Thursday, June 24, 2010 - The Progress & Freedom Foundation Blog

Send In the Clowns: A Review of Oberholzer-Gee and Stumpf's Copyright and File-Sharing (Part 1)

And where are the clowns?
Quick, send in the clowns…
Don't bother—they're here.
—Judy Collins/Stephen Sondheim, Send in the Clowns

Recently, Nate Anderson of Ars Technica published File-sharing has weakened copyright—and helped society. This story's title summarizes the thesis of a "new" paper by those Grokster-loving, Free-Culture-Movement Professors, Felix Oberholzer-Gee and Coleman Strumpf (collectively, "OGS"). Their "new" paper is entitled File-Sharing and Copyright. Fortunately, their non-sequitur thesis does not follow from their clown-car collection of factual, legal, economic, and historical errors that poses as "scholarship."

Indeed, I just published a blog post and a longer paper to show that those who listen to the likes of Oberholzer-Gee merely end up accusing the Government Accountability Office of decades of wrongdoing by celebrating the "positive economic effects" of criminal racketeering. The blog post is entitled, Why Copyright Industry Costs-of-Piracy Studies Correctly Ignore the "Positive Economic Effects of Criminal Racketeering; the paper is entitled, Punk'd: GAO Celebrates the "Positive Economic Effects of Counterfeiting and Other Criminal Racketeering.

Over the next few weeks, a series of posts will outline the worst of the sophomoric "mistakes" that OGS made in File-Sharing and Copyright. Here is a preliminary summary:

Cumulatively, such farce often degenerates into clownish slapstick. For example, OGS assure us, (p.2), that file-sharing will not affect the future production of books because the "publication of new books rose by 66% over the 2002-2007 period." But that ditzy claim can comfort only Techdirt buffoons—not the 99%+ of literate Americans who can, like me, report that while they read no book on a computer or an e-reader between 2002 and 2007, they know that soon enough, they will almost never read any book except on some descendent of a computer, iPad, Kindle, or Nook. Consequently, no competent "scholar" would pretend that yesterday's book-publication data could tell us anything useful about whether digital piracy will affect the future production of digital books. Yet OGS gleefully peddle that silly pretense.

In this post, I will deal with the first two of these many fatal defects in the farce that OGS entitled Copyrights and File-Sharing.

OGS pretend that exclusive rights are "a welfare program for authors."

Most Free-Culture-Movement academes can still dimly perceive that outside of the Faculty Lounge, they should still affect the pretense of reasoned objectivity. Nevertheless, their instinctive hatred of exclusive rights and markets still produces rabid outbursts of snarling contempt for history's most successful system of audience-driven cultural production. For example, the "scholars" who wrote File-Sharing and Copyright offered this confession of their own rabid biases and ignorance (p.6):

It might seem curious to some of our readers that we do not consider the welfare of artists and entertainment companies in our calculus. Our approach, however, reflects the original intent of copyright protection, which was conceived not as a welfare program for authors but to encourage the creation of new works.

There are two separate flaws in this "reasoning." Each is fatal.

First, this statement records its authors' ignorance of history, reality and economics. In fact, neither copyrights in particular nor private-property rights generally have ever been conceived as means to do as little as possible to prod creators into entertaining self-aggrandizing Dorito-noshers like Matthew Yglesias. Copyrights, for example, have always been perceived as both the economic and human rights of authors. James Madison thought this. So does the United Nations, (art. 27(2)).

Moreover, exclusive rights are not price-or-production-fixing mechanisms. Yet OGS pretend that, (p.3), "[w]eaker copyright is unambiguously desirable if it does not lessen the incentives of artists and entertainment companies to produce new works." Here is an equally inane claim: "Counterfeiting and weaker personal-property rights are unambiguously desirable if they do not lessen the incentives of engineers and Apple to create innovative tablet computers like the iPad."

Such claims miss the point of the last century: If manipulating the scope of private property rights could reliably produce desired outcomes, socialism would have trounced capitalism, stock prices would be predictable, and we would live in a very different world. But such precise manipulations don't really work in the real world—a point that competent scholars would know has been confirmed by empirical experiments in which about 80 million people were murdered while billions more were impoverished and enslaved--all with the best of intentions.

