02

I think I’ll get to that in a minute in more detail, but let me go ahead and talk about it now.  I mean my view is that the people that say – had this argument for the patent – let’s take the patent system for example.  If they’re really serious and sincere, instead of just saying, well, we need it to incentivize, well, then what you could do is you need to at least have an estimate or a guess even, a guess in your mind of what’s the cost of the patent system—lawyers’ fees, extra insurance, costs you have to pay, etc.

00:33:40

Another cost is inventions that we don’t have that we would have had because some people are afraid to get into an area, or they can’t afford to because of the threat of patent infringement.  Okay, so that’s a loss, and then the value of the innovation we do have that we wouldn’t have other had.  But then you’ve got to discount that by time because most of those probably would have been invented anyway.

00:34:01

So let’s say that we have a new innovation tomorrow that someone invented just so they could get a patent on it, but it would have been invented in five years anyway.  So you have to calculate the value of that – the present value of that five early – having this innovation five years early.  And then you have to weigh these things up.  You take that number, and you subtract the other two from it.  You subtract the cost of lost innovation and the cost of the patent system, and then they’ll see what it is.  Is it positive?  Is it negative?  I mean I know what it is.  It’s negative.  Of course it’s negative, but they don’t do these numbers.  The burden of proof is on them to calculate these numbers.  In any case, that’s one problem with their approach.  They never even try this, which I think is a sincerity problem and shows that they’re not really even serious.

00:34:51

Now, let’s talk about some other problems with the utilitarian approach.  One is that it’s methodologically incoherent.  Now, what does this mean?  The Austrian economic approach views value and utility as subjective.  That means – now it’s not the Ayn Randian type of subjective.  I mean being relativistic, but subjective that means the person himself is the one that is doing the valuing.

00:35:20

Valuing is sort of like a relationship or an action, and it’s demonstrated in your action.  It’s not just what you say.  I mean so whatever goals you seek to achieve, you’re showing that you value those goals more than second, third, fourth-rank goals.  Further, value in Austrian terms or utility is not measurable in a numerical sense.  It’s not cardinal.  It’s ordinal, ordinal meaning having order or ranking.

00:35:53

So if I choose a hamburger over a pizza, I’m showing that I value at that point in time the hamburger more than the pizza, but I can’t say I value it 2.3 times more.  It makes no sense.  And furthermore, these utilities are not interpersonally comparable.  You can’t compare my utility to yours.  So, for example, if I choose a hamburger over a pizza and you choose a hamburger over a taco, I mean what does that prove?  You can’t compare that – all we can know is that you value the hamburger more than the taco, and I value the hamburger more than pizza.

00:36:33

I mean it’s just a totally personal thing, so it’s just impossible to get numbers associated with these values and these value scales.  And it’s impossible to add them because they’re not cardinal numbers, and they’re not interpersonally comparable, so we can’t sum them up across society.  So there’s no way to do it anyway.  The only thing you can do is do a crude estimate in dollar terms, but even that is not correct because, as Mises points out, money is not a measure of value.

00:37:07

It’s not a measure of value because value doesn’t have a number on it.  Value is just something that you seek in action, that you demonstrate your preference for.  So that’s another problem with just this entire – the entire law and economics, the entire wealth maximization approach and the utilitarian approach.

00:37:29

Finally, there’s ethical problems with utilitarianism.  Number one, with the utilitarian mindset, you could justify horrible things, like you could imagine – actually, I don’t like this example.  It’s a little bit hideous, but anyway, they’re all hideous.  Let’s take some guy who’s been in jail for a long time.  He’s been sexually deprived, and he comes across a prostitute, and he cannot afford her fee, so he rapes her.

00:38:03

Well, a utilitarian could argue with a straight face that overall utility has been maximized by that rape because the guy is feeling great, and the woman was a prostitute anyway after all.  She’s only lost a $30 fee, so maybe it meant way more to the guy than $30.  I mean this kind of reasoning can lead to things like this.

00:38:27

And let’s take a Bill Gates example.  I mean Bill Gates is worth, I don’t know, $50 billion.  So we could take $10 billion of his money, and we could distribute it in $10,000 increments to thousands of low-income families.  And a utilitarian could argue with a straight face that each of those thousands of families that gets $10,000 – their total sum of utility is far more than the $10 billion felt by Gates because he’s still a multi-billionaire.  I mean what’s the difference to him?  And they could try to justify this with fancy marginal utility, which again doesn’t work because utility is not interpersonally comparable.

00:39:10

So marginal utility does not prove what they want to prove in these cases.  And what I mean by that is marginal utility is the idea that every extra unit of something is less valuable to an actor.  So what they would say is Bill Gates has $40 billion, $50 billion, so he’s got so much money that those extra billions of dollars are worth almost nothing to him.  Whereas $10,000 to a poor person who’s only got a hundred bucks in his pocket, the marginal utility of that is very high because you’re adding to a lower denominator or something, so they’re thinking mathematically.

