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Wednesday, February 17, 2010

Copyrights in Music Do NOT Exist Only "To Benefit [Matthew Yglesias]"
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Matthew Yglesias is the "progressive" mind behind the modestly titled blog Yglesias. In three recent posts, he turned the vast erudition bestowed by his B.A. in Philosophy toward the analysis of the economics of music and intellectual property. Indeed, Mr. Yglesias did so with such profound, if baseless, confidence that he deigned to declare those who disagree with him "absolutely insane."

In The Futile Struggle Against Free Content, Intellectual Property is About Consumers, and Marginal Costs and Average Costs, Mr. Yglesias thus proved publicly a point that research and humility enabled me to discover privately: an Econ-101-level understanding of economics is woefully inadequate to understand almost any real-world market, much less the economics of music or intellectual property. As a result, Mr. Yglesias' posts are useful not because they provide useful insights--they don't--but because they nicely illustrate five fatal mistakes in the economic analysis of intellectual property often made by those whose self-esteem exceeds their self-edification.

Mistake #1: "Perfect competition" is irrelevant to discussions about music, copyrights or other forms of intellectual property: Many problems arise when a blogger assumes that the graphs in his Econ 101 class actually described real-world markets. One of these arises from the difficulty of remembering what Econ 101 actually said. For example, here is Mr. Yglesias, trying and failing to remember where those long-ago curves on those long-ago graphs actually intersected:

Under conditions of perfect competition, the price of a song ought to be equal to the marginal cost of distributing a new copy of a song. Which is to say that the marginal cost ought to be $0. That's not a question of habit, you can look it up in all the leading textbooks.
No "leading textbooks" say this. Even in textbooks, (the only place that "perfect competition" can be found), the often-varying textbook definitions of "perfect competition" assert that were it ever to occur, then the price of given good or service would be equal the marginal or average cost of its production. Consequently, even were a song's marginal cost of distribution $0, "perfect competition" would dictate a higher price if the costs of producing that song exceed $0--as they always have, and always will. Any market that prices any socially valuable resource below the full costs of its production and distribution produces a "perfect debacle," not "perfect competition."

In other words, the unearthly abstraction of "perfect competition" presumes that producers have perfectly enforceable property rights in the goods or services that they produce. Consequently, neither looting the Food King nor pirating Animal House reflect "perfect competition." Copyright piracy is not "perfect competition," it is a violation of federal civil rights, and if deliberate, a federal crime. "Perfect competition" among producers of expressive works could exist only in a world in which copyright piracy did not--in other words, in an abstraction that has never has described the conditions actually confronted by real-world producers of expressive works.

More importantly, the phrase "perfect competition" is irrelevant to any discussion of the economics of music, other expressive works, or intellectual property generally. In theory, perfect competition occurs when all producers of a given good or service have perfect knowledge of what consumers want and perfect knowledge of how to produce it at the lowest possible price. Under such conditions, producers' products or services would become entirely fungible--every one on the market would be just as satisfying as any other.

This makes the soundtrack of perfect competition unimaginable. What does "fungible" music sound like? And how could economic conditions ever make the works of Marilyn Manson and Judy Collins "fungible"? In short, information goods--advertising, music, scholarly works, movies, patents, trademarks, and ditzy blog posts--are incompatible with abstractions about "perfect competition." Markets for information goods exist because the conditions required for "perfect competition" do not--regardless of whether "perfect competition" involves marginal-cost pricing or average-cost pricing. But Mr. Yglesias assures us:

The point, which really is in all the intro microeconomic textbooks, is just that if you had a market that features perfect competition and perfect information goods would, in fact, be sold for their marginal cost rather than for something based on the average cost.
The phrase, "perfect information goods," is oxymoronic. See Wolfgang Kasper, Competition in The Concise Encyclopedia of Economics 75 (David R. Henderson, ed. 2008) ("so-called perfect competition unrealistically assumes perfect knowledge"). Consequently, no one should babble about any sort of "perfect competition" when discussing music or copyrights, or other forms of expressive works or intellectual property.

Nor would it make sense to raise the ever-so-rare real-world shadows of perfect-competition--cases in which stagnation produces something close to marginal-cost or average-cost pricing. In the real world, even these shadows require fungibility--that is why economists, when seeking real-world examples of close-to-marginal/average-cost pricing, tend to cite secondary markets for agricultural commodities. (Perhaps not coincidentally, producers of agricultural products thus recently embraced a vast array of means to differentiate their own organic/local/vegan/hormone-free/free-range/grass-fed/grain-fed/cruelty-free products from those "fungible" commodities produced by others....)

