What Do Patents Encourage?

     A month ago, I posted complaining about how copyright law has imposed costs on the rest of us, prompted by my frustration in trying to legitimately copy some files from a CD-ROM to an iPad. This morning I had an experience that added to my frustration with intellectual property law, this time in the form of patents.
     The whole reason for having patent law is to encourage innovation, but at least sometimes I suspect  it does the opposite. I was driving my son to school in an older car a cassette deck where the CD player ought to be, when it occurred to me that, given how small MP3 players are now, shouldn't it be possible to build one into a device that emulated a tape cassette? You just make a little induction coil or some such gadget to interface with the tape head of the cassette player, and use that as an output. Have sensors in the reel sockets to detect when the cassette thinks it's playing, rewinding or fast-forwarding, maybe even have them draw some power from them for recharging, and there you go. All the technology to do this exists; it should be fairly simple to build such a device.
     As I thought about this, I realized that there were various hurdles to overcome besides the technical. The first one, I thought, from a business perspective would be market: how much demand would there actually be for this thing? I mean, there are still cassette players around, but for how much longer, and is it cost-effective for anyone to buy this gadget instead of just getting something up-to-date? But perhaps, if it were cheap enough, for people who just like their old stereo systems.
     The thing that really gave me pause, though, was patent law. Surely, I thought, someone else would have thought of this invention before I did. And that meant that if I were to go out and create this device and try to sell it, I'd probably get sued by whoever registered the patent on it. Even if nobody else had patented it and I didn't want to apply for a patent myself, I'd still need to search through patents to ensure that I wouldn't be running afoul of someone else's rights by creating such a device.

     This is all academic, of course, because I'm not at all technically adept enough to design and build this thing, and I'm not actually all that interested in marketing it either. (Also, I was right that someone else probably had thought of it, and built it. Turns out there are several on the market already.) But what I found striking was that of all the obstacles to turning an idea into a reality, the one that discouraged me the most was the whole business of patents. I just didn't want to have anything to do with the kind of research that would involve, and I've been to law school!

     That's not to say that patent law always discourages innovation. For people and companies who have ideas with solid economic potential, it is certainly worthwhile to invest the time and resources in developing the invention and applying for the patent. But for borderline case? For things that might be useful? Here is where things get iffy.
     Laws are generally intended to promote some sort of behaviour and discourage others, but it often turns out that the behaviour a law actually  promotes is not the behaviour it's intended to promote. Cynically, some people (wrongly) say "it's only illegal if you get caught." More accurately, you're only punished if you get caught, but the point here is that people often consider it more cost-effective to modify their behaviour around the practical consequences more than the actual intention of the law.
     Patent law is no different. As much as we might want patent law to encourage innovation, it isn't actually innovation that is encouraged, but the use of patent law itself. You aren't rewarded for coming up with and marketing a good idea so much as you're rewarded for applying for and asserting patent rights. Suppose two identical twins separated at birth independently come up with a brilliant idea, and both go through all the steps needed to develop it for market, but one of them applies for a patent and the other doesn't. Which one will reap the rewards? Clearly, all other things being equal (and here we've postulated that they are), it's the act of going to the patent office that's rewarded, not the innovation itself.

     Again, I don't have a solution for this. I don't have an alternative to patents to propose here, anymore than I was able to suggest an alternative to copyright. But I do think we should be aware of how sometimes our policies work against themselves.

Externalities

     Last week, I spent several hours trying to help my mother perform what ought to be a fairly simple function: transferring files from a CD-ROM to her iPad. This turns out to be surprisingly difficult, thanks to the Digital Rights Management paradigm around which the iPad and, increasingly, computers generally are built. A device like an iPad is presumed to be tied to a particular computer, and so the songs and other things you've bought on your laptop are conveniently and automatically shared with your iPad. But to prevent piracy, there are barriers to sharing files with someone else's computer.

     So, all I wanted to do was use the CD drive on my laptop to move the files from the CD to my mother's iPad, but a dialogue box warned me that the syncing process would delete photos on my mother's device that weren't present on my laptop. We were eventually able to move the files over, but it took a long time and was ridiculously inconvenient.