00:39:45

But these are not numbers, and you can’t compare them from person to person, so that still doesn’t work.  And the bottom line is even if it did work, even if overall utility is maximized in both of these cases—the rape, the income redistribution from Bill Gates—it’s still rape, and it’s still theft.  These are immoral.  They’re rights violations.  They’re aggression.  So it’s irrelevant that there’s a utility being maximized.  I mean law is about justice, not about maximizing utility over society, so that’s one critique. ¹

00:40:21

Eric asks can you use praxeology to refute utilitarianism or to disprove that granting monopolies wouldn’t increase innovation more than otherwise could exist?  Well, I think what I just said is sort of a – is indicating how praxeology does refute utilitarianism.  I mean praxeology shows that action is aimed at ends and that you have opportunity costs, which is the foregone next-most alternative.  I mean the entire concept of opportunity cost and subjective value is implied in the concept of action.  And that implies that value is – or utility is ordinal, not cardinal, and is subjective.  So of course the idea of utilitarianism is incoherent because it contradicts these ideas.

00:41:08

As for granting monopolies, I think you could use Rothbard’s utility and welfare economics.  Rothbard’s utility and welfare economics shows that the only time we can know for sure that there’s a wealth gain in society is when there’s a voluntary interaction or trade.  So A and B can make a trade.  A gives B a goat in exchange for B giving A ten chickens.

00:41:37

Now, the thing that’s magical about this is if this is voluntary, we know that both parties are better off after the trade from their, what we call, ex ante point of view.  That is, they both expected ahead of time to be better off after the trade, not numerically.  You can’t say they’re 10% better off, but they’re both better off.  That’s why they took the action.  So that one act of trade has increased the total net wealth in society because the total satisfaction of these two guys has gone up, not by a number, but it has gone up.

00:42:10

And even in sort of real terms, presumably these guys want these things because they satisfy real desires more, consumption desires more, or the have a better idea of how to use them.  That’s why they can bid more for them.  So there would be more economic actual productivity and efficiency and prosperity by allowing this to happen.  So that’s Rothbard’s point in his utility and welfare economics article.  It’s a classic article.

00:42:37

But he says, if there’s coercion or aggression in the transaction, one of the parties is compelled like A robs B, well, we can assume A is better off if you forget the ethics of it because A got what he wanted.  But B had to be forced, so B is made worse off.  If B wasn’t made worse off, he wouldn’t have had to have been forced.  So all we can conclude from that is it’s definitely not an overall wealth gain for society.

00:43:05

And that’s, of course, the case when monopolies are granted by the state because the state is granting a monopoly that involves coercion and aggression against people’s rights.  So it’s making some people worse off.  The victims of these patent suits are made worse off.  The recipients of the patents may be better off.  Some may be better off, but so what?  I mean that doesn’t prove any kind of net gain.  In fact, you cannot prove a net gain because some people are made worse off, and that’s all we can say is that some people are being harmed and made worse off.

00:43:37

Okay, next slide.  Well, if you haven’t read this article, take a look at the article.  It’s Rothbard’s utility and welfare economics.  It’s online at Mises.org, and it’s just great.  Okay, I’ve already gone through some of these other problems, the evidence problems like they don’t have sincerity because they don’t try to provide evidence.  And not only that, if you look at the evidence, I mean all the – excuse me a second.

00:44:12

Hey, let me – okay, no, let’s stay.  My son is coming out.  So anyway, all of the studies are either inconclusive, like they say, well, we can’t prove that copyrights are worth it, or they say that it actually decreases overall innovation.  It’s not worth it.  So all the empirical evidence is against them.  If you are a pure empiricist, you would want to conclude that we shouldn’t have patent and copyrights, but they don’t.  They stick with their original idea even when the evidence goes against them, so it’s a sincerity problem, and it’s an evidence problem.

00:44:54

And also just this entire mentality that we need to have these laws in place that increase overall innovation.  Well, first of all, there’s no stopping point.  I mean why have a 20-year term?  Why not a 30-year term?  Why not a 50-year term for patents?  Why not impose the death penalty and make the – there’s no stopping point.  And, in fact, some people have actually proposed that instead of or in addition to…

00:45:28

00:45:31

Instead of or in addition to a patent system, we ought to have money taken from the taxpayers, which is given – handed out to innovators at the end of every year by some panel of distinguished government-appointed experts.  I mean one guy proposed $80 billion for a medical innovation prize, and that’s medical innovation.  That’s not copyrights.  That’s not the arts.  That’s not other types of innovation and invention.  That’s $80 billion for that.  So what do they want, a trillion total?

00:46:06

And if really 80 billion or a trillion or whatever of tax-funded innovation awards yields more than your spending, why not 2 trillion?  Hey, let’s give them 2 and let’s get 10 trillion of benefit back?  Why not 3 trillion and get 15 trillion of benefit back?  I mean there’s no end to these insane schemes.  And this has been proposed a lot of times.  James Madison proposed this in 1787.  This was actually done in Russia in 1834 and in the Soviet Union in 1931, hardly a ringing endorsement for its pro-free market or capitalist credentials.  Hey, Jock is here!  Thanks Jock.

