If economics is a religion, then Adam Smith is surely a God. Business leaders the world over extol the virtues of the classic 18th century thinker who first argued that markets are best run by the invisible hand, that is, without the hindrance of meddling government oversight. Certainly, the present American and Canadian governments pay lip service to the principles of free markets Smith proposed so many years ago. They just don't adjust their actions to match their rhetoric.
Even its most ardent supporters admit that copyright and patent law, collectively known as intellectual property, is a draconian measure. Creations that enter into the public domain with no restrictions on their use benefit the general public. Established legislated intellectual protection grant a monopoly over ideas that denies others the right to use, distribute and build on intellectual creations already in the public domain. Without the licensing and royalty fees currently charged by intellectual owners today, products would be produced in a more competitive market where low cost and quality control would be naturally regulated. Any initial inquiry into intellectual property properly then, must begin by questioning why intellectual property monopolies are allowed to exist in the first place.
Supporters of intellectual property justify its effective monopolistic effect on the basis of the doctrine of `market failure'. According to this theory, intellectual property legislation generates an economic market for ideas that would otherwise be missing in an economy that allows for the free copying of novel creations. Absent the proper intellectual protection, such a market would experience an overall decline in both the quality and quantity of ideas currently entering into the public domain. Market failure theorists thus believe that intellectual property legislation ensures a continual market for ideas thereby maximizing the overall benefit to both the creator and the general public.
The market failure theory is not without its critics. For many years, people have tried to counter its underlying assumptions using historical example. Numerous legal academics have pointed out that, prior to the enactment of the first copyright law in Britain in 1624, there was no shortage of expressed creative talent. Unquestionably, Dante, Shakespeare, Michelangelo and Homer all created works of magnificent inspiration, this despite the lack of any legislation ensuring `incentive and reward'. For these academics then, the pre-copyright period stands as proof that patents and copyrights are not necessary in order to create innovation.
Historical and academic arguments aside, there are numerous reasons to believe that artists and innovators will realize sufficient profit from their creations even without the protection afforded by intellectual property protection. If you accept them, you are well on the way to accepting that the structural reason for IP protection should be abolished as a matter of sound policy.
The Economic Value of Non-Copyrighted Creations
First, let's begin by addressing the natural economics of non-copyrighted works. Original ideas naturally reward innovation and inspire future creativity. Moral rights are of tremendous potential value to successful innovators and explain how a market for ideas would exist in a copyright-free jurisdiction. Moral rights describe those rights intrinsically associated with the integrity of the creator. They are described by the Bern Convention for the Protection of Literary and Artistic Works as "perpetual, inalienable and imprescriptible" and include those qualities of a person that are implicitly tied to a creator's very essence of being. These rights remain part of the creator and any work she produces at all times. For this reason moral rights are seen as unique to the author and, perhaps more importantly, are something that cannot be reproduced in anyone else. It is this unique quality that gives innovators the opportunity to realize profit on their works with or without the intellectual protection of the state.
Moral rights result in two forms of economic gain. Firstly, authenticity and proof of interaction between a creator and her work significantly increases the overall value of that same product. Artists will benefit from the sale of original artwork and signed prints, singers will benefit from the sale of original scores and concert performances, and writers will benefit from the sale of their original notes and manuscripts. A copy of those same items, even though identical, simply does not command the same dollar value.
The second economic gain that results from moral rights stems from the economics of authority. 'Authority' measures the perceived value of a creator's potential. As in all other professions, as a creator establishes themselves in their field, their works and their time become increasingly valuable. Thus, a painter who is commissioned to paint one subject and does a good job can demand a higher level of recompense for her subsequent commissions and the singer who astounds the world in her first musical release can demand a higher level of compensation for her future concerts.
The Economic Value of Non-Patented Ideas
Patent law is designed to protect the industrial process by which a product is made or functions and is similar to copyright in two respects; it is supposed to ensure that the producers of a product receive economic benefits from their work and it is unnecessary because market forces would reward creators naturally in the absence any intellectual property legislation.
For the purpose of this blog, patents can be divided into two categories. First, there are those patents that are designed as a means to an end (means-based patents). Means-based patents encompass those products and designs that do not constitute an end in and of itself but instead contribute and assist the functioning of a greater product or process. Thus for instance, the gear of an engine that produces a smoother ride and the handle of a knife that provides for a better grip are both examples of products that would be covered by a means-based patent. The second category of patents encompasses those products that are designed to serve ends in themselves ( ends-based patent). These products or processes have as their final purpose the very function that the patent makes possible. The Yo-Yo is a product that has no function beyond its own use and is thus an excellent example of an ends-based patent.
The Means-Based Patent
Western business models place a premium on efficiency. The drive to produce more product faster, cheaper and better than a competitor is every modern company's goal. The products and processes that means based patents today protect are essential to this process.
Faster more efficient processes and products allow for greater levels of production, lower levels of manual labour and, in many cases, greater response to consumer demand. Most importantly, new processes and products allow companies to produce goods cheaper than their economic rivals and thus capture more market share. For this reason, new and innovative ideas are essential in carrying on the effort to maintain a modern company.