     Okay, I understand intellectual property law, and the rationale for copyright, and why it's important to provide a means for creators to earn a living from their works. I get that, I really do. I don't agree with the calculations of how much the music and film industries lose to piracy every year, which are absurdly inflated and self-serving, but I'm sympathetic to the plight of the starving artist. I really am. 

     But really, is copyright law the best we can come up with? Are these barriers to copying really justified? Because those barriers impose costs on people, and not just the people who ought to be paying. 

     If you've taken economics, you're probably familiar with the term "externality", which just refers to any cost (or benefit) that doesn't show up on the balance sheet of the economic actor in question. The classic textbook example of an externality is the pollution from a factory. The factory owner's costs of production are the cost of the land and the factory itself, the raw materials used, the machinery, and the labour to run it, but the cost of pollution (quantifiable as reduced property values, additional health care costs, diminished agricultural yields, etc.) is imposed on someone else. 

     Factories may be necessary, but the exclusion of externalities from their accounting greatly distorts the appraisal of their economic value. You can't argue that a factory is efficient because it's profitable if it's being subsidized by everyone who has to put up with the pollution it emits; you have to take into account all the costs (and benefits; there are positive externalities as well) of an activity before you can trust in the validity of the Invisible Hand's market results.

     Now, I'm not arguing here that intellectual property rights should be abolished. (I feel sure there must be a better solution, but at the moment I'm at a loss to provide one.) But I am arguing that the copyright as it is currently applied imposes significant externalities on people who aren't pirating anything. The files on that CD-ROM my mother wanted to look at were sent to her by their creators for her to review; there was no violation of copyright at all involved. And yet, to protect the rights of a relatively small subset of copyright holders (i.e. those represented by traditional publishing and media companies), the iPad was built to make it difficult to transfer any files outside of the commercial paradigm. 

     The inconvenience of copying perfectly legitimate files is only one of the costs we pay to protect the interests of copyright holders. There are countless others, from the trivial (why can't I skip past watching that same FBI anti-piracy warning on a DVD? How many person-seconds has that wasted?) to the absurd (why can't I watch the original WKRP in Cincinnati episodes with the original music? Is anyone seriously going to use that show to listen to snippets of popular songs without paying for them?) to the genuine stifling of creative contributions to the world's cultures (Was anyone going to read The Wind Done Gone and decide they didn't need to read Gone With The Wind or see the movie now that they knew how it ended?)

     All of these costs are imposed upon you and me and the rest of the world. There may be good reasons for imposing them, but we still end up paying them, and paying them involuntarily. That basic fact undermines the media industries' attempts to claim the moral high ground. They are trying very hard to make us all accept the idea that unauthorized copying of things is stealing, and there's some moral validity to that. But I just had three hours of my time "stolen" trying to copy something the owner actually wanted me to copy. If the recording industry wants people to recognize and sympathize with their losses to unauthorized copying, this is probably the wrong way to go about it.

I Find Your Lack Of Faith Disturbing: Musing on the Invisible Hand

     A few months ago, a friend of mine told me of a question on an exam he took in an economics course. I'm paraphrasing, but it was something like "Government  intervention can only harm the efficiency of the market: True or false?"  The "correct" answer was "true". Well, I found this troubling for a couple of reasons, most obviously because the underlying ideology (that government is bad for the economy) is so absurdly false.
     It's obviously false if you stop to think about it in any detail because there are forms of government interference without which most of our modern economy would be completely impossible. We have laws, police and courts not only to enforce the property rights that libertarians value so much, but also to enforce the contracts that make up the economy in the first place. Government also flagantly intervenes in the market by creating artificial forms of rights, such as intellectual property, that dramatically transform the economic landscape. And perhaps most pervasively, there is money. Money, a system of currency that enormously facilitates transactions by providing a simple, uniform unit of value, is a service created and provided by government, and it is almost impossible to describe how much that single piece of government intervention enhances the efficiency of the market.