Consequently, when competent governments informed by history define the scope of the exclusive rights of private producers of potentially valuable resources, they do not try to specify any particular price or level of production. Instead, they merely try to define the broad range of circumstances in which better outcomes are more likely to arise from bilaterally consensual exchanges between private producers and consumers than from governmental or scholarly diktats.

Second, only dishonest "scholars" would pretend that we enact a "welfare program" by granting producers of potentially socially valuable resources legally enforceable exclusive rights in the resources that they produce. Economically literate persons know that exclusive rights can attain or retain economic value only if consumers choose to value the resource to which the rights relate. That is why governments did not need to promote railroads and automobiles by narrowing the exclusive rights of operators of stage-coach lines or buggy-whip makers.

Consequently, the "calculus" of competent scholars must "consider the welfare of artists and entertainment companies"—at least if we want to keep using market mechanisms to encourage the private production of works that appeal to ordinary people, rather than wealthy or political patrons. In a market economy, human and financial capital are mobile. If we treat creating or financing expressive works as half-worthy activities, potential creators and investors will take the hint.

By contrast, if copyrights remain enforceable, they will continue to inspire not just competition among creators and financiers of expressive works, but the very sort of differentiated competition-by-innovation that economist Joseph Schumpeter correctly identified as the critical advantage of a market economy. In Capitalism, Socialism and Democracy, Schumpeter argued that the dispositive advantage of market economies based on private exclusive rights is not that they inspire a Punch-and-Judy battle to perfect competition among producers of fungible goods.

To the contrary, Schumpeter argued that markets inspire producers to make the risky investments required to innovate in order to differentiate their products and services. Schumpeter called this self-catalyzing process of productive competition-by-innovation "Creative Destruction." It is important— not because it explains why socialism failed—but because it explains why market economies have produced such steadily increasing standards of living for the masses. Copyrights inspire precisely this sort of differentiated competition-by-innovation among producers of expressive works.

Consequently, copyrights are the antithesis of a "welfare program for authors." More often than not, copyrights in even the most promising works turn out to be worthless. As a result, the same industrial structure emerges repeatedly in creative industries: authors tend to transfer copyrights to relatively large publishers/labels/studios that specialize in financing the production of works and promoting those successfully produced. These entitles tend to be large because they are entrepreneurial risk-shifters pursuing business models akin to those of the venture capitalists that fund high-tech start-ups: publishers, labels and studios all make risky, long-term investments in many promising works— knowing that most of those investments will fail, but that a few may be so successful that they may cover the costs of the failures and generate modest profits. See, e.g., Harold L. Vogel, Entertainment Industry Economics, 494 (7th ed. 2007) ("profits from a few very highly popular products are generally required to offset losses from many mediocrities"); see also id. at 133, 137 (discussing these principles as applied to feature films and concluding that "the business remains entrepreneurial and capitalistic").

In conclusion, enforcing copyrights cannot create "a welfare program for authors." To the contrary, some scholars advocate a right to taxpayer-funded welfare precisely because consumers—and the employers beholden to them—will inevitably value some people's exclusive right to allocate their personal productive capacities at an amount less than that required to sustain any semblance of a dignified lifestyle. Welfare programs exist because exclusive rights are not welfare programs.

To be clear, this does not prove that OGS were so economically ignorant that they mistook exclusive rights for welfare programs. It is also possible they were just being deliberately dishonest because they correctly assumed that TechDirt buffoons would never notice the many intellectual sleights-of-hand required to fling the stiletto of "welfare program for authors" at the concept of copyrights. Perhaps there may also be some third explanation that escapes my imagination.

OGS know less about file-sharing programs than they do about copyright law and economics.

Copyrights and File-Sharing creates the illusion of technological competence by droning on… and on… about how file-sharing programs evolved. Nevertheless, OGS either conceal, or feign ignorance of, the most obviously relevant characteristic of "decentralized" file-sharing programs: After Napster, these programs became—and they remain—technologically inefficient absurdities explicable only as calculated attempts to induce copyright piracy.

This brute fact reduces Copyrights and File-Sharing to low comedy. In this paper, Professors Bevis and Butthead try to convince us that even if sociopaths intentionally design blatantly inefficient programs and networks in order to usurp the rights of copyright owners, the resulting global piracy syndicates—the largest ever known—will still be unable to harm the copyright owners whom they were intended to harm. That's nuts—but that's also Copyrights and File-Sharing.