00:46:45

Michael Polanyi, 1944, and then more recently by Alexander Tabarrok, a libertarian, Bernie Sanders, the socialist senator from Vermont, and Joseph Stiglitz, the Nobel Prize winner.  So this is what this kind of mentality leads to.

00:47:03

00:47:12

Now, let’s switch to the more deontological or rights-based or what you might want to just call the principled approach.  These are people that have some kind of intuition or argument or view that it’s a matter of right and wrong and that it’s not done by society to achieve these sort of policy goals, which imply – that implies the inventor is not entitled to it.  We just happened to give it to him to achieve an end.  These guys think that the inventors deserve it.  They have some kind of right, or they should have a legal right like a property right basically.

00:47:48

Now, the important thing to notice is even though people nowadays point to the Constitution, which is explicitly utilitarian in the copyright clause.  It says to promote the progress of science and the arts will give limited privileges to these inventors and artists for awhile, which is explicitly utilitarian.  So the original – and there’s no system in the world that’s not like this.  They’re all utilitarian-based, and they’re explicitly policy-based.  And yet modern natural law types will point to this as if it supports that, and they’ll point to Locke and the founders.

00:48:25

And the truth is that the founders – none of them believed it was a natural right.  John Locke, whose ideas were very influential, did not believe that his homesteading theory would extend to intellectual property.  He thought that it was for homesteading of scarce resources.  Now, as I mentioned earlier, Locke’s argument goes you have a propriety in yourself.  That means you’re a self-owner.

00:48:49

And therefore, you own your labor.  That’s what he says.  And therefore, you own what you mix your labor with if it’s unowned already.  That’s his argument, and as I said, Hume and others including me think that that labor ownership part of Locke’s argument is unnecessary and overly metaphorical and imprecise and confusing.  And it’s just the argument works without it.  I mean in fact it makes no sense to say you own your labor.  As I said, labor is what you do.  It’s just an action.  You don’t own your actions any more than you own your love or your memories.  You own your body and yourself, and that gives you the right to control it and to do things with it.

00:49:28

So another way you can see that it’s pretty clear that the original conception of patent and copyright law in the US, which was one of the earliest modern systems anyway so it’s a good model to look at, is number one, they all had a limited finite term.  Patents and copyrights at the time were about 14 or something years.  Well, a natural right wouldn’t expire in 14 years.  And also they’re arbitrary.  I mean it makes no sense.  In fact, the reason 14 years was chosen originally, my understanding, was it’s basically historically upon the length of two consecutive apprenticeship terms back in more feudal days in England.

00:50:15

So I mean what’s that got to do with natural law, the length of two apprenticeship terms?  And the terms keep changing over time.  I mean patents are now – I mean copyrights are now up to over 100 years long.  They started at 14.  Now they’re over 100.

00:50:32

00:50:37

Also they’re only enforced geographically in your country, so if you have a patent in the US on a given process, unless you have a patent in China or Russia or France, someone making the same thing over there is not offending your rights, but in the US they are, which makes no sense because if you own a car, it doesn’t matter who hits it or takes it, it doesn’t matter what the nationality is or even where it is.  It’s considered to be your car.  So that’s another indication that we’re not talking about a natural right.

00:51:10

And as I mentioned, there’s this labor confusion and this creationism idea.  The creationism idea is – that’s my word, creationism.  I don’t mean religious creationism.  I mean the idea that we own things that we create.  Now, if you haven’t thought carefully about this or if you have just been reading kind of casually, you might not have noticed there’s something interesting about what is commonly said about how we come to own things, where property rights come from.  And commonly you’ll hear this recited.  People will say, well, you own things that you homestead, that is, unowned resources that you homestead.  Or you own things that other people sell to you or give to you.  That’s by contract, or things that you produce, that you create.

00:51:59

So they act like these are three alternative ways of coming to own things, and it sounds plausible at first.  We do create things.  We create wealth, and we make money.  We say we make money.  We don’t really make the money.  The Fed makes the money, though you earn money.  We say we make money.  So it seems plausible, but if you think about it carefully, creation is not actually an independent source of ownership.  And in fact, I think what they’re doing is they’re conflating wealth with property.

00:52:34

So let me give an example.  I’ve given this one before.  Maybe I’ll vary it up a little here.  Let’s say you – no, I’ve given all these before, but anyway.  You have a hunk of marble and you carve a statute in it.  Now, you can say you’ve made a statue.  You’ve created a statute.  But do you own the statute because you created it?  No, you own it because you already owned the raw materials that you carved it from.  It’s more valuable because you carved it.  This marble is now more valuable because you have rearranged it.  You’ve reshaped it.  You’ve transformed it with your labor, with your effort, with your action, with your ideas, with your intellect, sure.  But so you could say you have more wealth now because you could sell this marble statute now for $10,000 and before it was worth $1,000.  So you now have more wealth, so your actions can create wealth, but they don’t create new property rights.  This is the confusion.

