HAIC | Intellectual Property: anti-innovation, anti-competition, anti-property!
Intellectual Property: anti-innovation, anti-competition, anti-property!
Intellectual Property: anti-innovation, anti-competition, anti-property! Sergio Alberich
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Intellectual Property: anti-innovation, anti-competition, anti-property!

November 30th, 2015 | by Sergio Alberich

“The growth of knowledge is of such special importance because, while the material resources will always remain scarce and will have to be reserved for limited purposes, the users of new knowledge (where we do not make them artificially scarce by patents of monopoly) are unrestricted. Knowledge, once achieved, becomes gratuitously available for the benefit of all. It is through this free gift of the knowledge acquired by the experiments of some members of society that general progress is made possible, that the achievements of those who have gone before facilitate the advance of those who follow.” – F.A. Hayek

There are so many fallacies about Intellectual Property (IP) that it is hard to say which one is the most harmful and ridiculous. However, the one that bothers me the most is the confusion IP generates among successful businessmen. Many of whom have the misguided notion that they owe their achievements to patents and copyrights, and not necessarily to their entrepreneurial smarts.

After all, we all know that IP makes innovation possible because the media, politicians and lobbyists repeat this message endlessly. But even the educated man may never hear that IP actually is a millstone around the neck of innovators – much less come in contact with pro-property arguments against IP.

Sure, many firms and artists benefit handsomely from IP, but anyone who is granted a government monopoly profits greatly. If I run the only coffee farm in the country and imports are forbidden while draconian legislation blocks new entrants I will definitely profit, but in no way it means that society is better off. It does not mean that the industry will be marked by innovation, competition, low prices, variety, quality and productivity. In fact, it is the complete opposite, it is bare monopoly. It hinders innovation, it kills ideas, it is an attack on property and it is against freedom.

While much more needs to be said about patents and copyrights (IP includes many other types of laws as trademarks, trade secrets, database rights… but since the most problematic ones are patents and copyrights, this article focuses on them) before the entrepreneur, the consumer, the artist and the investor free their minds out of the IP obsession, it is imperative to highlight that IP is a ubiquitous part of modern life. It is a topic that is more important today than 20 years ago and that will be even more relevant in the upcoming years – basically due to the growing digitalization of almost everything, peer-to-peer communication and decentralization of production (here).

Within this rising trend, IP is becoming virtually unenforceable while its endorsers propose tougher penalties. As a result, kids have been sued for illegal downloads, videos of little children playing piano on youtube have been blocked, entrepreneurs have been kicked out of markets, drug prices are skyrocketing and basically everyone who uses the internet becomes a criminal (it is estimated that each person, in everyday online activities, annually incur in billions of dollars in liabilities due to the infringement of IP laws – and that is excluding P2P file sharing. HERE). Still, barring despotic impositions over both consumers and producers, the enforcement of IP laws is doomed to become even more ineffective.

Still, in today’s world, entrepreneurs and artists must understand IP and the role it plays in their work – whether they favor it or not. They have to avoid over-relying on patents and copyrights and adopt IP strategies that help them to thrive in spite of IP and not because of IP. They have to start looking at it as one more cost of doing business, as a hurdle such as taxes and not as an asset that gives the firm a reliable competitive advantage.

Certainly, the pro-IP mentality that “validates” the dishonest behavior of rent-seeking will still make a few winners, but for the vast, vast majority of people, wasting valuable time and limited resources trying to prohibit people from copying their inventions will only bring losses.

From its origins, IP has been an enemy of competition and innovation. Patents emerged out of mercantilist practices where the king would grant “Patent Letters” (Open Letters in Latin) of Monopoly to his favorites, while Copyright has its roots in the censorship of books and ideas (check Statute of Monopolies of 1624 and Statute of Anne of 1710). Also, it is ironic that some of the first Patents ever granted were Pirating Monopolistic Licenses issued by the British Crown to the likes of Francis Drake (a British hero no less) to pirate Spanish ships.

More importantly however, is the fact that IP has nothing to do with property rights. The P of IP is completely misleading and grants it undeserved credibility. It is a simple (but genial) marketing gimmick that replaces the unpleasant sound of monopoly by the respectable connotation of property (here).  

Defined as the set of laws that deals with products of the intellect instead of the usual ownership of physical and tangible goods, we could say that IP is an attempt to assign ownership to ideas and knowledge. And here rests the root of the problem. Because ideas do not fall under the realm of scarcity, are not capable of becoming scarce, do not require rationing and are not reduced by their diffusion, they cannot be properly owned.

