How Intellectual Property Hampers Capitalism (Transcript)

by Stephan Kinsella on October 18, 2010

in Austrian Economics,Intellectual Property

The following is a lightly-edited transcript of my speech, “How Intellectual Property Hampers Capitalism,” presented at the Mises Institute Supporters’ Summit 2010 (Oct. 8-9 2010, Auburn Alabama) (audio and video).

[Update: see the article based on this talk: “How Intellectual Property Hampers the Free Market,” The Freeman (June 2011), republished as “How to Slow Economic Progress,” Mises Daily (June 1, 2011).]

How Intellectual Property Hampers Capitalism

Stephan Kinsella

Mises Institute Supporters’ Summit 2010

“The Economic Recovery:  Washington’s Big Lie”

Auburn Alabama * Oct. 8–9 2010

As Doug [French] mentioned, I am a registered patent attorney.  I try not to do too many patents anymore.  I find it a little bit distasteful.  It’s not the most enjoyable profession to have when you mention to people you’re a patent attorney, they always want to tell you their inventions.  I was sitting on the plane and some guy asked, “What do you do”?

I said, “I’m a patent lawyer.”

He said, “Oh, let me tell you about the time I invented One Click before Amazon patented it.”

I’m thinking, “oh God, I have a three hour flight with this guy.”  Maybe I should have told him I was a proctologist.  But I guess that could have actually been worse!

So, David [Gordon], that’s joke #1 that I saved for you today.

Today, what I’m going to argue is intellectual property is incompatible with capitalism.  The word capitalism itself might need a little bit of clarification because, in recent years, some fellow advocates of the free market and free society have said they are in opposition to capitalism.  I think it’s basically a semantic dispute.  What they are opposed to is what we would refer to as corporatism or mercantilism or crony capitalism or capitalism as the western governments portray it.

So, you have this sort of funny situation where we are in favor of capitalism, by which we mean private property, and I’m against intellectual property.  Left libertarians are against capitalism and they’re against intellectual property.  Regular leftists believe that intellectual property is a legitimate type of property right and they’re against it for that reason.  So, they’re all over the map, which reminds me of my second joke, David.

This is inspired by the ideas of the late 19th century anarchist philosopher Proudhon.  So, the joke is: Why do anarchists drink herbal tea?  Because proper tea is theft.

Alright.  Off of the jokes.  Sorry Doug [French].

Why do I say that intellectual property is opposed to capitalism or not part of a legitimate property rights free market system?  Why don’t we just step back and let’s consider some cases where the western governments, supposedly representatives of capitalism, have tried to impose capitalism on the rest of the world, trying to bring more backwards countries into the fold of an advanced economy.  What have we given them?  What have we told them to do?  What have we twisted their arms and tried to force upon them?

Well, there’s income tax withholding.  We know that’s capitalist because Milton Friedman suggested it.

There’s American anti-trust law.

Anti-bribery laws like the Foreign Corrupt Practices Act, which we have here, which penalizes American businessmen from engaging in what is regular business practices in other parts of the world and puts them at a competitive disadvantage with respect to companies from other countries which are not so impeded, leading, of course, to America to force treaties upon the rest of the world to get other countries to also ban bribery in their country so that Americans wouldn’t be as harmed by these laws.

Central banking. We’ve imposed central banking, U.S. style, on the rest of the world:  Canada in the 1930’s, Russia after the fall of Communism.

State ownership of natural resources.  Is that capitalist?  That’s what we have in America.  On state lands—and I used to be an oil and gas lawyer before I went to the dark side—unlike anywhere else in the world that I’m aware of, minerals underneath land are privately owned, as it should be.   In every other country, and even outside the states in America, like offshore where the BP accident happened, the MMS, the Minerals Management Service, the federal government basically claims ownership of the minerals under the ground.  Then they grant leases and they take a cut.  So actually the landlord of the BP disaster was the federal government, but you don’t see them taking the blame for it.

