Let A Thousand Nations Bloom

This guest post comes from Michael F. Martin, a Thousand Nations regular, and a blogger at Broken Symmetry.–editor

Toward a Libertarian Theory of Intellectual Property

We libertarians, being libertarians, are seldom to be found in agreement on first principles when it comes to anything, especially legitimate roles of government.  But if there were one principle to which all libertarians might agree, it would be this: that government, in carrying out its legitimate roles, should minimize costs.  The costs of government include not only the more obvious direct costs in the form of taxes and redistributions of property, but more importantly the much larger and more pernicious indirect costs of distortions to private institutions and organizations. (I follow the convention of some economists in distinguishing between the rules that define activity among a group of people (“the institutions”) and the group of people itself (“the organization”).) When government intervenes to benefit a particular group in society, even for noble of reasons, it can also undermine private institutions that have evolved to bring order, private institutions that may reflect a broader and more stable consensus than can be achieved even by a representative democracy.  At the margins of government reach, communities can and do by consensus ignore legal norms, thereby avoiding the distortions caused by the undermining of locally stable cultural norms.  We Americans should be as proud of the ranchers in Shasta County, California who ignore California trespass law as we are of the Founding Fathers who disobeyed the laws of a more ancient and powerful sovereign.

But true to libertarian form, I mean to challenge this most basic of libertarian principles.  For through my study and practice of intellectual property and antitrust law, I have come to the view that a broader proposition should be embraced: That all institutions in society, in carrying out their legitimate roles, should minimize costs.

Why the need for this broader proposition?  In short, because great benefits may be gained by keeping the same skeptical and minimalist eye, which libertarians naturally keep on government, on all institutions in society, whether public and private.  By focusing on government costs alone, libertarians have been blind to the costs of private institutions.  In the end, what difference does it make whether an oppressive institution is called public or private?  What libertarians are in favor of is more freedom, not less government.

Some readers might object: How can a private institution be costly like government?  The cost of government — so these readers might say — is coercion.  And by definition, no private institution can be guilty of coercion.

My answer is that this objection begs the question.  Both public and private institutions interfere with individual liberties.  The constraints that parents place upon the liberties of their children — mental, emotional, and physical — are not different in kind from the constraints that governments place upon their citizens.  Parents’ rules are not just because parental; governments’ rules not unjust because governmental.

A stubborn reader might nonetheless persist: If not different in kind, then in degree.  Government coercion is at a scale (of millions of people) and to a degree (of taking life) beyond private coercion.  A glance at twentieth century history confirms it.

There can be no doubt that twentieth century history put a stink on government.  But did it leave private institutions smelling like a rose?  More importantly, the stubborn reader has already conceded my point by acknowledging that the scale and degree of coercion — rather than public or private status per se — is what makes government costly.  By this reasoning we can dismiss libertarians who argue against intellectual property simply because it is a government institution.

Having cleared away distractions, the more difficult question can be addressed:  Does intellectual property play a legitimate role at minimal cost relative to alternative institutions?  The question has both moral and economic dimensions.  Whether the role played by a given institution is legitimate is moral.  Whether there is not a better institutional form for accomplishing a given legitimate role is economic.  Intellectual property law should be favored by libertarians both for its moral and economic merit.

The Moral Case

The best argument ever made for the moral and economic merits of intellectual property was made very close to 150 years ago in Jacksonville, Illinois, where Abraham Lincoln gave a lecture (one in a series; multiple versions of which are available online).  Lincoln’s lecture “On Discoveries and Inventions” concludes with famous words: “Before [the patent system], any man might instantly use what another had invented; so that the inventor had no special advantage from his own invention. The patent system changed this [by securing] to the inventor, for a limited time, the exclusive use of his invention; and thereby added the fuel of interest to the fire of genius, in the discovery and production of new and useful things.”

