Year: 2004

Down yonder, a reader writes regarding Thomas Sowell’s point that prices reflect the collective values placed by individuals on limited resources that they are competing for in the marketplace (e.g., beach-front homes):

What would he [Sowell] say about that view of pricing for things that have no limited supply—e.g., usage of intellectual property?

Unfortunately, he doesn’t seem to treat intellectual property in this book. At least "copyright" and "intellectual property" aren’t listed in the index (though he may have comments about them somewhere).

Fortunately, there is a sequel (Applied Economics), which I’m going to read afterward. He might deal with it there.

Also fortunately, I already have thoughts about this subject. As (a) information exchange is how I make my living and (b) part of my income is royalties and (c) our age presents people with the technological means to easily violate copyright law, I’ve thought though this particular area of economics in more detail than most.

It also seems that there is a limit to the supply of intellectual property. In fact, there are two limits. The first is the limited number of copies of a piece of intellectual property that are actually in existence at any one moment. This is a finite number. If I show up at Best Buy on the day that the special edition of Return of the King is released later this month and the store is already sold out, I’ll be very annoyed (which is why I plan to go during lunch).

It’s true that technology makes it very easy to make new copies of works of intellectual property, and via the Internet one can make a new copy for very little expense. For example, I just started a trial subscription to the audiobook service Audible.Com, where you pay for a work and then download a copy onto your hard drive, which means making a new copy that didn’t exist before (and that is also burnable to CD).

Technology may be making it increasingly trivial to expand the finite number of copies of a single work of intellectual property that exist at any given moment, but the effort required to do so is not zero. It still takes electricity, hardware, and plastic to get a CD copy of an audio book off the Internet, and those items have costs (both in the sense of prices and in the sense of not being able to devote those resources to a different use after committing them to this one).

The greater limiting factor on works of intellectual property, though, is the one that copyright laws are designed to encourage: the creations of such works. There are a limited number of such works created. Nobody has an infinite number of monkeys with typewriters, so we have to rely on the ingenuity of humans to write our stories and novels and textbooks and articles for us (and that’s just in the medium of print; our movies and TV shows also have to get made and our songs recorded).

People will do a lot less of this if they aren’t paid for it. If someone can’t make a living as a writer, he won’t do it full time, and he may not do it at all. If you want someone to make up a story for you every week on your favorite TV show or write a book about a subject you’re interested in, he needs to be compensated for his time in doing so.

Copyright laws, by giving the creators of a work the right to control the copies that are made of it so that they can make money off these copies, enables creators to earn a living by what they do, and so society is enriched by having more stories and more novels and more textbooks and more articles (as well as more movies, TV shows, and songs) than would exist if creators didn’t get paid for their work.

Works of intellectual property are thus resources, just as all other works are. If you don’t pay people to produce them, they won’t be produced (not in anything like the same numbers, anyway). If you want someone to dig copper out of a mine, you have to pay him, and if you want someone to dig a story out of his brain, you have to pay him as well. Copyright is the mechanism that ensures this happens on a frequent and professional basis rather than on an infrequent and hobbyist basis.

That doesn’t mean that all copyright law is good law. I, personally, am opposed to several provisions of current copyright law. I think the fines for violating it are too high. I think the term of copyrights are now too long (corporations should not be able to keep things out of the public domain indefinitely). And I fear that our copyright law is headed in the wrong direction, which is why I recently blogged about a law that would threaten the institution of "fair use" under copyright law.

But the fundamental principle of copyright law is sound. Indeed, it applies directly to me and the work I do. If I couldn’t get paid for doing apologetics, I’d do a lot less of it.

I’d have to.

I’m not Bruce Wayne. I’m not a dilettante millionaire, so I’d have to be making a living in something other than apologetics, applying my brain and/or brawn to some other field in an effort to make the bread needed to buy the meat needed to keep body and soul together. Apologetics would be something I’d only be able to do (at most) on a part-time, after-hours basis.

Copyright law thus has a natural law basis in that it provides for the overall enrichment of society by the creation of new intellectual works. That natural law basis means that we aren’t morally free to ignore it.

