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Contract and Competition: the Microsoft Example

Anti-Windows operating system cultists have now begun to switch arguments. I now have a folder filling up with letters saying that Microsoft got rich because of copyright protection, and that means government, and government means monopoly. Therefore: Microsoft is Evil Incarnate.

Microsoft’s critics are looking for a way to explain Microsoft’s incomparable success in the market, but without having to acknowledge the obvious fact of voluntary consumer choice, which is a capitalistic principle. They hate Microsoft, but they also say they love free market competition, so in order to justify their hatred, they blame the government for Microsoft’s success. “Monopoly!” they cry. “Government-created monopoly!”

Apple also has its share of patents and copyrights, but it is still an also-ran. Even some Linux distributors invoke copyright protection. But Microsoft has won the battle where it counts: in the marketplace.

[By the way, I am receiving two opposing arguments from Linux cult members. (1) Linux is not free of charge; companies sell it; you can buy support from these companies. (2) Linux is free, so Microsoft is doomed because of price competition. To the first group, I ask: Why would any typical user of Windows pay money to switch to unknown Linux, sold by an unknown little company, instead of paying to upgrade his familiar Windows? To the second group, I ask: Why should millions of users switch to a program that is not supported locally in repair shops, where most of us get our computer problems solved, the way we get our Windows-based systems fixed?]

The copyright issue is what my generation has called a red herring. It throws people off track the way a herring dragged across a path supposedly throws hounds off the scent of a fox. Bill Gates would not need copyright protection if the courts enforced private contracts. Patent law and copyright law are substitutes for contract law.

SUBSTITUTE PROTECTION

Copyright protection is important to authors only because the State has put restrictions on courts in their enforcement of contracts. Copyright protection would not be necessary if software sellers could write clauses into their license agreements that the courts could and would enforce. Software producers have done this from the early days of the microcomputer. To activate programs, we must click “I agree” buttons. This is surely a free market principle. No one compels me to agree. The problem is, courts will not predictably enforce such contracts.

Microsoft uses copyright law to defend its intellectual property, but this is not central, economically speaking, to its so-called monopoly. Contract law would work just as well if the courts enforced contracts. Explaining Microsoft’s success by an appeal to copyright law is naïve. Its competitors, dead and alive, have also used copyright law. The commercial sellers of Linux-based products do, too.

Contracts are not protected comprehensively in the modern world. This is because the State’s agents know that the full right of contract would create multiple and permanent private institutions that could operate without being beholden to legislators and bureaucrats. Think of zoning laws. They are passed because courts refuse to enforce “restrictive covenants,” meaning restrictive contracts.

If contracts were consistently and comprehensibly enforceable in the courts, Microsoft could develop a new piece of software and authorize no one use its property who did not agree to abide by the terms of the contract. Microsoft could write the contract so that its property — code — would be fully protected. This is true of any producer of any product.

Patent laws have much the same function as copyright laws. Patent laws are the State’s way to grant limited protection of property rights — either 20 or 14 years of monopoly — to those companies or inventors that are willing to go through the government’s hoops in order to prove that they have invented a truly new product. The State’s agents get to determine who qualifies as truly inventive.

The free market case against patent law or copyright law should be the case in favor of contract law. But the critics of Microsoft indicate that they see copyright law as evil because it keeps users and rival producers from stealing Microsoft’s code-based products. They attack copyright law because it restricts theft. They are enthusiastic defenders of the free market only to the degree that there is no protection for intellectual property.

You may think I’m exaggerating, that nobody would argue this way. Here is a letter from Paul.

But microsoft did the software equivalent of inventing the wheel (or actually, copying Apple’s wheel) and then patented/copyrighted it. So what started as free market has become a global monopoly corporation because they threaten their customers with government force if they do as they choose, i,e., share, copy, adjust(crack) code on their own computers.