Property exists in order to allow free individuals in society to resolve and avoid controversies regarding the use of scarce goods, goods that when put to use they automatically eliminate the possibility of being used concomitantly by someone else. Its role is to permit the productive and cooperative use of scarce resources. That said, we can only hold exclusive rights over things (own things) when the use of these things is of the sort that requires the exclusion of other uses. And ideas do not require exclusion!

Like love, ideas do not need to be economized. The same way I can love my wife while my cousin loves his daughter, I can use my uncle’s paella recipe (the idea, the knowledge) at the same time my cousin makes another paella following the same family recipe. The fact I make use of that knowledge does not exclude my cousin or anyone else from cooking using the same recipe. Differently from the tools and rice used in the paella, which cannot be used at the same time by my cousin and myself, the recipe is not scarce, does not need to be economized and cannot be subjected to ownership. Once made public, it is open to anyone to use and to improve upon, but with IP laws prohibiting anyone else from using my uncle’s recipe, I become the monopolistic producer of the paella recipe. Consequently, paella prices are increased, knowledge is not spread, innovation is inhibited, consumers are robbed, quantities are restricted and special interests are rewarded.

Also, IP laws clearly invade other people’s property. Since they are “negative servitudes” that prohibit my cousin from using his own property (his rice, shrimp, broth and cooking tools) to make a paella following my uncle’s recipe (given I owe the IP rights), IP laws, in a way, make me co-owner of my cousin’s and everyone else’s property. Even though no one has ever signed a contract granting me this partial property right over his cooking tools and food.

Lastly, but most importantly, IP prostitutes the meaning of real Law. It is deconstructed from general (applied equally to all of us), universal (applied equally in any space and time) and abstract (it should only establish a wide range for individuals to act, not a rigid modus of behavior with the goal of imposing a certain social outcome – that is, picking winners and losers) principles into specific coercive mandates that mark IP laws – which are clearly not general, universal nor abstract, and that could never be.  

Actually, any tentative to universally and generally enforce IP mandates would automatically lead us to theoretical absurdities. Can anyone imagine a world where IP is enforced upon any kind of intellectual product? Where brushing your teeth implies in paying royalties, where running and walking is patented and where any phrase is copyrighted? My guess is that anyone is capable of seeing such absurdity.

Also, how can anyone reconcile the arbitrary boundaries and the social-engineering characteristics of IP laws with the blindfold representation of Lady Justice? Why music is subject to IP and clothes are not? The same fallible utilitarian arguments used to sustain IP in the first could be easily employed in the second. Moreover, why 17 years for certain patents and not 18? Why 70 years and not 71 or 50 for copyrights?

As a result, IP laws make a mockery out of real Law by emptying it of content, by subjecting it to the will of a few and, most of all, by debasing its meaning.  

All that said, it should be easy to realize that Copyrights and Patents are not part of the market process, but a product of positive law that erodes property rights, seizures property, redistributes wealth and is imposed in the name of cronyism to exclude competition.      

Unfortunately, even when the monopolistic traits of Patents and Copyrights are accepted by some of the proponents of IP, they still argue that the harm of monopolies is more than offset by the gains of innovation. They claim that without IP there would be no incentive for inventors, artists and firms to create. They say that anyone would easily copy everything that you and I created after much sweat and effort.

These utilitarian arguments are wrong and contrary to reality, but because the average person does not always have the time to examine them, the endless repetition of such lies makes the pro-IP narrative the conventional wisdom.

So, when confronted with anti-IP arguments, most people rapidly start to shoot a bunch of predictable questions that the answers they have never really stopped to think about. Overall, they ask how can anyone make a buck in a world of widespread emulation? They inquire about the small inventor, and wonder who is going to protect him? They fear the pharmaceutical industry would stop developing drugs if they could be copied by anyone at any second, and place questions. They are almost certain that musicians, writers and movie makers would not be able to make a living and wait for an explanation. Not to mention their doubts about high-tech research…

The answers to these questions are not very difficult to find, but they are often overshadowed by the abundance of IP fallacies that dominate the surface. Digging just a few inches in should be more than enough to reveal a plethora of very solid theoretical and historical works providing evidence of the harms of IP and of the beauty of the inventions that happen outside of the IP myth, but perhaps, a good and less exhausting starting point would be for the reluctant person to ask a different set of questions and think about their implications.