So, what do we do?  We impose this system on other countries, too.  Iraq, after the American government overthrew Sadaam Hussein, they’re encouraging them to use the American model there.  Is that capitalist, to have the government of Iraq own the resources and sell the oil to customers?

There’s drug laws, too.  Would we allow Mexico, for example, to legalize narcotics?  Would we put up with that?

There’s managed trade, in terms of NAFTA, agreements like this.  Of course, the Marshall Plan, after World War II, and democracy itself, which arguably, and in my opinion, is not capitalist, not compatible with property rights.

So, we have cases of America and the West, pressuring other countries to adopt so-called capitalist measures routinely, in the name of capitalism, but these are not capitalist.

Now, what about intellectual property?  We have a similar situation.  We have America and its lackey, the World Trade Organization, pressuring other countries, like Russia, India, China, to adopt our draconian IP laws.

China is now actually coming into shape a little bit.  They’re now third in place, behind Japan and America in terms of patent filings which is a radical change from five to ten  years ago, due to American pressure.  We have diplomatic pressure being exerted on Canada right now to adopt some of our copyright provisions that are in our Digital Millennium Copyright Act which make IP law much worse and more draconian.

Even worse, right now pending, is the secret anti-counterfeiting trade agreement or ACTA.  It’s a treaty that’s being negotiated right now.  I suspect it will pass, probably this year, and it’s going to be horrible.  It’s going to impose patent and copyright type protections around the world, including Digital Millennium Copyright Act, or DMCA type provisions.  As science fiction author Corey Doctorow observed, the act is a “radical rewriting of the world’s Internet laws taking place in secret without public input.”

So, maybe we got it right this time.  Maybe anti-bribery laws, tax laws, anti-trust laws—maybe these are not really capitalist, but maybe this one case of IP law is really capitalist.  Maybe it’s compatible with property rights.  Maybe it’s a good thing that the American government is trying to force other countries to adopt our way of doing business.

Maybe we got it right.

But let’s think about where did it actually come from?  Where did intellectual property come from?  By intellectual property, I’m primarily referring to patent and copyright.  These are the two big culprits in my opinion.

There are others.  There’s trade secrets, there’s trademarks, there’s reputation rights, there’s boat hull designs, there’s semiconductor mask work, but the big two are patent and copyright.

Where did they come from?  Well, they both basically came from sovereigns or monarchs issuing monopolies to favored people to get them indebted to the sovereign, basically.  They were exclusive monopolies that protected various goods and services for a limited period of time.  They were monopolies.  The word patent, as historian Patricia Seed notes, comes from the Latin patente, signifying open, as distinct to closed letters or private letters.  They were open letters granted by the monarch that gave someone authorization to do something like to be the only person to sell a certain good in a certain area.

Here’s something interesting I came across recently.  Letters patent, one of the early uses of the letters patent in the 1500’s, was granting authority to pirates, real pirates, not Pirate Bay pirates, to become privateers, which is just legalized piracy.  So, you gave them a monopoly over the spoils of their piracy for some certain period of time. [See my post The Real IP Pirates.]

This is where patents originated.  A famous example was Francis Drake.  Some people say Sir Francis Drake but, as he was a slaver, I don’t call him Sir.  He was given a Letter Patent on March 15, 1587 which authorized him to engage in piracy.  He attacked Spanish ships sailing back from South America laden with silver.  He brought the treasures back home to the Queen.  He was famous for this.

What’s ironic is you have defenders of intellectual property attacking pirates today who are not really pirates.  Real pirates come aboard your ship, kill people, break things, take things, make you worse off, right?  So, they basically accuse people that share information of being pirates when, ironically, one of the original uses of patents was to authorize real piracy.

It’s a little bit amusing.  You’ll find defenders of intellectual property, some patent lawyers and even some libertarians, they get really indignant, if you call it a monopoly. “That’s not a monopoly, it’s a property right.  If it’s a monopoly then your use of you car is a monopoly.”