00:53:32

00:53:36

Gwen says it might be worth less if it’s a lousy statute.  That’s true.  That’s true.  And so you can destroy things too by your actions, but even Ayn Rand recognized this when she wrote.  Rothbard recognized this, which he should because he’s against IP.  Mises did.  They say over and over again that, look, we don’t create anything in the world.  We find matter out there.  We appropriate it to ourselves.  We find it useful, and then we transform it.  We rearrange it into more useful shapes.

00:54:09

Now, as another example, imagine that I sneak onto your lawn and I carve a statute into your marble.  Well, I created the statute, but I don’t own it.  You see, so those examples show you that creation is neither necessary nor sufficient for owning for property rights.  But creation, of course, is.  It does play a role in homesteading.  You could call it being creative to homestead attractive land.  That’s okay, but what is causing you to own that land is that you homesteaded it.  So I hope that’s clear because basically we don’t have three ways of acquiring rights.  We only have two.  One is finding something unowned or having some owner of a thing give it to you by contract.  That’s it.  Now, I’m going to stop in a minute, right at the hour, maybe right past the hour and take a short break.

00:55:06

But one thing you’ll notice, I’ve tried to conceptually distinguish here between the principled approach and the sort of wealth maximization approach or the consequentialist or the civil right or policy tool approach.  But the advocates of IP are not so careful, and quite often they will intermingle and intermix these ideas.  Now, a few of them don’t, like maybe Galambos.  Look up Galambos if you haven’t heard about this guy.

00:55:37

This guy was this weird California, kind of hyper-scientistic, engineer, cult leader, libertarian.  A lot of people love the guy.  I’ve never understood it.  He had this weird theory of property rights, and he thought everything flowed from the mind and that it was inalienable too so that all of his followers loved him, but they didn’t even feel free to tell other people about Galambos’ ideas because it was inalienable.  He thought that if you used the word liberty, you have to drop a nickel in a box for the errors of Thomas Paine who invented the word to some day compensate them for that.

00:56:16

I mean complete insane, out of – extreme IP.  Now, he’s at least fairly consistent—infinite term.  Everything is covered and everything is IP.  And there’s a few others that are getting close to that.  But now Rand supported the US patent system, which has finite terms, and the US copyright system, which has a finite term.  So she pretended to have a natural right argument for it, but she used utilitarian-type arguments to argue that, well, it should be finite.  Your – the errors of your – the descendants of your descendants of your descendants for each generation now shouldn’t profit from your labor, just maybe one generation.

00:57:03

I mean that’s obviously completely arbitrary, and this is what legislators and other utilitarians do.  They just kind of draw these lines for totally pragmatic considerations.  So that was Rand’s argument.  She thought it was totally justified to have finite terms and other things too.  So she pretended to be natural rights, but I think she was really more of a consequentialist or wealth maximizationist, but she didn’t want to admit it because it’s unprincipled sounding.  So let’s take a break and let’s pause here, and we’ll come back in five minutes.

00:57:36

[five-minute break]

01:02:46

Okay, I’m back.  All right, let’s see where I maybe review the comments here real quick.  There was a Rothbard article.  Gwen says nose barely over water.  Am I going too fast, or is this just – okay, you ask are you getting it right that the portion contributed by creativity in the transformative process may contribute to value but not to ownership?  Yes, that’s correct.  That’s my view, thus the lack of intellectual in the IP question.

01:03:29

Well, yeah, I mean I think – so I think property is – I mean some people use the word property to refer to the object.  Like if I own a computer, that’s my property.  But it’s a little bit sloppy language.  Locke, I think, said you had a propriety in yourself.  Propriety means sort of ownership of or the control of or the right to control.  So I view property as a relationship between an actor or an agent, a human, and some scarce resource that can serve as a means to action.  That’s how I think of it.

01:04:06

01:04:10

So intellectual property would mean you have a property right in things that are not scarce resources.  I mean one of the fundamental problems with this idea is you really – it’s really literally impossible to have a property right in a non-scarce resource.  To have a property means the right to control.  But how can you control a pattern of information?  It makes no sense.  You literally cannot control it.  This is – it’s not a thing that you can manipulate or touch or possess even.

01:04:46

Now, you can have information in your brain, but you cannot own information per se.  You cannot own the number two.  You can’t own a binary bit pattern.  So what the law really does is, under the guise of owning these things you create, which are really patterns of information – they’re recipes.  They’re steps.  They’re ideas.  They’re knowledge basically.  The only way that you can actually translate that into some meaningful law is to really give ownership in other people’s scarce resources.  So for example, if the law says you have a copyright in this painting, what that really means is you, as the holder of that legal right, can go to court and get the court to take money from me if I did something with my property like if I painted a similar picture on my property.

01:05:49

So it comes down to ownership of my money, you see, or my body even if the court can tell me not to do something.  So it always comes down to physical force in the real world applied against the physical body or physical property, scarce resources, of other humans.  So really IP law, because it’s really impossible to own a scarce thing – a non-scarce thing, it’s just a disguised way of redistributing property rights from existing owners of regular property to other people.

01:06:25

And the problem with this is the main libertarian idea is that the first person to use a given scarce resource is its owner.  That’s the Lockian idea.  That’s what homesteading means, right?  And you shouldn’t be dispossessed of this unless you give it away voluntarily or you abandon it or you die maybe or you commit a crime or a tort where you owe someone damages.