But in the context of expressive works, this prerequisite of fungibility has always been achingly absent: most games, software applications, books, movies, and music are not fungible--as even a brief glance at Avatar or the first-round auditions for American Idol might suggest. Moreover, the inherent differences in talent, effort, timing and promotion that do and will differentiate both artists and their works are compounded by network effects.

Expressive works communicate, and communication tends to generate network effects--in other words, among the scant pool of potentially equally good works, an unpredictable few will skyrocket in popularity because they became popular before their potential substitutes. Consequently, these few works become vastly more valuable to consumers because they provide not only the enjoyable experience that other works might also have provided, but also a better means to interact with other people--like friends, family, other gamers, co-workers or recruiters for potential employers. Mr. Yglesias offers no coherent reason why the Internet--the "network of networks"--will do anything but strengthen these "network effects" that have tended to appear whenever expressive works have been disseminated by less integrated means of mass communication.

Mistake #2: James Madison did not draft the Copyright Clause of the Constitution to prove that his ideas about copyrights were "absolutely insane": Mr. Yglesias' airy pontifications about why music piracy is OK until it inconveniences him produced some pointed responses. In particular, Sonny Bunch of America's Future Foundation responded with a post entitled Piracy. Is. Stealing, in which he argued that copyrights exist--not just to gratify Matthew Yglesias--but also to reward artists and industries for producing music that enriches many other lives.

In Intellectual Property is about [Me], Mr. Yglesias replied by sneering that Mr. Bunch was "absolutely insane" to think that respect for the hard work of artists, or the risky investments of creative industries, should play some role in copyright law and policy:

[T]hat is... an absolutely insane idea. The point of intellectual property law is to benefit consumers, not producers.... I note that this issue is specifically addressed in the Constitution, which says that patents and copyrights should be granted "for limited times"--i.e., not as a transcendent moral right--in order "to promote the progress of science and the useful arts," again, not as a matter of transcendent moral right.
In case anyone missed the point just made twice, here it is again: Mr. Yglesias thinks that copyrights are not "transcendent moral right[s]" of authors. Fortunately for authors, most civilized people reject the selfish hauteur of Mr. Yglesias. See The United Nations, Universal Declaration of Human Rights, Art. 27(2) (1948) ("Everyone has the right to the protection of the moral and material interests resulting from any scientific, literary or artistic production of which he is the author") (emphasis added). Oops.

And speaking of "oops," note that Mr. Yglesias just argued that the Intellectual Property Clause drafted by James Madison proves that James Madison's ideas about intellectual property are "absolutely insane." In The Federalist No. 43, James Madison--who submitted to the Constitutional Convention the proposed text from which the Copyright Clause was derived--advocated the allegedly "absolutely insane idea" that authors and inventors deserve copyrights and patents: "The copyright of authors has been solemnly adjudged, in Great Britain, to be a right of common law. The right to useful inventions seems with equal reason to belong to the inventors." But Madison also thought that, "The public good fully coincides in both cases with the claims of individuals." Nor was Madison "absolutely insane" to perceive such a coincidence.

History would prove Madison more correct than he could possibly have imagined. For example, since the days of Madison, America creators and creative industries have transformed this country from an expressive embarrassment into the world's leading creator and exporter of a vast array of expressive works. Yet there is Mr. Yglesias, decreeing that it would be "absolutely insane" to think that copyright law and policy should consider the interests of the American artists whose creativity has inspired billions because of the risky, long-term investments made by American creative industries that have employed millions.

In short, President Obama is now struggling to find ways to re-employ Americans. Meanwhile, Mr. Yglesias shrieks that President Obama would have to be "absolutely insane" to consider the prospects for creating sustainable, well-paying American jobs by protecting the intellectual property rights of American artists and innovators and the publishers and venture capitalists who support them. Fortunately for artists, inventors, their funders and America, President Obama seems to realize that he would have to be "absolutely insane" to do otherwise.