What did Lincoln consider the moral case for patents?  To punish theft.  Without a property right in an invention, anybody who devoted the time and effort at inventing would be at the mercy of any dishonest character who managed to learn enough about the invention to copy.  To Lincoln, that seemed unamerican.  To Lincoln, the great difference between the United States and the nations of Europe was the result of “Discoveries, Inventions, and Improvements,” which in turn “are the result of observation, reflection, and experiment.”  In the United States, inventors earn rewards.

Some are skeptical of Lincoln’s premise.  Wouldn’t people spend time in “observation, reflection, and experiment” even without the rewards of intellectual property?

Some people, yes.  But for Lincoln the question was not whether inventing could go on without intellectual property.  Clearly it had in Europe, Greece, and Egypt.  (Although interestingly, the first patent system emerged from renaissance Venice.)  For Lincoln, the question was whether we ought to protect the livelihood of people who spend their time in “observation, reflection, and experiment.”  Lincoln never worried, as did Thomas Jefferson, that ideas wouldn’t spread fast enough if intellectual property punished copyists.

The Economic Case

The economic case for intellectual property is the most difficult.  The economic theory taught in law schools relies heavily on the principles of neoclassical economics, emphasizing equilibrium and the allocative efficiency of markets.  The recent paper by Bessen and Maskin provides an illustration.  A careful mathematical model is made of the net present value of patenting given a stream of innovations and the costs of licensing intellectual property.  But no theory or model is given for the source of the stream.  Many neoclassical economists seem to assume that inventions are an inevitable consequence of market competition.  No particular attention need be paid to inventors.  If the invention is efficient, an inventor will invent.  Even F.A. Hayek seems to have fallen into this circular reasoning.  More careful observation and reflection on inventing results in a calculus of costs and benefits in clear favor of intellectual property.

It is supremely ironic that Hayek opposed intellectual property because it was Hayek who founded the economic theory of institutions and organizations that reveals the economic case for intellectual property.  In particular, it was Hayek who first wrote about the problem of coordinating dispersed bits of information held by individuals in society.  It was Hayek who first explained why decentralized institutions should be favored over central planning.  What Hayek understood was that the costs of information gathering and processing increased with scale much faster than even the most well-run central planning could handle.  At best, the result of central planning at scale are institutions badly adapted or poorly timed to resolve disputes.  At worst, central planners are corrupted by incumbent authorities or vocal minorities into serving an elite group in society.

By contrast, decentralized institutions in the form of privately adaptable rules provide a scalable, accessible mechanism for resolving competing claims to scarce resources.  The archetypal Hayekian decentralized institution is market price.  By looking at market price signals, a dispersed group of individuals through society can coordinate a variety of activities associated with production and consumption without a single meeting, much less an election.  The story has been told of Nixon being introduced to a central planner in China who simply could not grasp how there was no need for his job in the United States.  Those days seem ancient!

But what is it exactly that makes decentralized institutions superior to central planning?  Is it the fact that central planning is done by government?  Consistent with the analysis given above, the answer is no.  First, whether public or private, central planning is less efficient than decentralized institutions.  Institutional religion, for example, is not exempt from the problems of central planning that plague governments.  Governments simply limit the damage that can be done by the central planning of institutional religion.  The Founding Fathers struck a unique balance through the First Amendment, permitting the United States a unique equilibrium between religious and government institutions.  (But maybe it’s better to say that the First Amendment was a consequence of the unique equilibrium that existed rather than its cause.)  Conversely, decentralized institutions are not perfectly private.  There can be little doubt, for example, that a threshold level of government is necessary to markets for insurance, much less complex derivatives.

What makes decentralized institutions superior is their structure and dynamics.  Decentralized institutions comprise a set of rules that underdetermine the outcome of competing claims to scarce resources.  In many cases, the rules are mutable — i.e., subject to renegotiation among parties and counter-parties.  As a group, the individuals subject to constraint by decentralized institutions get feedback earlier and more often than do the individuals subject to rule by central planners.  Moreover, the process of variation, selection, and retention of rules that seem to work well for subject individuals means that decentralized institutions actually learn and adapt to changing circumstances.