Well, one of the first patent statutes was England’s Statute of Monopoly of 1624.  They didn’t really mince words back then.  Remember, we used to have a Department of War in America.  Now it’s the Department of Defense.  The old statists were much better.

They were more honest.  This patent statue in England, the Statute of Monopoly, was a way to raise money for the Crown without having to impose a tax.  They sold these monopoly grants by charging fees to people for applying.  What it did, it helped cement political loyalty.  So what happened was, and this is from a correspondence I had with Jeff Tucker, talking about this, so the monarch, what they wanted, you had growing trade at the time, in the 1600s.  The monarchs wanted credit for this growing trade.  They wanted to say we can take credit for this.  We’re granting these patents.  The producers of these goods wanted not to be looted. They wanted protection from competition.  So they did this deal.  Everyone benefited except for the consumer.  The merchants were afraid of being looted by the king so they took this deal, so like monopoly, they joined the state to keep the enemy close.

Today, what we’ve done, is we’ve democratized or institutionalized intellectual property.  Anyone can apply.  You don’t have to go to the king.  You can just go to the patent office.  But you see the same thing happening now.  You see companies, like my company, applying for patents because you have to, to keep the wolves at bay.  In other words, if you don’t have patents, someone might sue you or might steal your ideas.  So you have all these companies spending millions of dollars to obtain patents just to have a weapon to fire back against someone who might sue you with their patents.

Of course what happens is the large companies get together and they sue each other, they rattle their sabers, and then they make a deal. They cross license to each other.  Microsoft and Apple might sue.  They both have large patent arsenals, so they’ll finally compromise and settle.  They’ll say, “Okay, okay, okay.  Maybe you pay me some money and maybe I’ll pay you some money and then going forward, we each get the right to use each other’s patents.”

Well, that’s fine for them.  That means they both have protection from each other’s competition, but what does it do to these little companies?  Little companies don’t have big patent arsenals.  They can’t jump over this hurdle.  They can’t get into the club.  So the patents basically amount to a barrier to entry, a mercantilist type of protectionism.

What about copyright?  The roots of copyright literally lie in censorship.  You had these guilds arise when printing became easier.  The church and the government started to get worried.  We can’t control official and political thought as easily now.  We can’t control what is approved thought.  They passed the copyright statues to basically help limit what could be produced and said and what information people could copy and share with each other.  The first full fledged copyright statue was the Statue of Anne in England in 1709.

If you want to go back a little further, you can all the way to 500 B.C. in Greece.  In the Greek city of Sybaris, located in what is now southern Italy, there were annual culinary competitions.  The victor was given the exclusive right to prepare his dish for one year.  I always think that it’s great that we had this law, otherwise we wouldn’t have had any innovation of food in the last 2500 years.

Now, if you want to turn to the modern type of IP, the American system, 200 and some odd years ago, basically it started with the American Constitution, adopted in 1789.  Article 1, Section 8, Clause 8 authorizes Congress, it doesn’t require them, but it allows them, to promote the progress of science and the useful arts by securing for a limited time to authors and investors the exclusive right to their respective writings and discoveries.  Basically, this is the authorization for modern patent and copyright law.

Unlike some opponents of IP law, I don’t think it’s unconstitutional.  Actually, it is constitutional; so was slavery.  It doesn’t make it right.  What is interesting about that is the words science and the useful arts is used.  Most people today think science is patents, useful arts is artistic creations like copyright.  Actually, it is the opposite. There was more archaic language used then.  Useful arts meant artisans, like crafts.  It meant produced goods and inventions.  Science was a more broad term back then.  It meant all knowledge, including artistic knowledge and creations.  So actually science had to do with copyright and useful arts had to do with patents.  Be that as it may, what is interesting is, that despite common arguments for IP by the people in favor of it, the founders of the Constitution, and you can tell from the language, did not view intellectual property as a natural right.  They viewed it merely as a sort of prudential measure.  It’s just a policy tool.  They thought they could encourage innovation with this.  That’s why they gave it for just a limited time. They were nervous about it.  Thomas Jefferson was the first patent commissioner, ironically, was very queasy about the idea of granting these monopolies.  They knew they were monopolies.  They granted them consciously.  Even Locke didn’t view copyright and patent as natural rights. Even Locke did not believe (whose writing influenced the Founding Fathers, by the way) that his homesteading idea extended to ideas.  It only extended to scarce resources.