Mistake #3: The "Progress" preamble to the Copyright Clause does not differentiate copyrights from other tangible and intangible property rights: Ultimately, Mr. Yglesias' claim to have said anything coherent about copyright law or policy turns upon whether he has proven that, common sense notwithstanding, the Constitution just requires American copyright law and policy to focus exclusively on the bliss of consumption--on the short-term satisfaction of Dorito-noshing couch potatoes. Mr. Yglesias purported to find such an "it's-all-about-me" imperative in the "To Promote the Progress of Science and the Useful Arts" preamble to the Copyright Clause:

I note that this issue is specifically addressed in the Constitution, which says that... copyrights should be granted "for limited times"--...in order "to promote the progress of science and the useful arts," again, not as a matter of transcendent moral right."
But as Ben Sheffner has gently suggested, Yglesias has fixated on a distinction without a difference. Assume, arguendo, (p. 27), that the preamble to the Copyright Clause actually did state an enforceable substantive limit on copyright protection. Even were this so, why would a legal duty to promote the progress of science and the useful arts differentiate copyrights from the other sorts of property rights that we accord to online-service-providers, like Google, or device-makers, like Apple? Does Mr. Yglesias argue that because of the so called "Progress Clause," the copyrights of Viacom--unlike the property rights of Google and Apple--must actually promote progress, as opposed to just letting greedy capitalist piggies gorge on profits at the expense of workers, consumers, and society? Because if that was not Yglesias' point, then he had no point.

This conclusion follows because an operative "Progress" Clause would not differentiate copyrights and patents from other forms of private property rights. To the contrary, both economist Joseph Schumpeter and my own 40+ years of observing life in a democracy with a relatively free market economy would argue that the critical advantage of market economies that grant tradable private property rights to both private producers and consumers of most sorts of socially valuable resources, (including expressive works), is that such rights are an indispensible predicate to the sort of differentiated, imperfect market competition that tends to produce--not the stagnation inherent in the abstraction of "perfect competition"--but the real-world progress inherent in a self-catalyzing cascade of productive innovation.

Schumpeter called this self-catalyzing process of productive innovation "Creative Destruction." See Joseph A. Schumpeter, Capitalism, Socialism and Democracy 83 (3d ed., Harper & Row 1950). The Framers of the Constitution would call it, more aptly, the promotion of "the Progress of Science and the Useful Arts." Both terms describe the critical advantage of real-world markets and real-world imperfect competition: they force producers to innovate in order to avoid a lose-lose battle to "perfect competition" against producers of wholly fungible goods or services.

Consequently, in practice, we grant tradable, enforceable exclusive rights to Viacom, Google, and Apple for the same reasons--because doing so will tend to ensure that these producers' interactions with potential consumers of their goods and services will "promote the progress of science and the useful arts." Granted, the scope and incidents of the property rights of each of these producers do and should differ, but those differences arise from the differing effects, in differing markets, of the usual factors used to define property rights: appropriability, transaction costs, search costs, cost-shifting, network effects, etc. Therefore, the "Progress Clause," if operative, would merely confirm that we should grant, define, and enforce copyrights and patents for the same reasons that we grant, define, and enforce the other sorts of property rights that protect the hard work (and incentive to innovate) of private producers of other socially valuable goods or services.

And lest this confuse the usual suspects into concluding that we do not actually need patents, trademarks, and copyrights because market economies will automatically "promote the progress of science and the useful arts" without such rights, let me be clear: that is nonsense. Property rights as just indispensible to the use of market mechanisms to produce expression and innovation as they are in any other context.

Indeed, Schumpeterian competition-by-innovation can create a self-catalyzing process of productive innovation only if producers can profitably differentiate their goods or services by incurring both the costs and risks inherent in an overall strategy of competition-by-innovation. Consequently, at least apart from those ever-more-rare cases in which capital costs or other factors can create sufficient entry barriers, (e.g., CPUs and memory chips), intellectual property rights are all but indispensible to perpetuating a self-catalyzing process of Schumpeterian competition-by-innovation--in other words, to perpetuating an American economy that keeps on producing economic growth, good jobs, world-leading creative industries, and innovative means to enjoy the content created by hard work and risky investments of our artists and creative industries.

Mistake #4: Calling copyrights "monopolies" does not distinguish them from other property rights that grant exclusive rights (a.k.a. "monopolies") in the use of a particular good, service or resource: Sophists like Mr. Yglesias often "think" about copyrights by regurgitating scary-sounding, half-understood econo-babble about "monopolies," "monopoly rents," and "deadweight loss." Here is an example from Marginal Costs and Average Costs in which Yglesias benevolently stooped to "correct" the ignorance of Nate Anderson of Ars Technica:

[T]he idea behind giving people patents and copyrights is precisely that it might be a bad idea to force people to sell things (books, songs, prescription drugs) for the marginal cost of distributing them. It might be better to give someone a monopoly on the sale of [expressive works or inventions].... But any time you grant a monopoly, you also create some deadweight loss and inefficiency.
Note the chilling ending to this fine campfire story: "But any time you grant a monopoly, you also create some deadweight loss and inefficiency...." For two reasons, this story is more silly than scary.