Intellectual Property as Complex Adaptive System

The most compelling economic case for intellectual property is that it provides a decentralized alternative to centrally planned alternatives, such as prizes, grants, or even tax credits.  Intellectual property does not determine economic outcomes.  Rather, like other systems of property and contract law, it constitutes a market whereby outcomes are determined through repeated private interactions.  Intellectual property law is a substrate on which a network of inventors, entrepreneurs, and established companies coalesces into an ad hoc organization formed with a particular social goal.  The cooperation of legally separate NFL teams to license the NFL brand on an exclusive basis to Reebok — now on appeal to the Supreme Court in the American Needle case — provides only a hint of what can be accomplished when dispersed organizations band together through intellectual property rights to accomplish specific goals.  The formation of patent pools for the licensing of drugs developed for treatement of HIV/AIDS are another.

Although Lincoln would not have chosen these terms, we can be sure that he nevertheless had this decentralized network of intellectual property rights in mind when he argued in favor of the patent system 150 years ago.  In his extended argument, he identifies the patent system as the fourth major stage in the progress of civilization.  Lincoln identified speech, writing, and printing as the first, second, and third stages.  What all four stages have in common is their status as decentralized institutions.  All are subject to renegotiation over time through an evolutionary process.  As I have noted elsewhere, had he anticipated their invention, Lincoln almost certaintly would have added internet protocols as a fifth stage.  Perhaps intellectual property should be called the fifth and internet protocols the fourth.

Elsewhere I have made the argument that the patent system should be understood as an evolving complex system, and that important problems with current system could be solved by understanding patents in those terms.  In the terms presented here, my argument is that decentralized institutions constitute a complex adapative system, although to avoid the somewhat unfortunate terminology I often abbreviate this to “systems theory,” a moniker embraced by a diverse group of venerable authorities including Mihalyi Csikszentmihalyi, Douglas McGregor, and W. Edwards Deming.

In this post I cannot provide an appropriate introduction to systems theory.  I must instead assert that a comparative institutional analysis conducted within the framework of systems theory strongly suggests that a decentralized institution like intellectual property is constitutive of innovation in ways that alternatives such as prizes or grants could never be.  Whereas prizes or grants are made (in a best case scenario) when the prospective value of an invention comes in view for the central planners, intellectual property permits a dispersed group of private individuals and organizations to invest in new technology.  Whereas the internal rate of return to investment in new technology would be negative (for easily copied technology) or too small to incur opportunity costs (for almost any technology), the security of intellectual property rights promises the possibility of outsize rewards for a limited time.  We are all gamblers in view of the uncertain future.  Intellectual property simply encourages a gamble on investments that promise even larger social benefits over the longer term.  In this limited regard, anaologies to secured credit, derivatives, and insurance markets are not inapt. All of these institutions facilitate the creation of wealth — in a literal sense — by facilitating divisions of labor and voluntary exchange that would otherwise be impracticable.

Given the scope of its impact, even ten years is too short a time to evaluate the relative costs and benefits of a intellectual property. But historical evidence for the net benefits of intellectual property is not hard to find looking across the longer span of history.  As noted above, the patent system was born in renaissance Venice, and carried out across the European continent by artisans who sought a reasonable reward for time spent perfecting a particular skill.  Although the English and American patent systems got off to a bad start by failing to honor the basic quid pro quo of public disclosures of knowledge in exchange for limited exclusive rights, by the mid-nineteenth century (the Patent Act of 1836 to be precise), the patent system had taken on what is substantially its modern form.  Interestingly, the concept of trade secrets as intellectual property rights emerged around the same time.  The industrialization that took place in the United States subsequent to 1836 is at least comparable in scope to the fifteenth century renaissance in Italy.

In the past, libertarians have simply misunderstood intellectual property to be merely government-granted privilege. Libertarians should be in favor of intellectual property because it promotes freedom through private enterprise at a scale and to a degree anticipated only by speech, writing, printing, and the Internet.