  • Isn’t the fashion world composed by many profitable and highly innovative firms? How is it possible in the absence of IP and constant emulation?
  • Didn’t we have blockbuster Hollywood productions before the appearance of VCRs, DVDs, streaming services and widespread product licensing?
  • Aren’t concerts and shows the major sources of income for musicians? (if interested, check out this great Mick Jagger interview on the music business)
    • What about the billion dollar tecnobrega music industry that flourishes in Northern Brazil by giving out CDs on the streets and endorsing free digital downloads? How is it possible that musicians thrive in the absence of IP?
  • Would Madonna not have opted for a singing career had she realized she would have to live from the tens of millions she has made on tours around the globe and not from royalties? Would she rather have stayed working at a Dunkin’ Donuts store?
  • What about J.K. Rowling, how would her decision to write Harry Potter have been impacted had she considered that at best she would have become a mere millionaire instead of a billionaire? Also, is licensing and book royalties the only sources of income a writer has? Can we not imagine her making a very good living in the absence of traditional royalties?
  • Isn’t obscurity the worst thing that can happen to an artist or writer?
  • Why, in the past century, has the copy-friendly Rock and Jazz music developed so much faster than the IP oriented Classical Music?
  • Have you ever thought about pre-sale campaigns funding the production of video games, books and movies? It is big in many circles! What about sponsorships? Very popular as well.
  • How do we explain the greatest achievements of medicine being accomplished outside of IP? After all, patents had nothing to do with penicillin, X-rays, tissue culture, anesthetic, public sanitation, most vaccines, aspirin, AZT, morphine, fluoride, methadone, most vitamins, phenobarbital, quinine, ritalin, computers (greatly helped medicine), the birth control pill, the discoveries of the health risks associated to smoking
    • How could Switzerland and Italy be powerful innovators in the pharmaceutical industry (the poster child of IP) during the 19th and 20th if until the 1950s and 1970s they were free of IP legislation?
  • How is it possible that over 70% of the online servers in the world run the open-source Apache? How is that possible for so many people to make a living out of the popular Linux? Actually, it is such a well open-source operational system that Google opts to run Android on Linux!
  • Are you sure that no one is making a living out of open-source software? Many firms, like Red Hat, are very successful at selling services for open-source creations of their own (despite strong competition).
  • How is it possible for Twitter (and many other successful firms) to survive without trying to enforce its patents?
  • How was it possible for Norton to profit selling the 9/11 report that was available for free? (Maybe, being the first to market it, by a matter of hours, had something to do with it – by the way, selling figures were similar to the first Harry Potter)
  • How is it possible to profit from publishing classic books that are available for anyone to publish?
    • Is Shakespeare not recognized as the author of Romeo and Juliet? Is anyone capable of selling Don Quixote pretending that someone else wrote it?
  • How is it possible for Netflix and Amazon to profit streaming movies if peer-to-peer illegal downloads are extremely popular and easy? (Perhaps, providing a great platform that customers value more than the free options available has something to do with it… and yes, when they stop providing better services, they will not sell anymore – and that is exactly what happens in every single other line of business)
  • Do we really create things out of the blue or do we always build upon the creations and the knowledge of others? If our inventions indeed rest on the shoulders of others, how is it possible to restrict the spread of knowledge and foster innovation at the same time?
  • Is a food recipe enough for you to replicate a chef’s dish? Isn’t there a kind of knowledge involved with any action that is simply tacit and impossible to be transmitted through pen and paper? (know how vs know that)
  • What is more important to the entrepreneur, his individual knowledge about the particularities of his time and place or some formula written on a book page?
  • In the absence of IP laws would we have nothing better to do than to copy everyone and everything? Opportunity cost?
  • What about the unseen costs of patents and copyrights? What about everything that is not created because of IP? Music, books, drugs, apps, machines…

IP is indeed a complex topic, full of facets and implications in our lives that cannot and should not be ignored. Though, from ignoring it to being a uber belligerent IP enforcer there is an enormous distance. We cannot ignore it because, like taxes, it exists and is part of our legal systems, and we should not over rely on IP because it is morally wrong, unproductive and simply bad for business. In a few words, businesspeople should adopt defensive IP strategies and disregard any offensive approach towards Patents and Copyrights.  

From a purely pragmatic point of view, treating IP like an asset and a secret formula to success, seems like a terrible option in our day and age, when, despite ever stronger penalties on the violations of IP laws, their enforcement is extremely ineffective.    

Centering a business strategy on IP and being aggressive in trying to block competition from using it usually back-fires and becomes a very heavy ball-and-chain to the business itself. Not only it diverts important resources (money, management attention…) away from productive uses into legal battles (that might stop a certain competitor but that lacks the capacity to block the whole competitive market) but it also leads to firms overcommitting to certain technologies just because they believe to hold strong patents (and yet, they conduct business in an ever-changing market that demands constant re-adaptation).

Furthermore, aside from situations marked by rent-seeking, IP has never been key to success. Entrepreneurs, inventors and artists have never triumphed because of IP, but because of their creativity, because they were the first ones to bring a certain product to the market, because they improved upon what others were already doing, because they were cheaper, because customers valued their products more, because they were, in one way or another, superior to competition on a daily basis. All of that, and not IP, was, is and will always be the key for entrepreneurial success.