First, Mr. Yglesias forgot--again--that even Econ 101 taught that the production and the distribution of a socially valuable resource are separate markets. That is why it is always "a bad idea" to force anyone to sell anything "for the marginal cost of distributing" it. Forcing the Food King to sell groceries for the marginal cost of distributing them might briefly lower prices because it would force the owners to ignore the inconvenience of actually paying the people who produced the food, but.... Nor is this some textbook hypothetical: "economists" like Robert Mugabe have run real-world versions of this experiment time and again--with the same disastrous results.

Second, absent nonexistent "perfect competition" among providers of perfectly fungible goods, services or resources, every private property right is a "monopoly" that creates "some deadweight loss and inefficiency"--at least if compared to some mirage of omniscient, omnipotent perfection. A "monopoly" is a legal right to the exclusive use of some good, service or resource. A "property right" is also a legal right to the exclusive use of some good, service or resource. Consequently, all property rights, (including copyrights) are--by definition--"monopoly" rights. Economist Milton Friedman made this very point in Capitalism and Freedom:

[Copyrights]... can equally be regarded as defining property rights. In a literal sense, if I have a property right to a particular piece of land, I can be said to have a monopoly with respect to that piece of land defined and enforced by the government.
Black's Law Dictionary makes the same point about property/monopoly rights. So Mr. Yglesias is right--copyrights or patents, like private property rights in land or differentiated trade goods--like iPods or Google's ad network--are all "monopolies" that can "create some deadweight loss and inefficiency...." But the Deep Thought of Yglesias just begs the real question: as compared to what?

Naturally, Mr. Yglesias failed to name any known means of encouraging the private production of expressive works compared to which copyrights "create some deadweight loss and inefficiency." Academic tenure? The Authors' Guild of the Soviet Union? A Ministry of Culture? All of these qualify as sources of "deadweight loss and inefficiency" vastly exceeding any imposed by private copyrights--which may explain why copyrights helped to make America the world's leading producer of a vast array of expressive works.

Mistake #5: Internet piracy proves that professionally produced content can still trounce "free" content if copyrights are reasonably enforceable: Mr. Yglesias ended The Futile Struggle Against Free Content with the following dumbfounding prediction:

Of course real businesses rarely operate in circumstances of perfect competition, and record companies have a variety of political and legal tools they can deploy to try to protect monopoly rents. But this is hard to do. I think the real story with the iTunes store is that over time competitive pressure has impelled it to largely drop DRM and over time I expect we'll see that the CPI-adjusted price of songs declines.
That last claim just defies reality. Perhaps the only good that may come of rampant Internet piracy is this: it has proven pretty conclusively that if we ensure that copyrights remain enforceable even on the Internet, then the professionally produced content that has created so many American export industries can continue to trounce even "free" content, particularly over the long term.

As Professor Tim Wu once put it, (p. 38), "The technical study of P2P design shows that designing a P2P filesharing network to avoid copyright requires important deviations from the optimal design for speed, control, and usability." A LimeWire developer once explained the resulting irony: "Here's modern p2p's dirty little secret: It's actually horrible at rare stuff." He made a similar point about BitTorrent-based file-sharing programs: "BitTorrent is horrible at rare stuff! As soon as a file becomes rare, it loses seeders and dies."

In other words, piracy-adapted file-sharing programs and websites do identify which sorts of files are actually popular, because those are the only types of files that such programs and websites are well-suited to distribute. And--just as decades of experience with non-integrated networks would suggest--the experiences of piracy-adapted websites and programs very strongly tend to confirm that the popularity of pirated professionally produced content will tend to trounce even content made freely and legally available. For example, in cases like Grokster and Fung, courts found that more than 95% of files made available or selected for downloading by users of programs like Grokster and Morpheus or websites like isohunt were, or were highly likely to be, infringing.

Indeed, for decades, and even before the Internet, content industries have had to, in effect, compete against free. The Internet will ensure that they must continue to do so. But to date, our experience with the Internet seem to confirm that so long as professional creators do not have to compete against rampant piracy--against those who usurp the rewards of their rare successes without incurring the costs that made those successes possible--professional creators should continue to thrive. To the extent that Mr. Yglesias concludes otherwise, he has failed, miserably, to explain why.

posted by Thomas Sydnor @ 10:17 AM | Advertising & Marketing , Capitalism , Copyright , E-commerce , Economics , IP , Innovation , Internet , Mass Media , Software

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