Does Monopoly Create Wealth?

How strange this "intellectual property" issue is. In normal life, we tend to (or should) credit enterprise and markets for most innovations that surround us. I'm typing on a system here that includes products for several dozens different creative companies, with hardware and software and applications of all sorts stitched together through some miracle we call the coordinative power of the market. No news in that, I suppose. Ho hum.

But let the subject of IP come up, and most people will say that we only have this stuff thanks to IP. Think of the shift here. On the one hand, we credit markets. On the other hand, we credit monopoly. Both can't be true. Or if both are true, we have a serious theoretical tangle to unravel. So which is true?

This is the topic addressed in the second chapter of Boldine and Levine's Against Intellectual Monopoly. They begin by observing that "virtually none of the innovations" in the digital industry of computers" took place with the protection of intellectual monopoly."

Before 1981 it was not possible to patent or copyright software. The craze to patent every mouse click began only following a 1994 court ruling (In re Alappat). Meanwhile, the underlying guts of all that you see began long before. As with all genuine economic revolutions, the foundation of end-user consumption was decades in preparation. The compilers, assemblers, linked listed, databases, search algorithms, displays, languages, word processing: all began long before the age of software patents or copyrights.

Let’s see how this works. Property rights are protected. Trade is free. People made useful stuff. People bought stuff and used it. They imitated and emulated each other and improved things step by step through investment, profit, and re-investment. That's all. All development since this great age of innovation that preceding software IP has built on this foundation of open-source material. Bill Gates: "If people had understood how patents would be granted when most of today's ideas were invented, and had taken out patents, the industry would be at a complete standstill today."

The authors comment on the post hoc ergo propter hoc fallacy: "Intellectual monopoly is not a cause of innovation, but rather an unwelcome consequence of it." How so? Young industries do amazing things and get a foothold in the market. Then even better folks come along with better ideas. The old guys panic, and turn to government for protection. The industry freezes in place. It is the oldest pattern. Thus did Microsoft make no effort to protect its IP in the early days; it begged for attention and encouraged widespread use and copying. When it saw a threat from newcomers, matters changed.

There hasn't been that much innovation in operating systems since 1994. There has been innovation in web browsing, but where did the web browser come from? It bought it from a creative company in 1993, before there were software patents. Imagine how a patent in web browsing would have set back the entire industry! The losses would have been incalculable.

We can see here that the authors are holding up the computer industry as a model for how things work in a free market. And a super strong case for their position is the open-source software movement, which is a main fuel behind the development we see today. Firms relinquish monopoly to assure longevity in the industry: others can pick up their designs and develop them. This helps build their market. In any case, we all depend on open-source software every day if we use Google: it runs Linux, an open-source OS. There are many others. Indeed, open source dominates the web completely. Some 70% of servers online today run Apache.

But how can they make money? The authors tell the story of Red Hat. It is open source. It has plenty of competitors who offer the exact same product. But because of brand name, Red Hat is still marketable and has more staying power. As B&L say "If you had a problem with software you bought, and had to call the seller for advice – who would you prefer to call – the people who wrote the program, or the people who copied it?" Thus does Red Hat profit and their many competitors come and go, come again and go again.

The authors effortlessly segue from software to books, and here is the part that especially interests me. They provide an alternative explanation for why British literature was so widely circulated in the United States in the 19^th century. American publishers could publish without copyright – there were no international copyright agreements – and there was massive competition. It was so intense that American firms would pay authors directly for sending chapters even before they appear in Britain. The amounts they would receive even exceeded their British royalties over a period of years.

As a result, there was huge dissemination of knowledge. And the prices were low: Dickens's A Christmas Carol sold for $.06 in the US and $2.50 in England. And printing technology improved. Literacy improved. Ideas spread. Children and schools could have books, which in turn increased the demand for books, and spurred on new investment and technological improvements. It was a dynamic and wild world of publishing, comparable to what we see with the web today.

But could it work in modern times? Look at government documents, which are always and everywhere in the public domain (unless they are secret). The 9-11 report of 2004 was a huge bestseller, comparable to the first Harry Potter in sales volume. Norton even negotiated a deal with the government to release a paperback on the day of release, and it was also available for free download. Why would they do this? The same reason all entrepreneurs do what they do: to be the first to market. Meanwhile, anyone on the planet could publish it a day later. Still, Norton turned a massive profit.

Another fascinating section concerns the newspaper industry. It began without patent protection. Benjamin Day started the New York Sun and his technology was open source: he collected advertising to pay the costs and recruited young boys to sell it. Anyone could do it. But the point is that he did it first and made lots of money. He was first and he was innovative. That’s the key to success. It was a massively costly undertaking!

Why wasn’t he driven out of business by piracy? The RIAA claim constantly that a free market can’t work because pirate will go straight to the most profitable production ends and steal them. But the authors ask us to think about this carefully. How do we know what is profitable? We have to let the market work. You can’t know in advance. And once a line of production is profitable, it is too late: the player has market dominance, and all the advantages that come with that. They ask us to try this yourself: try ruining a pop star by pirating songs only once you are certain they are big hits.

Back up and consider the history of IP. It is a modern invention, whereas music and literature appeared at the dawn of civilization. Music and literature and art thrived for many centuries before IP. The authors don’t go into it, but just imagine if the invention of the musical staff had been copyrighted and patented by the monk Guido d’Arezzo who invented it. Progress would have been set back by a century!

The first signs of IP appeared after the invention of the printing press. Governments used it to suppress political dissent (I suspect that the religion wars had something to do with this). It was a royal mercantilist privilege confer on printers, same as it was conferred on tea, tin, cotton, banking, or any other good. In the day, it seemed reasonable. The ruler wanted to control goods and producers want guarantees. Everyone wins, right? Except that there is no competition, no market process, and hence there is stasis. Mercantilism was refuted by economists and free market emerged and history was changed.

What happened to IP in the age when mercantilism was being repealed? It was not abolished but transferred from kings to producers: the exclusive right to produce was granted to private owners who became responsible for enforcement under the cover of law. This was a huge mistake in the liberal revolution of the 18^th century, an inconsistency that continues to haunt us.

This section on IP history should be mandatory reading!

Next in this chapter: a short section on the history of sheet music. Did you know that the industry leader in sheet music – Francis, Day & Hunter – got its start in mass piracy? Fascinating. The war on cheap sheet music is comparable to the war on pirates today. It didn’t work, thank goodness.

We conclude this chapter with a long and interesting section on the dynamic hugely profitable industry of porn. You wince. Of course. So does the state. Copyright protection is nearly unavailable here for reasons that are obvious. It is a legitimate subject for investigation from an economic perspective. This open-source industry is massive and growing, orderly and profitable and technologically innovative. How tragic that IP has created a situation in which we have to look to the seedier side of life to see how truly free markets work.