     Okay, so maybe those kinds of government interventions in the economy are necessary, the laissez-faire ideologue might concede. But they're just to ensure the basic requirements of free trade. OTHER kinds of intervention, like taxes and regulations on who can do what with their property, those are always bad. Free markets have to be free, and any time you interfere with that freedom, you lose the benefit of the free market which always axiomatically produces the most efficient possible allocation of resources.

     Hey, I'm totally into that Invisible Hand thing. Free markets are, generally, the best way of finding prices for things, and they tend to produce efficient solutions to allocation problems. Markets adapt to changes in costs of production, availability of substitute goods, and all those unpredictable vicissitudes of  the real world. Price of oil goes up? Well, watch as ripples through the markets spread, and prices of everything else adjust to an optimum distribution given the new cost of energy. Oh look, the rising price of oil has made it economical to invest in that new form of solar energy! Solar electricity becomes cheaper, ripples spread through the market, and a new equilibrium forms.

    So when free market ideologues complain about how the government shouldn't interfere with the free market by imposing taxes on this vice or subsidizing that public good, for fear that it will distort the pure functioning of the Invisible Hand, I am baffled. The Invisible Hand isn't some fickle faerie who will only work its magic if we leave out the right kind of milk and cookies, and will run away and leave us helpless if we offend it. It's a powerful statistical principle, almost on the order of a Law Of Nature. Markets will be free, regardless of how hard we might try to constrain them, because markets are made up of independent individuals, some of whom exercise a great deal of creativity to find a way to exploit them. The Invisible Hand is far, far more powerful than conservatives give it credit for.

     Now, you can argue about whether or not a particular government policy is a good idea. If the government decides to impose a tax on pollution, for example, to try to internalize that externality (to use economist-speak), you can argue about whether or not the tax is the right amount or the best way to address the problem or even whether there's a problem at all. There's lots of valid reasons to favour or oppose any given government policy. But whenever someone starts talking about how it will interfere with the efficiency of the market, I wanna reach out and force-choke them.

Pro-Business versus Pro-Business: Mistaking Universals for Particulars

     One of the ways in which our thoughts often seem to go astray is in the ambiguity of how we can use nouns in English. If I say, for example, "I believe in the rights of the individual to freedom of speech and belief," you might reasonably ask (particularly if you're not a native English speaker), "Which individual?"
     Of course, that's a pretty obvious one, and just about everyone knows that in that kind of context, speaking of "the individual" really refers to all individuals. Yet I think that sometimes it's dangerously easy to slip into that trap, and to mistake the particular for the universal and vice versa.
     In particular, I'm thinking of how often politicians fall into the trap of thinking that if they help a particular business or even a particular industry sector, they're "pro-business" in the abstract universal sense, rather than just being pro-that-business. I used to think, when I was younger and even more cynical, that it was simply corruption, that the politicians were deliberately helping their cronies and disingenuously proclaiming themselves as pro-business or pro-free-enterprise. But now I'm not so sure, and even if that is the case, I feel obliged in good faith to charitably assume it's a subtle (and corrigible) cognitive error, perhaps the very one I'm describing here.
     It's not that far-fetched, after all. The arguments that implementing policies to benefit a particularly important employer in the community will create jobs and bring prosperity can be pretty persuasive, and may actually be true in many cases. It might well be the case sometimes that keeping a particular factory or mine open is in the general interest of a community. And so it can be very easy to slide into the ambiguity of thinking, without any deliberate corruption or cronyism, that being (generally) pro-business actually means helping out particular companies or businesses, even awarding them monopolies at the expense of other businesses.
     Of course, that's not what it means at all, or it's not what it is supposed to mean. Being pro-business in terms of policy means fostering an environment in which businesses generally can flourish, not simply where one particular business is better off. But I can understand, now, how one could make that honest mistake.
     It's even easier to make that mistake when a well-organized business interest lobbies for some concession or handout and manages to present itself as representing the entire industry, or a majority of the community. This is a common tactic whenever a professional sports team asks for a new stadium; they play up how popular it'll be with all the sports fans (and of course every respectable politician is a loyal fan of the home team, right?) and how many jobs will be created and how local businesses will benefit. It's not always true, but it gets a lot of momentum and it becomes hard to challenge the conventional wisdom established: new arena = boost to local business generally.
     I think we're seeing the same thing right now with the music and film recording industries, and their aggressive lobbying for reforms to copyright law. They present themselves as representing artists, and of course it's true they do represent some artists, but by no means all and in fact, only a rather tiny minority of artists, generally those who have enjoyed some degree of commercial success. Those who don't have a contract with a label, or roles in Hollywood establishment films, are simply not included.
     Here's an example of how measures intended to help "artists" can end up harming artists. Years ago, when I was in a garage band, we set out to make a demo tape. (In those days, the late 80's or so, we actually used tape.) Since we were going to be renting a high-quality reel-to-reel unit, rather than an ordinary old cassette, we had to go buy a proper reel of tape for it. We were a little surprised to discover that there was a surtax to be paid on such recording media, to go towards paying royalties to the established artists whose work would presumably be pirated onto some of the recording media sold.
     Now, think about that for a moment. I'm not insensitive to the plight of recording artists who lose sales of their music to piracy, but look who was paying for it! Here we were, wanting to record our own performance of our own original compositions, and we were being forced to pay good money to musicians (or perhaps more accurately, their recording companies) who were already established and commercially successful. It was a regressive tax that rewarded established musicians for their past success, while discouraging new creative talent from even getting started.
     Yet I don't doubt for a minute that the politicians who passed that law sincerely felt that they were really helping artists generally, even though they were helping some particular artists at the expense of a great many more. And they were able to think that, in part, because our language has an inherent ambiguity between particulars and universals: "the artist" can mean "this artist" or "all artists", just as "the individual" or "business" can be arbitrarily extended or narrowed by context.

