On Innovation and Inequality

Copyright and patent laws are ripping off America.

Once upon a time, nobody worried about income inequality.  Human beings appeared so incredibly unequal in skills, intelligence, strength, and so many other characteristics that inequality seemed to be the natural way of things.  The overwhelming majority lived in absolute poverty; a handful "to the manor born" lived in sybaritic wealth as their natural birthright.  For most people, the only way to improve oneself was by force of arms, which automatically ruled out people who did not own arms or were too weak to properly wield them.

Only after the Reformation and Industrial Revolution began to produce enough wealth to spread around along with vast numbers of "The Great Equalizer" did anybody seriously worry about how evenly the proceeds should be spread.  Charles Dickens became rich and famous writing heart-wrenching novels about Britain's poor and downtrodden.  The Victorian reformers worked hard to improve the lot of the impoverished; today, every major country provides for the health and welfare of those who don't or can't work.

Yet, according to Nobel Prizewinner Joseph Stiglitz writing in the New York Times, Charles Dickens was not merely the chronicler of the travails of the miserables, he contributed to their misery.

Intellectual Property = Unearned Rent?

To understand Prof. Stiglitz's argument, we need to know that Mr. Dickens made money by writing books which people wanted to buy.

A moment's thought raises a question: it's a lot easier to republish an existing book than to write a new one.  As soon as it became obvious that people wanted to buy Dickens' books, why didn't every printer in the world start churning them out and let competition benefit customers by fording down prices?

We know the answer, of course: copyright laws.  When Dickens began writing in the mid-1830s, it was illegal for any printer not authorized by the author to publish any work in England.  The author's monopoly lasted for 28 years after its registration.  In effect, Dickens and every other author had a legal monopoly on their own works for nearly three decades.

At the height of his popularity, Parliament gifted Dickens with a change to the law: from 1842, copyright lasted for the author's lifetime plus 7 years, or a total of 42 years, whichever was longer.  More decades of monopoly profits flowed into the Dickensian coffers!  One wonders how much of this largess was shared with influential members of Parliament.

The same effect was taking place in the area of mechanical inventions, with patents generating large profits for fortunate tinkerers and their investors.  How much money did the Singer Sewing Machine Company make before the patents ran out?

Today we're so used to the idea of intellectual property and overwrought entreaties against "piracy" that it's hard to imagine that intellectual "property" isn't just as normal and natural as real physical property.

But it's not: IP is entirely a creation of government.  Dickens could not possibly travel the length and breadth of England beating up pirate printers and smashing their presses, he had to rely on the king's men to do it for him.

He couldn't get anything in places the king's men couldn't reach.

In 1842, there were no international copyright laws so Americans could read Dickens's works for free in pirated editions.

Once Dickens saw how popular he was in the US, he realised he could virtually double his income if his American fans started paying a going rate for his work.

"I am the greatest loser alive by the present law," he complained in letters home.

His income would double if he could force Americans to pay royalties, but those rowdy revolutionaries were disinclined to shell out when they didn't have King's Men forcing them to pay.  Dickens went home empty-handed.

Competition between American printers kept the prices very low because nobody needed Dickens' permission to crank out another reprint.  The result: a poor reader in America could buy a lot more Dickens for his dollar than a similar unfortunate in London.

When Everything Is Intellectual Property...

Let's contrast Charles Dickens, who died a very wealthy man even without American royalties, with someone even more famous and arguably more beneficial to the human race: Johannes Gutenberg, the inventor of the first practical mechanical movable-type printing press in 1439.  Imagine the impact of the iPod times about a hundred.  All of a sudden, knowledge could be quickly and easily spread across the world to everyone literate.

Yet Gutenberg made nothing from his genius save a small court pension from his local ruler in recognition of his achievements.  His print shop and publications were lost in a business dispute and everyone in Europe gleefully copied his technology without paying him a cent.

This seems unfair.  Our Founders established a patent and copyright system so that innovators would be rewarded.  Knowing that most people instinctively distrust monopolies of any kind, they were careful to lay out the rationale behind their decision to empower Congress to create monopolies:

To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.

Their goal was to promote, not vast fortunes, but useful inventions being developed.  In deliberate contrast with natural property, which is yours as long as you own it, these exclusive rights to intellectual properly were for a limited time only.

Our Founders knew that, human nature being what it is, inventors would try to rake in as much as they could.  Human nature being what it is, inventors weren't likely to burn the midnight oil if, like Gutenberg, they wouldn't see anything for it, but the obstacles to spreading knowledge needed to be minimized as much as possible.  Copyrights and patents are supposed to expire after a reasonable time, allowing anyone to use them free of charge thereafter.

Contrast this to the situation today, where Mickey Mouse's copyright keeps getting extended decade after decade and where lifesaving drugs that can profitably be sold for $13.50 sell for $750 instead.  Martin Shkreli became "the most despised man in the world" after he executed just such a price increase on Daraprim.

Mr. Shkreli garnered such hate that the FBI arrested him on somewhat questionable securities charges in a crowd-pleasing but not obviously just move.  Even while throwing verbal grenades at Shkreli, nobody questioned the underlying facts: why exactly is the full force of the United States Government exerted to protect this legal monopoly over a copyrighted drug, regardless of how much money is being made?

In fact, this is rare on a world scale: most poor countries have little or no drug patent law enforcement and copyright enforcement is a joke.  China has ostentatiously destroyed vast mountains of pirated DVDs time after time without making the slightest dent in the business of selling illegal copies.