You won’t find any Biblical basis for IP and it in fact violates real property. You are usually clear and right on these kind of things, but I’ve read conflicting things from you on this. Perhaps an unsettled conscience? Mine is clear and settled since I dealt with the moral issues based on prayer and the Word of God: file sharing is doing freedom a favour and downsizing oversized businesses built upon violent threats of government force over property that no longer rightfully belongs to them is good (so is prudence of course!)

In practice, other OS’es and ‘piracy’ are a residual market force that keep microsoft on its toes so it does the job reasonably well. But who can tell what would have developed without IP laws in a real market? . . .

You are right about market share and linux user friendliness right now. This is to do with the corporate/feudal/fascist form of capitalism that prevails. It affects everything including marketing and the free flow of good advice, and has relegated other Os’es to niche markets, for now, and the impetus for user friendliness is reduced.

He asks rhetorically, “But who can tell what would have developed without IP laws in a real market?” I don’t know who can tell, but I can tell this much: he has confused intellectual property legislation with intellectual property rights. He has confused copyright law with contract law. He has confused legislation with tort law. He is not alone.

To explain his attitude, I refer back to a political and judicial battle over property rights and contract law in the United States: the civil rights movement.

THE RIGHT NOT TO DO BUSINESS

In the 1960s, protestors in the South went into restaurants and luncheon counters and refused to leave when asked to leave. These were called sit-ins. This was a flagrant violation of property rights. Signs on the walls announced, “We reserve the right to refuse service to anyone.” Those signs were not enforced by the courts. They have been made illegal by federal law today.

I would have driven a free jitney in Birmingham in 1956 to take blacks to and from work as a protest against the tax-funded municipal bus line that refused to let all paying customers sit where they wanted, and when a local law against for-profit cabs was enforced to keep bus-boycotters from getting to their destinations. I would have done this because I favor the free market. I don’t like municipal bus lines and cab licensing because these are violations of the principle of voluntary contract. I would have bowed out when the sit-ins began for the same reason.

The right of a restaurant owner not to do business with anyone he chose not to do business with should have been legally enforceable. The right of a Birmingham protestor to do business with an unlicensed for-profit provider of transportation services should have been equally enforceable. Both of these rights stem from the same right: the right of voluntary contract.

The sit-in organizers violated this right as surely as the Birmingham city council violated it. The right of an unlicensed cabbie to say “get in” is as valid as the right of a restaurant owner to say “get out.” But both sides saw color as the basis of right, and therefore as the basis of legislation. Blacks had to sit in the back of the tax-funded buses, despite the fact that they paid the same fare, and no one was allowed to offer an alternative for profit. Blacks were allowed to sit at a counter after being asked to leave, and the courts would not enforce their forcible removal. Southern whites cheered for one violation of property rights (sit-backs) and booed against the other (sit-ins). Blacks and white agitators did the same cheering and booing, but reversed the categories.

Think of Lester Maddox, with a baseball bat on the wall, and a sign, “We reserve the right to refuse service to anyone.” I would not have been one of Mr. Maddox’s customers. I don’t approve of racism. I would have protested his refusal to serve blacks by withholding my money. But I would have voted for him for Governor of Georgia for the sake of that sign and that baseball bat. Racism is bad, but the violation of property rights is worse. Racism can be dealt with by the victims through increased productivity, as Japanese Americans proved after World War II. The honoring of contracts is the best possible way to overcome racism. “Your money is good here” are among the most anti-racist words on earth.

Some of the OS cultists see Gates in the way that protestors viewed white restaurant owners: as beyond the law’s protection. They cheer a violation of property rights — theft — when Microsoft’s products are the target. They boo copyright protection, not because copyright law limits contracts, but because it gives protection against theft. The test of their commitment to the principle of private property is this: their willingness to cheer the enforcement of contracts — contracts that Microsoft can write any way it pleases. But the cheering stops.

“CORPORATE FEUDAL FASCISM”

My critic invokes a mantra of the anti-corporation Left. He uses knee-jerk Leftist rhetoric: feudal (we all hate feudalism, right?) and fascism (bad stuff, right?).