     So, I suppose, the point of today's sermon is this: Be wary whenever someone (including you) speaks in apparent generalities, and if there's any doubt, insist on clarification. Are you really talking about all artists, or all businesses, or all citizens, or only a particular subset? It's okay to speak for just the subset, of course, but just be clear about it.

The Paradox of Unemployment

     I have always found something a little bit paradoxical about the whole issue of unemployment. When unemployment is high, we often say there's no work available. This is a problem, of course, because without work, the unemployed cannot earn the money needed for food, shelter, clothing and so forth. Therein lies the paradox, because it seems to me that if there are people without adequate food, clothing and shelter, there's work to be done: people to feed, clothe and shelter.

     So the problem isn't really unemployment itself; if there were really no work to be done, then we'd all have cause to celebrate, relax, engage in leisure activities and so forth. Rather, unemployment is a market problem; no one is willing or able to pay for the work that needs to be done. Or more generally, it's a distortion introduced by a market system that only measures value in certain ways.

    Let me be clear: I'm not condemning free market capitalism here. Any economic system involving more than one participant will introduce some kind of market distortion, and the overall gains in productivity and general welfare that accrue from free markets usually outweigh the costs of the distortions, often by a huge margin. But it does seem obvious that we can make our system better in various ways, some of which I expect I'll talk about in future posts.

     Talking about unemployment is further complicated, though, by some unconscious biases associated with the work ethic, which made perfect sense in a time when communities desperately needed every available hand to help out bringing in the harvest, threshing the grain, and with countless other tasks that needed to be done to ensure people wouldn't starve that winter. It was entirely appropriate to condemn idleness, when there was so much work to be done. And, to be sure, laziness is still properly considered a vice (of which I am dreadfully guilty).
     This attitude, condemning idleness as a moral failing, is rather misplaced in our current economy, and I suspect it gets in the way somewhat when we try to think about solutions, because it attaches a stigma to unemployment that is inconsistent with the economic reality. We just don't need everyone to help out with the harvest anymore to ensure that no one starves this winter. And as the enormous growth in the labour-efficiency of agriculture spreads to manufacturing and other industries, it's actually possible in principle to support the entire population at a reasonably high standard of living on the labour of a relatively small number of people. So the historical reason for condemning idleness is now irrelevant.
     That's not to say I believe a few people should support the rest of us, free of charge. That would be unfair to the few working, and bad for the freeloaders' psychological health as well. However, there's clearly something wrong when large numbers of people have only their labour to sell, and no one's buying.