01:06:49

But basically, unless you do something like that—you voluntarily get rid of it or you do something wrong—you have the right to stay in possession of your property.  And you have the right to do whatever you want with it except invade the borders of other people’s property.  And that’s actually not a limitation on your property rights.  It’s a limitation on your action.  And it’s a limitation on your action because we presume property rights.  In other words, I’m not able to take my gun and shoot you with it.  That’s not a limitation on my property rights in the gun.  It’s a limitation on what I’m able to do with any means—someone else’s gun, someone else’s knife, my first—because you own your body.

01:07:32

So all of these so-called limitations on property rights are really just manifestations of other people’s property rights.  And you cannot – and sometimes these IP proponents will say, well, true.  The owner of a copyright can tell – can put limits on what you can do with your own property, but all property rights do that.  But that’s not an argument because you have to explain why it’s justified in a given case because you can have – you can say, well, rape of redheads is legal.

01:08:08

And if someone objects and says, well, that violates their rights, then you can say, well, all property rights violate – limit people’s – what they can do with their own property.  In this particular case, it’s limiting what this – what redheaded women can say about their own bodies.  In other words, you can’t just say the general case is that sometimes there’s limits on what you can do with your property and therefore you can’t object to any limits, which is what their argument for IP is.

01:08:33

01:08:38

So Gwen, the problem is if you try to grant rights in non-scarce things, then you really end up granting rights in other people’s physical property.  Now, if you don’t, then it’s not a problem, but then it’s nothing but words on paper.  I mean if you couldn’t use physical force of the state or the legal system against other people’s physical property to enforce your rights, then – your copyright for example, then it wouldn’t mean anything.  And that ought to say something about the reality of these things.  I mean if these things really existed, if this kind of weird realm of intellectual creations really existed in some meaningful sense, why couldn’t you just enforce those rights in that realm?  So I took your painting.  You take my painting, something like that, which is fine, but that’s – it wouldn’t allow what we have now in IP law.

01:09:33

Okay, Karl says the anti-IP argument – wait, give me a second.  Let me flip to the next page to see.  I think we can stop here.  Let me just double check.  Yeah, we can stop here because I can pick up with this next time.  Karl says the anti-IP argument is similar to the argument for private money that those activities should be regulated by contract and that it’s unnecessary for the state to standardize those relationships.

01:10:02

01:10:07

Okay, well, let me give you my perspective on that.  First of all, I’m an anarchist, so I think that the state is not necessary for anything.  I mean the question would be whatever the legal system we have, what do they need to do?  So first of all, I would say yes.  You’re right.  Anything that we need to do, we ought to be able to do by voluntary interactions and by contracts.  And remember, a contract is a way of assigning title to scarce resources.  That’s what a contract is.

01:10:35

So it’s based upon the idea of owning these things, so you have to use your body, which you own, and things that you acquire, and you can transform some of them.  You can make them more valuable.  You can sell them, and then you have to find ways to make money off – if what you want to do is make money off your intellectual creativity, you have to find a way to do that.  But you can’t go to the state and get the state to give you a monopoly right to basically stop competition, to make it easier for you to compete.  I mean if you don’t have any competition, of course you’re going to find it easy to make a profit.  But that’s not a legitimate function of the state or of any government.

01:11:12

Now, as for private money, you don’t need a fed.  Of course you don’t need a fed.  Now, Austrians disagree on whether private money should be 100% gold reserves, which is sort of my view or fractional reserve.  Free banking some people call it, which I have no libertarian problem with if people want to try that.  I think it’s a Ponzi scheme myself, and I don’t think it would work very well, but whatever.

01:11:36

Let’s have a free market, and let’s see.  Let’s have competing Rothbard banks and fractional reserve banks and see which one does better, our mutual banking, sure.  We can try them all.  That – from what I heard of mutual banking, it makes a lot more sense than fractional reserve banking, free banking unless that’s fractional reserve too, and I don’t think it is.

01:11:54

Another thing that, Karl, is more analogous to what you’re talking about would be the corporation.  The corporation right now is understood to be a creature of the state.  It’s a privilege the state gives you.  They create this thing that has legal personality.  It’s called an entity, so it’s actually a person under the law.  And the state claims then they can regulate it and they can penalize it and they can double – they can tax it in addition to taxing the owners of it because, after all, it’s a separate person.

01:12:25

But it’s not entitled to this.  It’s a privilege, so then the state says, well, in exchange for this privilege, we can regulate the corporations, etc.  But Robert Hessen, H-E-S-S-E-N, and others like Murray Rothbard and Roger Pilon, they’ve – especially Hessen – they’ve shown that a corporation could be just constructed purely out of a network for private contracts.  You don’t need the state to do it.  It should not be looked at as an illegal entity.  It’s just a web of private contractual relationships.