For those of you who are confused about corporation law, let me present a simplified example of what is at stake. You join a church. You donate to the church. You benefit from being a member of the church. If the church gets sued, and the courts convict the church, and the church is forced to sell its property to pay off the plaintiff, should the plaintiff also have the right to take everything you own, too, just because you are a member of the church?

No? Why not? You reply, “Because I am not responsible for what the Board of Trustees or the pastor did on behalf of the church.” I agree entirely. Fortunately for the success of the church, so do most legislatures and the courts. So far. If limited liability protection is valid for church members, why is it invalid for investors in corporations? What is morally wrong with the concept of the limited liability corporation? What is wrong with contract law that would allow the following provision in a contract? “In doing business with this organization, I hereby surrender my right to sue investors in this corporation for acts of the Board of this corporation.”

Critics of the corporation, some of whom are anti-capitalists to the core of their being, despite their verbal affirmation of the free market, do not understand the rise of the modern corporation. The legislatures’ creation of limited liability protection was a formal transfer to business entities of the principle of limited liability church membership.

Here is what was wrong with corporation law in the late nineteenth century: limited liability protection was granted by legislatures only to the favored few. It should have been available, as it is today, to anyone who would write a limited liability clause into the corporate by-laws and fill out boilerplate forms.

It is not the corporation as such that is evil. What was evil, a century ago, was state legislatures’ monopolization of the right to grant such limited liability protection to a business. The state should have allowed the courts to enforce contract law, which could easily have established limited liability protection for any privately funded entity.

Patent law today is analogous to corporate law in 1900. It is a limitation of the right of voluntary contract. For example, the State grants protection for 14 or 20 years. Why not permaently? If there is a legitimate right of property, by what principle does the State limit protection to only 14/20 years? Copyright law in the U.S. grants protection to a work for 75 years after the death of the author. Why not permanently? This is legislation based, not on moral principle, but on public policy considerations.

Murray Rothbard once quipped that Ayn Rand hated God more than she hated the State. I get the distinct impression that a hard core of anti-Microsoft libertarians hate Bill Gates more than they hate the State.

CONCLUSION

An excellent test of a person’s commitment to a principle is his willingness to accept his worst enemy’s success by honoring that principle. As Moses put it, “One law shall be to him that is homeborn, and unto the stranger that sojourneth among you” (Exodus 12:49). This is the rule of law. Without it, legal predictability dies and tyranny is secured.

Microsoft did not gain market supremacy because of copyright law. It gained supremacy because the product line that it produced was superior, for the average desktop user, to the rival copyrighted/patented software/hardware products.

If contract law were enforced rather to the same extent that patent law and copyright law are enforced, Microsoft would dominate the desktop market. If the Department of Justice had not intervened, Microsoft probably would be even more dominant. My wife would be using Microsoft Quicken to handle our finances.

If a product, such as digits, cannot be protected from theft because of the inherent nature of the product, then to create a gigantic State enforcement apparatus to enforce property is counter-productive. It wastes resources. Tyranny increases. Microsoft’s code can be protected from some kinds of theft, but not all kinds. Its lawyers understand this. Gates knows that there is no way to enforce anti-piracy laws in a Chinese village, where no one could have paid retail anyway. He is concerned, and legitimately so, about profitable firms that steal his software to install on a hundred desktops. Microsoft should be able to sue and receive damages from such a company for violation of contract. But because contract law has been undermined by a century of anti-capitalist legislation and court decisions, Microsoft’s lawyers use copyright law as a defensive shield.

In short, anti-contract ideologues who blame copyright law, corporation law, and the State for Microsoft’s success are either uninformed about contract law and corporation law or else are simply seeking a way to justify their envy against a highly productive company that has defeated its rivals fair and square, if by “fair and square,” we mean competition in an industry that, more than most, is marked by open entry. I hope this is how defenders of capitalism define “fair and square.”

October 29, 2004

Gary North [send him mail] is the author of Mises on Money. Visit http://www.freebooks.com.

Copyright © 2004 LewRockwell.com