It is true that sometimes there were little versions of copyright, and things like this, in some of the state constitutions before the American Constitution [see Tom W. Bell, Intellectual Privilege: Copyright, Common Law, and the Common Good, Part 1, Chapter 3, Sec. B.1].  On occasion, language of natural rights was used to defend them.  This was just cover.  In other words, they were granting monopolies to special interests and they wanted to hide that fact.  They called it natural rights to cover it up.

Clearly it is not a natural right.  Natural rights wouldn’t expire after fifteen years.  Natural rights wouldn’t be extended only to Americans, which they were.  Natural rights wouldn’t exclude lots of types of creations and only cover some enumerated types.  It’s clearly a policy tool and a “civil” right.

So we have this modern federal statue administered by a huge federal bureaucracy granting monopolies to Americans who apply that allow them to go to the federal courts to ask the federal courts to use federal force against their competitors who are doing what?  They are using information to guide the use of their actions.  They’re peaceful people.  They’re competitors.  Can we really think this is capitalist?

There are any number of examples I can give.  I won’t run through them here; they get tedious.  There are daily examples of outrages and horror stories, crazy patent lawsuits, crazy copyright lawsuits, crazy patents granted on a daily basis.  Of course these are not the problem.  The problem is that even if you get a patent legitimately, you can use it to use the force of the government against your competitor.

I will mention one outcome of IP law which is particularly egregious with respect to copyright and how it can be used to actually censor thought which shouldn’t be surprising since its roots are in censorship as I had mentioned.  It literally has led to censorship, even recently.  I’ll just give you a couple of examples here.

This was just a month or so ago in the news.  Russian authorities were using the pretext of intellectual property piracy and violations for seizing the computers and other materials from political opponents of the government.  So they were using IP to crack down on political opponents and dissidents.

Susan Boyle, you might remember her from Britain’s Got Talent, the singer from England, she was literally prevented from singing a Lou Reed song on some show the other day because of copyright.  She couldn’t sing it.  She couldn’t use her mouth to perform certain actions.

In Germany, there is a group of newspaper publishers.  They’re lobbying for a new exclusive right, conferring the power to monopolize speech.  In other words, assigning the right to reuse a particular wording in the headline of a news article anywhere else without the permission of the holder.  They want to monopolize the right to the title of an article.  There is an actual case where there is a German silent film, Nosferatu, that was deemed a derivative work of Dracula.  The courts ordered all copies destroyed. This is literally true.

The worst case, in my opinion, is of the author J.D. Salinger of Catcher in the Rye, the one the all the psychos read.  There was a novel called Sixty Years Later, Coming Through the Rye.  It was sort of a derivative work, a parody or a follow up.  He got the courts to ban the publication of that book, based on copyright.  I mean it is just banned.  This is literally the modern equivalent of book burning due to copyright law.

Now, you tell me how this can be justified by libertarians?  I’ll give you some of the best arguments I’ve heard for intellectual property from advocates of intellectual property.  There is a philosopher named David Koepsell who is a good libertarian philosopher and professor.  He is an anti-intellectual property theorist.  He had pointed out, in an online debate, that in the 19th and early 20th centuries, two of the most innovative countries on earth, which were the Netherlands and Switzerland, had no patent systems at all due to legislative anomalies.  They actually didn’t have a patent system for a while, but they had tons of innovation despite this.  He was giving this argument.  There is this patent attorney named Gene Quinn who is a regular patent shill.  He wrote this:

Thank goodness, the Swiss did have a patent office. That is where Albert Einstein worked. During his time as a patent examiner, he came up with the Theory of Relativity.