01:12:53

The state is not needed for that at all.  Now, there’s one aspect of it that some people point to.  Some left libertarians and others say that, well, the corporation has limited liability, and that’s not fair, and the state gives it that.  So in a free market or in a freed market, these private contractual corporations wouldn’t have limited liability, and they wouldn’t be able to get as big or they wouldn’t have the same moral hazard problem, etc.

01:13:19

01:13:23

The problem with that argument, number one, most of the people making it don’t really understand corporate law.  They don’t really even understand what limited liability means.  A lot of them think it has to do with the managers and the employees and it has nothing to do with that.  A lot of them can’t even comprehend the simple contractual argument that there’s basically two types of debt that a corporation can have.

01:13:44

One is contractual.  Let’s say the corporation borrows money from a bank and then they can’t repay it, or they buy something on credit from a vendor and they can’t repay it.  The vendor cannot pursue – he can only pursue the assets of the corporation.  It can’t pursue the individual shareholders individually as personally liable.  And the reason is you don’t need the state to grant limited liability to do that.  And by the way, limited liability means that shareholders are not personally liable for obligations of the corporation that they own stock in.  And that’s usually what people object to, although sometimes they think it applies to managers, which it doesn’t as far as I know.

01:14:25

So the contractual part of limited liability could be done easily by contract.  You just say, look, when you do a deal with us, you know you can only pursue these assets.  So that’s not a problem, although some opponents of it have a problem even with that.  The only difficult law is tort law.  So let’s imagine Gwen owns stock in FedEx.  FedEx has a truck.  The driver negligently hits Jock, breaks his leg.  Now, Jock – who is Jock going to sue?  In a free market, he would sue the driver, number one.

01:15:03

The driver was negligent, and then he might be able to sue the corporation as an entity under the doctrine of respondeat superior, which Rothbard and others argue is probably not even libertarian.  I tend to agree.  I mean normally you can only sue the person who hurt you.  If you want to sue anyone else as being responsible for that person’s harm, that’s called vicarious liability or responsibility, so you have to have an argument for that.  So maybe you could argue, and I think you probably could and should be able to.

01:15:36

You could argue that the managers who come up with the system that encouraged this guy’s negligence, they have a direct role in it.  Maybe you can sue them as being vicariously liable.  That’s fine, maybe the board of directors even, maybe even a co-employee.  But why would you sue the shareholders?  They – what role did they play?  They’re passive.  They don’t make decisions for the company.  All they do is on occasion vote for directors.

01:16:05

So the idea that Hessen and others argue is that, in a free market, these guys wouldn’t be liable anyway because they’re just too remote from the damage.  I mean they didn’t cause the truck driver to hurt you.  Now, you could say, well, they have a right to vote, so they influence who the board is.  Well, the board was not necessarily negligent anyway, but let’s say they are, or you could say, well, they gave the company money when they bought the shares.

01:16:36

Well, okay, so first of all, as for the first argument, the influence argument, some shareholders don’t ever vote.  Some shareholders vote for the guy that loses.  So are they liable?  And moreover, in terms of practical effects, sometimes a lot of other actors have much more influence on what the corporation does than the shareholders—a big creditor like a big bank, big labor union maybe, employees themselves, stakeholders, big suppliers, big customers.  I mean all these companies can impose all kinds of requirements on the corporation that influence it far more than the shareholders do.

01:17:28

So are they all going to be liable?  Now, as for the fact that the shareholder gave money to the company and so then they’re like – I guess they’re aiding and abetting a crime is the idea.  Well, first of all, not all shareholders gave money to the company because many shareholders bought their shares from the previous shareholder.  So they only gave money to a shareholder.  They never gave money to the company.

01:17:49

Second of all, lots of people give money to a company.  Customers give money to companies.  Are all customers now liable?  A bank lends money to it.  Are they liable?  And in fact, money is not the only way you help someone.  Money is just one of many other things that are subjectively valuable.  I mean what about all the employees of the company, all the co-employees, all the union workers?  Should they be liable for this one guy’s accident?

01:18:14

So if you have such a loose standard of vicarious responsibility, you would get everyone.  I mean you would get the whole town so – which is obviously absurd.  So anyway, that’s just an example.  You reminded me of that because that’s a case where you can do a corporation just by private contract.  All right, let me see if there’s any other questions here.  Karl—it’s like laws against insider trading in that it socializes the ownership of asymmetrical information.

01:18:45

01:18:50

What are you talking about?  Are you talking about – I don’t know what you’re talking about, corporations or what?  I think that is true for a lot of cases, but I’m not sure which one you’re talking about.  Gwen says how do you engage in trade with an artistic product?  Is it impossible?  Well, I really do – I mean the last class, number six, we’re going to talk in detail about a lot of practical issues like that.

01:19:14

I think the bottom line is it’s up to the actor the entrepreneur to figure these things out.  Look, you have to look at in general like this, although there’s a lot of answers to it.  And I can’t say I know them all.  I’ve got some ideas, and people are coming up with new ideas all the time.  But for some fields it might be relatively hard.  For others it’s easy.

01:19:38

A musician – they can give their CDs away or their MP3 files away to get famous or to get a fan base.  And then they can – that helps them get tickets for – to sell tickets for their live concerts, so it works as advertising.  Well, that’s just musicians.  I mean every different type is different, and some may be harder to make work than others.

