But, Apple, copying isn’t theft

Last week a US court ruled that Samsung Electronics had to pay US$1bn to Apple for patent infringement. Samsung made a cool $6bn profit in the second quarter of 2012 on revenue of nearly $50bn, so $1bn, in the final analysis, is pretty manageable. But that’s not the point.

The Apple-Samsung patent war, which — sadly — is probably far from over, raises once again the broader question over the basic efficacy and legitimacy of intellectual property law. Is patent and copyright protection socially beneficial? Is it even legitimate property right? Although this is a divisive issue, most people regard intellectual property (IP) rights, specifically patent and copyright, as legitimate property rights. Most people are wrong, and below I’ll show why.

Before I continue, let me point out that my ramblings on IP rights are a distant second best to the expositions of a true specialist, Stephen Kinsella. Kinsella, an attorney in Houston, is a regular contributor on Mises.org, director of the Center for the Study of Innovative Freedom, and editor of Libertarian Papers. More importantly, he is the author of a seminal work on IP rights which can (and must!) be read here (only 50 or so short pages and free).  You can also get into his short summary articles here and here which also have extensive links to further reading.

IP rights are a suite of privileges granted by the state to successful applicants trying to secure patent, copyright, trademark or trade secret protection. In the case of patents and copyright, people are essentially granted property rights over ideas or patterns of ideas. Patents, for example, grant an inventor a limited monopoly on the manufacture, use and sale of his invention or process. Copyright is granted to creators of “original” works and grants exclusive right to the creator to reproduce, sell, and perform those works publicly.

The supposed legitimacy of patents and copyright in IP policy discourse essentially rests on two core pillars:

1. That creation is sufficient basis for property rights; and
2. That higher levels of investment (time and resources) in innovative and creative processes can be achieved if innovators/creators are granted the opportunity to earn exclusive monopoly profits for a period of time.

It is relatively easy to demonstrate that proposition 1 is logically false. If I break into my neighbour’s garage, steal some items belonging to him, and fashion a product from those items, is the product I created my property? Of course not — once caught I would immediately have my creation confiscated and the component parts returned to my neighbour. Creation is clearly therefore not a sufficient condition for property ownership. Moreover, creation is also not a necessary condition for property ownership since property — say, land — can come to be owned by acquisition in voluntary exchange (gift or purchase) or by first possession (original homesteading).

“Property rights” granted exclusively on the basis of creation are therefore illegitimate.

What then is the correct basis for determining property rights? To get to an answer to this we must ask another question: why do any property rights exist at all? Asked in another way, what purpose do property rights serve mankind? It is clear that property rights exist first and foremost to eliminate conflict over scarce resources. There is no property right over the air we breathe since practically it is non-scarce. In contrast, there are property rights in physical resources since these are scarce. If there was no scarcity, if all the finished consumer goods and services humans could possibly desire were infinitely supplied and appropriated for use at zero marginal cost or effort, there would not only be no need for property rights but no “economic problem” at all.

Therefore, the raison d’etre for any right to property is scarcity. Without scarcity there is no need for a property right.

Therefore, since the “creation” of an idea is an inadequate basis solely on which to establish property rights in ideas, proponents of intellectual property rights must somehow show that, at the very least, ideas are economically scarce goods. However, ideas are clearly non-scarce. One person’s idea can be adopted by another person without the first person’s use of the idea being affected in any way. While my use of certain physical resources necessarily excludes someone else from using those very same resources, ideas or patterns of ideas are not subject to this same constraint.

If creation is neither a necessary nor sufficient basis for property rights, and if ideas are non-scarce, then intellectual property rights, particularly those embodied in patents and copyright, are nothing more than illegitimate monopoly privileges granted arbitrarily by the state.

Sensing this inherent problem, many IP rights advocates revert to the utilitarian argument of core pillar number 2, which essentially states that: more innovation is better, and IP rights lead to more innovation.

Although this is one of the most popular defences of a regime of intellectual property rights, it fails miserably on a number of levels.