Nor is the technological absurdity of file-sharing programs debatable. Even Free-Culture-Movment academics who retain some trace of integrity admit that decentralized file-sharing programs are piracy machines. See, e.g., Tim Wu, When Code Isn't Law, 89 Va. L. Rev. 679, 717 (2003) ("P2P design shows that avoiding copyright requires important deviations from the optimal design for speed, control, and usability"); id. at 731-37 (describing efforts to "program around" copyright law); Tim Wu, The Copyright Paradox, 2005 Sup. Ct. Rev. 229, 239 (arguing that theoretically neutral programs like Kazaa and Grokster "have always been understood not just as a means of disseminating information, but as a way to get music and sometimes movies for free"); Tim Wu, Copyright's Communications Policy, 103 Mich. L. Rev. 278, 361 (2004) ("'peer-to-peer' filesharing programs['s]… advantage lies in the fact that they are designed to evade copyright's enforcement system, and therefore minimize the price of an essential input (copyrighted materials)"); but see Lawrence Lessig, Free Culture, 17 (2004) (pretending that file-sharing programs are "among the most efficient of the efficient technologies the Internet enables").

Honest technologists also admit that file-sharing programs evolved to become less effective and efficient. LimeWire developers certainly do. See Kevin Faaborg, Losing the Long Tail, LimeWire Blog (July 13, 2006) (explaining why LimeWire is less efficient than Napster: "here's modern p2p's dirty little secret: it's actually horrible at rare stuff"). So do others. See Gorton Haff, Whatever else it is, P2P is inefficient, (CNET Nov. 20, 2007) ("Tor's Roger Dingledine said that 'P2P is not good for anything you can do in a centralized way with the same properties.'"); see also Thomas D. Sydnor II, et al., Filesharing Programs and "Technological Features to Induce Users to Share", 59 & n.93 (USPTO 2007) (noting misrepresentations made to the Supreme Court about the "efficiency" of decentralized file-sharing programs).

Yet in Copyrights and File-Sharing, OGS pretend to believe that such programs are not piracy-adapted, (p.9): "LimeWire insists that it does not induce consumers to infringe copyrights." True, but Judge Kimba Wood just held that no reasonable person would believe such gibberish. See Arista Records v. Lime Group, 2010 U.S. DIST. LEXIS 46638 (S.D.N.Y. 2010). OSG thus prove that not even unanimous defeat in the Supreme Court can prevent piracy-cheerleaders as brainless as themselves from again swallowing the same old implausible baloney served up by the distributors of yet another Grokster-or-Morpheus clone.

Consequently, in Copyrights and File-Sharing, Professor Oberholzer-Gee-I'm-Slow still insists that LimeWire "software provides substantial legal uses. For example, the company operates a digital music store that offers 500,000 songs, many of them from independent bands." Wrong again: the LimeWire Store has nothing to do with the LimeWire file-sharing program or the Gnutella file-sharing network. Indeed, the LimeWire Store is a central-webserver-based system like iTunes. It thus proves only that after a decade of developing a Gnutella-protocol-based file-sharing program, LimeWire LLC knew better than to use it when distributing music legally. See Arista Records v. Lime Group, 2010 U.S. DIST. LEXIS 46638 at *14 (finding that the LimeWire program was used to infringe copyrights 98.8% of the time).

In conclusion, while these analyses highlight but a few of the many dumbfounding defects in Copyrights and File-Sharing, they may suffice to prove the critical point: Copyrights and File-Sharing is not a work of "scholarship." Rather, it is an amateur recording of a cheerleading routine badly performed by two biased, incompetent, cut-rate lobbyists publicly gratifying undisclosed clients—or, perhaps, no one but themselves.

Nevertheless, the blatant errors and biases of Copyrights and File-Sharing may serve a productive purpose. It may teach both potential MBA students and their parents that if they want even marginally competent instruction in business administration, they should avoid Harvard and UNC and enroll, instead, at an institution that hires more competent faculty. Phoenix University seems like an obvious "step up" from the clown-car demagogeury of Professors Oberholzer-Gee and Stumpf.

posted by Thomas Sydnor @ 7:46 PM | Antitrust & Competition Policy , Capitalism , Copyright , Cyber-Security , Economics , Global Innovation , IP , Innovation , Internet , Mass Media , Software