01:20:02

I mean I think it was Francis Ford Coppola said he used to wake up at 3 or 4 in the morning and write screenplays, and then he would go to his day job.  Maybe it’s got to be that way again, or maybe you have to have a patron or maybe it’s a second job.  Maybe it’s an avocation.  Now, I do think in a free society we’d all be so much wealthier that you literally could just have a job working four hours a week and make enough money to live, and the rest of the time you do your passion.

01:20:26

So a lot of this is because of the state impoverishing us and making our choices not as good.  But the bottom line is I would look at it like this.  When you are trying to engage in a business, you have to think of what possible free-riding effects are there that you have to overcome.  What competition might you face?  And in particular, competition from people knocking you off, maybe pirating your stuff.  And what costs of exclusion or bundling techniques can you engage in that overcome it enough for you to make enough profit to engage in this activity?  If you can’t think of any, then don’t do it.  I mean it’s just not economic, or do it as a hobby.

01:21:12

Now, I think there are ways you can do it in almost every field I’ve thought of so far.  It’s just not easy without the state helping you along and stopping competition.  But we need to save some of this for lecture six because we’re almost out of time.  Gwen says a large customer may influence the company to work longer hours than normal, thus causing the drive to be too tired for conditions.  Yeah, and like one example is Apple is blamed for some of the conditions at one of its suppliers in I think Taiwan or somewhere like that so – or China, causing some of them to commit suicide, blah, blah, blah.

01:22:00

I mean there’s all these interrelations.  Gwen—let’s say I have a thought experiment.  Let’s say I have a web comic going by an L. Neil Smith style system.  Instead of just giving free access, you might charge a micro payment in gold and contract with people to read it.  Part of the contract is they don’t make copies of the book and sell it separately.  Do it as a contractual agreement privately instead of a state-forced monopoly.  That’s sort of the first approach some people think of.  I don’t know if that would work.

01:22:33

I tend to think that wouldn’t work, and let me tell you why, maybe not the micro payment part but the contract.  I mean let’s say it’s a book.  I mean how much do you pay for a book?  $5, $10, $15, $20, right?  I mean do you really want to sign a contract obligating yourself to potentially millions of dollars in damages if you break this contract?  I mean it’s like remember Apple used to have DRM on their music files they would sell.

01:23:05

And then I think there was a transitional period where you could pay 99 cents for the DRM version, or you could pay $1.29 for the DRM-free version.  So you had to pay a little bit more for that one so – but not like $50 more.  I mean if there was a book for $20, and I had to sign a contract that could potentially obligate me – put in a lawsuit, I don’t want that book.  I’d rather buy a book for $23 from some guy that’s DRM-free and that’s contract-free.  I just don’t think that model is going to work.

01:23:39

So here are just a couple of ideas.  Let’s say you write a book, and you release it for free.  Some people do this on Kindle now.  They put their first book in a series up, one that was released two or three years ago.  They put a zero price on it.  They’re trying to get a fan base.  And then they sell their next book for a fee, and maybe you sell it on Kindle and people buy it because it’s convenient.  Maybe it’s $3 a copy.

01:24:05

Maybe the publishing industry dies and it’s just direct to market so you have no middle man, so $3 is a good fee.  You get probably two-thirds of that instead of – which is $2, which is all you get from a book anyway that sells for $20 from a publisher.  So people are selling their second books on – now, someone can go pirate it from Pirate Bay, but if it’s $3 on Kindle, they might do that because it’s more convenient.  Or another idea is you build up a fan base by getting your name out there, and then you tell your fans I’ve got a third book in the works.

01:24:40

As soon as I get 100,000 people contractually commit or pledge on their honor to give me $10 a copy, as soon as I get to that number, I’ll release it, and then you do that.  I mean that’s another idea.  And people are going to have all kinds of ideas.  Another idea I’ve had, and I don’t know how well it will work, but let’s imagine you write a series of novels, and someone wants to make a movie out of it.

01:25:02

Well, they actually don’t need your permission under our system.  They can just do it.  But they might want your permission.  Well, number one, they might want to hire you as a consultant to help make the movie better.  Number two, they might want your official endorsement because there’s going to be other competitors.  So there might be three producers making a movie version of your book, right?  And if this guy can say this one is approved by the author and consulted on the movie, I mean who are your – which movie are your fans going to see?

01:25:35

They’re going to tend to want to see the movie that you endorsed partly for loyalty and partly because they’re going to trust it more.  So maybe that movie makes $5 million more profit.  Well, they can give you a million of that as a fee.  I mean they’re going to win.  So these are just some ideas, so you can see that there’s ways to enhance your reputation, to build up fans, to leverage these ideas.  This is what the entrepreneur has got to do.

01:26:01

Matt—the author-endorsed idea is sort of building upon this idea that Nina Paley came up with and Karl Fogel.  If you go to questioncopyright.org, it’s called the creator-endorsed mark.  And that doesn’t require IP to enforce.  It only requires a version of trademark, which is I think libertarian-compatible.  Basically the competitor movie, if they want to put a fake Gwen-patent-endorsed movie, well, they’re actually committing fraud on their customers.