We need to have patents so we’ll have patent offices so we’ll employ potential future physicists!

I came across this argument by a free market economist writing on a website in the last year, a senior fellow with a free market think tank.  He said:

It’s true that other means exist for creative people to profit from their effort (he was arguing in favor of IP).  In the case of copyright, authors can charge fees for reading their works to paying audiences.  Charles Dickens did this, but his heavy schedule of public performances in the United States, where his performances were not protected by copyright, arguably contributed to his untimely death.

We have to look out for Dickens.  We don’t want to kill people by not having copyright laws to protect their interest.

This author also observed, “To paraphrase the late economist, John Robinson, patents and copyrights slow down the diffusion of new ideas for a reason, to insure there will be more new ideas to diffuse.”

Now this is an advocate of IP. He thinks this is an argument for IP.  He is actually admitting that copyright slows down new ideas and their diffusion.  It reminds me of modern economists who talk about, in all these scientifistic metaphors, about the economy.  We need to cool down an overheating economy.  Basketball games have “momentum”; all these scientific terms.

More seriously, the basic utilitarian argument, which is the common one among libertarians, is this just assumption which the Founding Fathers had. There is an assumption that if we have the government grant these monopolies on certain types of innovation, we’ll get more of it and we’ll all be better off; basically, net wealth will be created.  This is their argument, but they rarely make it this explicit.  If they made it explicit, they would have to give us numbers.  Their argument is that it creates wealth.  Well, how much wealth?  Tell me how much.

There is no doubt that the patent system, for example, imposes cost on society.  I’ve estimated it costs $38-48 billion a year.  That’s my off the cuff estimate and that’s annually in America alone, just the patent system.  So it imposes cost: my salary, litigation costs, insurance, higher costs for products.

If you are going to argue that patents impose a net gain on society, you need to tell me what the cost is, tell me what the net gain is, subtract from it certain types of innovation that are now suppressed.  There is no doubt that some innovation is lost because of patents. Even if some innovation is gained, some is lost.  We need to know the net.  They never give you these answers.  They don’t know.  If you ask them, they just change the subject.  I have yet to meet a serious person who argues this way. All the studies that I have seen, I’m not an empiricist, I’m not a utilitarian, but this is their argument.  Every study that people come up with is either inconclusive. They say, well, we just can’t figure it out, we don’t know … which is probably the proper answer because values are subjective and ordinal, not cardinal.  We cannot really sum up these things.  All the attempts to do so, using conventional methods, they either conclude that the copyright or patent system actually imposes a net cost on society and it decreases innovation.  So it’s like there is a double penalty.  Or they say we can’t prove it one way or the other.

You would think that if you are a utilitarian you would conclude from this we should be against patent law and copyright law.  We know that it is an infringement on liberty.  We know that it’s costly.  We have no evidence to back up our utilitarian hunch which the Founders had that it might be a net gain.  Until someone can satisfy their burden of proof, we should oppose it—but no, they’re in favor of it.

Their argument is that you wouldn’t make this drug if you didn’t have the incentive by the government.  Let’s think about this.  Here we have the federal government which imposes, if you add it all up, 50% taxes, on average, on people that work at these companies and who are their customers, taxes the corporations, imposes FDA regulations and delays on them, imposes other monopolies through the FDA which are like the patent system, regulates these companies to death and imposes all kinds of costs on them.  Now you want to empower this agency, this criminal agency that does everything it can to destroy business, the power to grant selected monopolies to people to allow them to charge a little bit of monopoly price on the market to make up somewhat for all the damage the government is doing you.  I wouldn’t trust this agency to do it for me.

How about they drop the taxes?  How about they stop the regulations?  How about they abolish the FDA?  Then these companies, everyone will be eight times richer and they would have a lot more money to invest in research.

I will conclude there. I would just say that I think it is clear that capitalism is not compatible with intellectual property.

Thank you.

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