Competition and the innovation it produces is the natural result of self-interest and has little to do with legislated patent protection. `Game theory' provides a generalized method of dealing with modern rationalized optimization problems. According to one branch of this theory, in a freely competitive market with no collusion, it is reasonable to assume that each individual actor will do everything possible to further their own self-interests provided that their actions do more benefit to themselves individually than harm. Thus for instance, a sheppard will rationally introduce an extra sheep to a grazing pasture shared by many other farmers despite the fact that such an action will result in an overall decline in the amount of grass available for all of the other sheep including his own. Crucially, game theory predicts that the every rational economic actor will continue to introduce new cattle to the field as it will always be in their interests to do so, even though collectively, there is no rational justification for such an action.
According to game theory then, individual actors in competition with one another will continue to innovate even in the absence of protective patent legislation. They will create and encourage new ideas, processes and designs based largely on their own self-interests that will seek to introduce new or better products to the marketplace in order to stay abreast of the competition. In this way, competition naturally ensures innovation making means-based patent legislation unnecessary and even redundant.
The Ends-Based Patent
Much like the means-based product or process, the ends-based product or process is of significant economic value to its innovators, even in a patent-free jurisdiction. To a large degree, this is a result of the "first to market" effect. First to market effects describe those advantages that accrue to an entrant upon entering into an untapped marketplace.
The most obvious first-to-market advantage enjoyed by a new product or process upon entering a virgin market is that of the natural monopoly. An innovator will enjoy such a monopoly over its product or process in the initial months or years following its release as a natural result of the intrinsic difficulties a potential rival competitor will experience in replicating the existing product or process design. Large physical product or processes require sophisticated production factories, extensive market research and loyal distribution networks that may take months, if not years, to properly establish. Obviously, the initial creator will have already established the aforementioned necessities and will be able to use a competitor's start-up period to expand unfettered by the normal competitive forces that operate in a competitive market.
The natural monopoly described above is best evidenced in Mr. Henry Ford's famous production assembly line. In 1913 the president of Ford Motor Company [FMC] inaugurated a new assembly-line production model to construct his "Model T" type automobile. This process had the effect of improving the speed of the chassis assembly from twelve hours and eight minutes to one hour and thirty-three minutes per vehicle. Although this process was copyable and indeed, was soon adopted by all of the automotive production assembly plants in America, the production process gave Ford immense advantages over his domestic rivals in the decade following the plant's introduction. Ford's competitors had to laboriously construct production facilities that duplicated Mr. Ford's own plant and, in that time, Ford quickly went from a small start-up to the largest car company in the world.
First mover advantages are not limited to the technical. The lack of competition at the outset of a product or process's life will afford that item unparalleled brand recognition. Brand recognition is of great economic consequence insofar as it assures the customer of a product or process' quality and overall effectiveness. Crucially this assurance will continue to exist once a competitor finally emerges to challenge the originator's market share. Any competitor to the originator's monopoly will be saddled with the burden of convincing the consumer market to switch from the originator's trusted brand to a new, unknown and untested product, a hurdle that is not easily overcome. In the most extreme example of this principle, a company brand will become synonymous with the product or process itself. Thus, trademark issues aside, there is no better advertising model than to have the world calling all black bubbly liquid "coke" and all vacuum based cleaner appliances a "hoover". It associates the product with the dual benefits of authenticity and credibility and further ensures that the customer remains loyal to the originator's brand once rival competitors begin to offer alternatives to the original product or process.
The second benefit accumulated through ends-based goods is that of originality. Originality is often of great economic significance and stems from the human desire to own the "original" thing and not some duplicated work. Thus, people are willing to pay more for "Calvin Klein" jeans than they are for "Calvin Klein knock-offs", even if the latter were of a similar quality and cheaper price. The value of originality allows an original creator to charge more for a given product even in a competitive environment or, in the alternative, to try to wipe out its competition by placing its "original brand" in the same price range as its non-original competitors.
Therefore, both ends and means based products and processes bestow a variety economic advantages on their innovators. Means based products or processes are valuable because they provide their creators with advantages that allow them to more effectively compete in the marketplace while ends-based products or processes provide innovators with limited natural monopolies that translate into economically significant first-to-market benefits. Importantly, these economic advantages exist even in the absence of legislated patent protection.
Conclusion
It is time to stop praising Adam Smith while, at the same time, subverting his ideas in practice. The monopolization over ideas afforded by copyright and patent hinders the general efficiency of the market. By limiting access to intellectual property, legislatures needlessly levy a cost on our domestic industry and, in the end, force a higher price on the consumer. This would be justifiable if the aforementioned price was necessary to promote innovation and encourage the development of new products but this is simply not the case. Copyright and Patent legislation provides redundant economic incentive to innovate. Original claims to a work, moral rights, the economics of authority, the principle of natural competition, natural monopoly and first-to-market effects all serve to ensure that the creator of a product or process will be monetarily compensated for their work.