And so, to Prof. Stiglitz' argument:

Economic power often speaks louder, though, than moral values; and in the many instances in which American corporate interests prevail in intellectual property rights, our policies help increase inequality abroad. In most countries, it’s much the same as in the United States: the lives of the poor are sacrificed at the altar of corporate profits. But even in those where, say, the government would provide a test like Myriad’s at affordable prices for all, there is a cost: when a government pays monopoly prices for a medical test, it takes money away that could be spent for other lifesaving health expenditures.

On one hand, this sounds like the usual Marxist claptrap we so often hear from our elite mandarins which in principle could be applied to anything: why should one rich guy live in a palatial house that could house a hundred homeless?  Why should giant corporations garner billions when their wares are literally a matter of life and death for sick people?

But that's without reckoning the fact that this "property right" is entirely artificial, created by We the People with the intention of benefiting society as a whole.

Think of the vast fortunes made in the last several decades: Almost without exception, they were created from intellectual property.  You can't merely not make your own iPod, Apple has spent years and much wampum suing anyone who mimics their user interface even though they'd gotten the idea from Xerox of all places.

How much of that money is a reasonable reward for risk and hard work and how much is simple greed extracted "because they can?"

To answer this question, let's look back a hundred years at the greatest inventor of all time: Thomas Alva Edison.

The Wizard of Menlo Park's Sputtering Spells

There is no doubt that Mr. Edison was one of history's great innovative geniuses.  No single person has ever filed as many patents as he, before or since.  What's more, no single person has invented such a panoply of world-changing gadgets.  Usually a name and one gadget are inextricably linked in grade school: Eli Whitney's cotton gin, James Watt's steam engine, Robert Fulton's steamboat.

That won't work with Mr. Edison because he made too many inventions.  Merely to scratch the surface, he invented the light bulb; pretty much the entire power grid from hydroelectric generators to the transformer on the pole; the phonograph; the movies; the carbon microphone; the mimeograph, an early sort of photocopier that some of our older readers may recall from grade school; the electric locomotive; Christmas tree lights; and indeed the modern R&D lab itself.

Yet, even in the Gilded Age era where American entrepreneurs like the Vanderbilts, Carnegie, and Ford were heaping up money faster than they could count it, Thomas Edison didn't really escape the upper middle class.  Oh, he swanned around with the super-rich and famous.  He was Henry Ford's close friend until his last breath, but his bank account never measured up.

And why not?  Because, even with hundreds of patents filed, Edison mostly had to do his own enforcing.  He had to hire detectives to gather evidence of infringement; he had to pay lawyers to file suit in court; he had to appear and testify.  Assuming he won, he had to chase down the offender to get any money, and most offenders had spent all their money on lawyers or shipped it overseas.

It wasn't for lack of trying: Edison was legendary for hard-nosed and brutal enforcement of his patent rights.  Indeed, it was his "Motion Picture Patent Company" and its attempts to charge fees for anything and everything to do with movies that drove the move industry to Los Angeles from its original home in New York City.  New York was just across the river from Edison's New Jersey base, whereas California was three thousand miles and two weeks travel away.  The extra trouble this caused Mr. Edison in suing made all the difference.

Yet, in the end, something resembling a reasonable balance obtained.  Edison lived a prosperous, successful, honored life, but did not collect wealth beyond the dreams of avarice.  America and the world paid Edison something, but not as much as he wanted, and not so much as to prevent his inventions from spreading everywhere.

It's pretty obvious that Martin Shkreli's balance was way out of whack.  It's equally obvious that Third World countries that don't pay drug royalties at all are shooting themselves in the foot: nobody bothers to design drugs for poor-country diseases because there's no money in it.

It's certainly debatable whether Bill Gates, Mark Zuckerberg, Larry Ellison, Steve Jobs, or the Google Guys have struck the right balance between service and price, but the size of their fortunes gives pause.  Most income inequality these days derives from intellectual property instead of from real property.

Is there a better way?  Thomas Edison's story shows there is: Let the law support the rights of patent and copyright, and let infringers have their day in court, but make the patent holders bear the entire burden and inconvenience of enforcement in a court of law.  After all, they're the ones reaping the benefits, are they not?  Why should the American people be forced to pay the monopoly costs of intellectual property and also pay the bureaucrats who enforce it?

It's true that various monopoly industries spend large sums of money enforcing copyright, RIAA and the MPAA being merely the most notorious.  Yet at the beginning of every DVD is an un-skippable splash screen trumpeting the news that the FBI is watching to see if you copy movies.  What business is it of the FBI to make sure Hollywood gets its pound of flesh?

The imbalance is worse today than ever before in history, thanks to our thoroughly technological world.  Everybody uses intellectual property all the time because practically everything we touch has been copyrighted, patented, or both.  Few of us will ever see a dime from anything we create; true innovators are comparatively few and far between.  Isn't it time to adjust the balance a bit?

Prof. Stiglitz doesn't come right out and say it, but he's pointing in the right direction.  Let's make some major changes to our intellectual property laws and watch the economy grow.  Who knows, we might even make some progress on fixing inequality - assuming you believe that's a problem that needs fixing at all.

Petrarch is a contributing editor for Scragged.  Read other Scragged.com articles by Petrarch or other articles on Law.
Reader Comments

The problem isn't who enforces what, but the extremely long time frames both copyrights and patents enjoy today. Knock patents down to 5 or 10 years, renewable for same, and copyright down to 20 renewable for 20 and a lot of issues would solve themselves.

As for drugs, the issue there is not the patent but the reimportation bans that big pharma has gotten passed. That law is the only thing that allows drug companies to charge $100 a pill here and $1 a pill in Mexico. In any other industry, elimination first sale right would be evidence of collusion and monopoly. In healthcare, though, none of the normal rights apply because they've been slowly whittled down to enable an industry built on rent seeking, not productivity and actual care.

January 30, 2016 11:23 AM
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