01:26:36

Forget about trademark.  They’re just committing fraud, so if someone buys a ticket and they see it and then Gwen goes on TV and says I didn’t endorse that movie, then they’re going to get sued, or at least their reputation is going to be hurt, and everyone is going to regard them as a two-bit movie company.  And of course their movies aren’t going to be as good as the legitimate movie houses.

01:26:59

I mean – and not only that, the big movie houses you might go see movies in, they’re going to screen these guys for legitimacy just like when you go down to the Kroger.  They’re not going to be knockoff Crest toothpaste from some Russian guy on the street.  I mean – because if they do, they’re going to hurt their reputation.  So there’s all these certification and qualification things that happen in the market, and they’re going to happen naturally and automatically.  That’s just one idea.

01:27:28

Matt says instead of a single patron, you could have a large number of patrons that contribute a small amount, and they could be mentioned by name when the work is being completed.  Well, that’s sort of my idea about get pledges to buy the book from, let’s say, 100,000 people or 10,000 or whatever, 5,000.  And then you say, well, I’ve made my net back, and then the rest will be gravy, lagniappe as you guy say in Louisiana, right?

01:27:52

Actually, if you look at the last – I think it’s – I’m trying to think which – it’s Cory Doctorow was on a recent podcast.  Oh, I know what it was.  It’s the – it’s one of my favorite podcasts.  I listen to a lot of the TWiT Network podcast, twit.tv, and one of them is called “Triangulation,” and it’s an interview, an in-depth interview with Leo Laporte and his co-host with one guy.  And they’ve had a lot of fascinating people on so far.  They had Ray Kurzweil, etc., and they’ve had Cory Doctorow.

01:28:31

And Cory is talking about one of his recent experiments because he opened his books up pretty much and gives them away for free.  But one of his books he’s opening up like that, and he’s also selling these $250 hard backs, and each one has a unique physical copy on the back page, and it’s by some hand-binder in London, so they’re really cool.  But it’s got a page that’s an actual manuscript page from the draft notes of some semi-famous author.

01:28:59

So he went to all of his buddies, and he got them to, instead of throwing all their notes away, give them to him.  And so if you buy a copy of this book, it’s a unique book, and it’s got an actual manuscript page or notebook page from some other author in the back.  So I mean that’s just an idea about how to make them unique and how to sell these things.

01:29:18

01:29:29

Oh yeah, I see what you got.  You guys are mentioning Kickstarter now.  I do remember.  In fact, I mentioned Kickstarter.  I have a post.  It’s – well, we’re almost out of time now, but let me find this post really quickly.  Well, just do this.  Search for innovations that thrive and then Kinsella.  You should be able to find that.  And I think I mentioned Kickstarter and several other ideas that are like that.  I’ve been collecting things like that.

01:30:00

And Gwen is mentioning that she was involved in the Neil Gaiman The Price thing with the Kickstarter project.  I haven’t looked into exactly how they work, but I think these ideas are great, and of course they’re going to emerge more and more because the world we’re approaching is like an IP-free world or like a copyright-free world anyway with the ubiquity of torrenting and pirating and encryption.

01:30:22

I mean it’s a reality, and these movie companies, these novelists, they know that their stuff is going to be knocked off, so they’re trying to make money from the legitimate customers knowing that there’s some piracy going on and trying to get the attention and compete with others.  So the same techniques would just be multiplied I think and expanded and exacerbated.

01:30:43

I think we should call it a break here.  If you guys have any questions I didn’t answer, you can ask them next time or put them in the course questions, and I’ll definitely check it in the next few days and make sure I’m on the subscribed list.  I don’t know how I didn’t get Gwen’s.  Thanks.  I enjoyed it too.  Gwen, sorry I went so fast, trying to squeeze a lot in.  But next class, next lecture we’ll have time for more questions.  Thanks everybody.  Have a good evening and a good week.  Thank you, Donald.  ‘Night, Jock.  Sleep tight.

01:31:27

1. See Ronald M. Dworkin, “Is Wealth a Value?,” J. Legal Stud.,  Vol. 9, no. 2 (March 1980), p. 197: “Consider this hypothetical example. Derek has a book Amartya wants. Derek would sell the book to Amartya for $2 and Amartya would pay $3 for it. T (the tyrant in charge) takes the book from Derek and gives it to Amartya with less waste in money or its equivalent than would be consumed in transaction costs if the two were to haggle over the distribution of the $1 surplus value. The forced transfer from Derek to Amartya produces a gain in social wealth even though Derek has lost something he values with no compensation. Let us call the situation before the forced transfer takes place “Society 1” and the situation after it takes place “Society 2.” Is Society 2 in any respect superior to Society 1? I do not mean whether the gain in wealth is overridden by the cost in justice, or in equal treatment, or in anything else, but whether the gain in wealth is, considered in itself, any gain at all. I should say, and I think most people would agree, that Society 2 is not better in any respect.” [↩]