1. The first is empirical: There is scant evidence to show that rates of innovation are higher under IP regimes. In fact, most studies are either inconclusive or show that IP laws actually hinder innovation.  See here, here, here, here, here and here.
2. Cost-Benefit analysis: There is also very little understanding of the human and financial capital costs of creating, maintaining, administering and enforcing the patent and copyright system. How much money and how many man hours are spent on litigation, fines, licensing fees, legal experts and filing patents and copyrights with patent and copyright offices? These “direct costs” are seldom considered by utilitarian IP supporters, let alone measured in a rigorous cost-benefit analysis.
3. Progress in industries without IP protection: The utilitarian argument also fails to explain how and why innovation took place prior to the advent of modern IP law and how some industries, most notably the fashion industry, remain highly innovative, dynamic and profitable with almost no meaningful IP protection.
4. Non-protected rewards from innovation: The utilitarian viewpoint also grossly underestimates, if not ignores outright, the ability of innovators to reap handsome rewards from their innovations without IP protection by being first to market, using secret, hard-to-replicate formulas, innovative branding strategies, and the erection of other legitimate barriers to entry such as signing long-term service contracts with clients or creating spin-off products that are exclusively compatible or highly complementary (ironically, as Apple has done). Such rewards can be, and have historically been in certain instances, substantial.
5. Giant leaps vs incremental innovation: In addition, the utilitarian argument ignores the ability of innovative processes to proceed along an incremental path as opposed to a process that proceeds in large leaps forward every few years. The assumption of pro-IP utilitarians is that inventors need to commit enormous resources and effort into research and development and therefore require the potential to earn protected, exclusive monopoly rewards. But in a non-IP world in which information and ideas are replicable and easily assimilated at much lower cost into existing R&D efforts, it is entirely conceivable, indeed likely, that innovation would proceed on a far more incremental, fluid, and, importantly, lower cost basis, requiring lower rewards in the marketplace to clear investment return hurdles.
6. Malinvestment or overinvestment: Finally, this line of thinking assumes falsely that more R&D, invention and creation is necessarily better. Austrian business cycle theory has shown that when certain market prices are artificially distorted for any meaningful period of time, serious “malinvestments” can occur, leading to widespread entrepreneurial error that must eventually result in a painful bust and reallocation of productive resources to the production of goods and services most desired by consumers. More R&D, if it is the result of price incentives that would not necessarily have arisen in a free market (ie. arising from state-granted IP rights), and especially once it finds expression in actual physical capital investment, can be economically harmful and set in motion distortive forces within an economy that ultimately reduces or hampers overall subjective welfare.

Even if we were to concede for the sake of argument that there was merit in the utilitarian view, the IP rights advocate would still have to concede that, in order to achieve such utilitarian ends, a society would need to abandon the fundamental basis of property rights and require the state to enforce and uphold special privileged monopoly rights. It is strange, therefore, that many libertarians support the enforcing and protection of intellectual property rights, particularly in respect of patents and copyright, which require strong subversion of legitimate principles of property rights and a high degree of state intervention.

But this is not all. The following are even more reasons why we need to ditch intellectual property rights, especially as they are embodied in patents and copyright:

1. Legally arbitrary: Legal purists should shudder at the thought of IP law regimes. The legislation and regulation governing patents and copyrights is entirely arbitrary. Why is copyright protected for 21 years and not 14 years, or 14 months? Who decides and on what sound juridicial basis? What constitutes something original? Isn’t everything a remix? Is it the first to file a patent or the first to invent? How do you prove the latter beyond reasonable doubt? What is “enough” time to be allowed to profit exclusively from an invention? What if someone else independently invents something already patented? The sore truth is that IP advocates cannot answer these questions with any legal rigour. The reason they cannot is that patents and copyright are bogus legal constructs.
2. Diminishes real property rights: It gets worse. By granting illegitimate property rights in non-scarce things (ideas or patterns of ideas), the state grants patent holders, for example, the right to effectively take control over other people’s physical, scarce property. How? By allowing a patent holder the right to prevent others from copying his product ideas by using their own physical property, IP rights create a perverse unnatural extension of coercive property rights over the physical property of others. We can safely say, therefore, that IP rights are not only illegitimate property rights in and of themselves, but they actually diminish true property rights within society.
3. Creates new pseudo property rights: The granting of pseudo rights in the case of most intellectual property law begets yet more pseudo rights. Patents and copyright, for example, imply the right to some future commercial value derived from inventions/creations, but since commercial market value is determined by subjective valuations of customers, this right would have to imply control over other people’s value judgments, which is entirely erroneous. Asserting a right to future commercial value purely on the basis of creation runs into the fallacy of the communist labour theory of value by suggesting that the mere act of work or labour establishes value.
4. Retards economic progress by creating artificial scarcity: The very essence of economic progress is the elimination of scarcity through an ever greater division of labour. Since human needs and wants are practically unlimited, the elimination (or near-elimination to be precise) of scarcity in some goods allows us to channel time, effort and resources into meeting new, previously unmet needs, allowing us to live a more pleasurable existence. This process entails bringing to bear non-scarce knowledge onto scarce resources in order to arrange those resources in such a way as to achieve the highest valued ends in the most efficient ways. Without non-scarce knowledge, resource use would be highly myopic and inefficient and the division of labour would scarcely be possible. The non-scarcity of ideas is the only reason we are able to achieve any degree of prosperity in our natural, causal world of real resource scarcity. IP rights are therefore nothing more than an attempt to artificially establish scarcity where it does not naturally exist. This can only retard economic progress.

Apple’s “victory” over Samsung Electronics last week is really a victory for illegitimate, state-granted monopoly privilege over dynamic, competitive enterprise.

Copying isn’t theft.

The world is worse off for the system of intellectual privilege that may directly benefit a privileged few in the short run, but unambiguously harms us all in the long run.

• Russell Lamberti is head strategist at ETM Analytics. This piece was first published by the Ludwig von Mises Institute SA and is used by TechCentral with permission of the author.