As to the pricing of works of intellectual property, it seems to me that as a matter of course market forces are the best mechanism to determine this, just as they are the best mechanism to determine the price of thigns in general. If someone can come up with a story that is exciting enough that people will pay $10 each to read it then he ought to be able to charge that much for it. And if someone else comes up with a story that peolple think is cool enough that they’re willing to pay $50 each to read it then that extra-cool storyteller ought to be able to charge that much for it.

If, on the other hand, the storyteller thinks that he’s got a $50 story and people think it’s really only a $10 story then he’ll find out that he needs to lower the price in a hurry.

I don’t know what besides market forces could fairly determine the price of individual stories. Governments can’t even figure out the market value of tangible goods. I don’t know how they would determine the appropriate price of intangibles like intellectual property works.

And, as with tangible goods, setting price controls on intellectual property works would have a devastating effect. If, for example, the government set a max cap of $20 for a story then nobody (or almost nobody) would write $50 stories anymore. On the other hand, if they set a minimum floor of $20 per story then people would start cranking out tons of $5 stories since they no longer had to work as hard to get a $20 sale.

A new round of bad effects once the public learned that the quality of the stories was going down, but I’ll leave those to your imagination. You get the point.

Intellectual property works are thus not so different than beach-front houses. If the market will result in people getting well paid for building beach-front houses, they’ll build more of them. And if it results in people getting well paid for writing books, they’ll write more of them. In both cases, the price isn’t simply a barrier to you getting what you want. It’s an rationing mechanism for the limited copies of something that exist. In the case of beach-front houses there is a sharper limit on how many of these there can be (due to a limited amount of developable beach space), and in the case of books there is a limit on how many unpaid copies there can be before the paying market is undermined and writing becomes unprofitable and authors stop doing it.

Since it’s Sunday, I thought I’d give a little example from Thomas Sowell’s book Basic Economics that deals with religion.

This entry also might be called "Market Ecumenism" or "How the Market Promotes Not-Killing-Each-Other-Over-Religious-Differences."

After explaining that the purchase prices different groups are willing to pay for limited goods and services competitively determines the prices of those services, the Master writes:

Most people may be unaware that they are competing [against other purchasers when they buy an item or hire a worker] and simply see themselves as deciding how much of various things to buy at whatever prices they find, but scarcity [of goods and services] ensures that they are competing with others, even if they are conscious only of weighing their own purchasing decisions against the amount of money they have available.

One of the incidental benefits of competing and sharing through prices is that different people are not as likely ot think of themselves as rivals, nor to develop the kinds of hostility that rivalry can breed. For exmaple, much the same labor and construction material needed to build a Protestant church could be used to build a Catholic church. But, if a Protestant congregation is raising money to build a church for themselves, they are likely to be preoccupied with how much money they can raise and how much is needed for the kind of church they want. Construction prices may cause them to scale back some of their more elaborate plans, in order to fit within the limits of what they can afford. But they are unlikely to blame Catholics, even though the competition of Catholics for the same construction mateirals makes their prices higher than otherwise.

If, instead, the government were in the business of building churches and presenting them to different religious groups, Protestans and Catholics would be explicit rivals for this largess and neither would have any financial incentive to cut back on their building plans to accomodate the other. Instead, each would have an incentive to make the case, as strongly as possible, for the full extent of their desires and to resent any suggestion that they scale back their plans. The inherent scarcity of materials and labor would still limit what could be built, but the limit would now be imposed politically and would be seen by each as due to the rivalry of the other. The Constitution of the United States of course prevents the American government form building churches for religious groups, no doubt in order to prevent just such political rivalries and the bitterness, and sometimes bloodshed, to which such rivalries have led in other countries.

The same economic principle, however, applies to groups that are not based on religion but on ethnicity, geographical regions, or age brackets. All are inherently competing for the same resources, simply because these resources are scarce. However, competing indirectly by having to keep your demands within the limits of your own pocketbook is very different from seeing your desires for government benefits thwarted by the rival claims of some other group. Market rationing limits the amount of your claims on the output of others to what your own produtivity has created, while political rationing limits your claims by the competing claims and clout of others (pp. 54-55).