Intellectual Property as Socially Optimal?
Political Economy

Intellectual Property as Socially Optimal?

A Reply to Demsetz

Harold Demsetz, in Toward a Theory of Property Rights, makes the case that economic and historical factors determine the particular bundle of rights that constitute “property rights”. He points to the case of Native American tribes and land rights: once the costs of externalities (the tragedy of the commons, in this case) outweighs the cost of exclusion (e.g. negotiation and policing), land rights will form spontaneously. The tipping point was the fur trade, which exacerbated the externalities by making hunting on common land much more lucrative than it had been. Thus, the the tribes in the Northeast, where the fur trade was prominent, developed property rights in land, while those in the Southwest, where it was not as important, did not.

Demsetz concludes his paper by suggesting further lines of inquiry, for example intellectual property:

Consider the problems of copyright and patents. If a new idea is freely appropriable by all, if there exist communal rights to new ideas, incentives for developing such ideas will be lacking. The benefits derivable from these ideas will not be concentrated on their originators. If we extend some degree of private rights to the originators, these ideas will come forth at a more rapid pace. But the existence of the private rights does not mean that their effects on the property of others will be directly taken into account. A new idea makes an old one obsolete and another old one more valuable. These effects will not be directly taken into account, but they can be called to the attention of the originator of the new idea through market negotiations. All problems of externalities are closely analogous to those which arise in the land ownership example. The relevant variables are identical.

The analysis is compelling, both historically and logically. However, one of the difficulties with the Stiglerian “exists-ergo-optimal” type analysis is that it takes process for granted. The ordering forces that lead humans to realize optimal solutions given costs are simply assumed to exist. Thus, once the negative externalities of the commons outweigh the costs of instituting a set of rights, it’s practically inevitable that property rights come into being.

This is, of course, the primary Austrian critique of Chicago-style economics. These processes cannot simply be assumed, for their operation is part of the question. How can we assume that the lowest-cost solution will be obvious? Introducing information costs only deals partially with this problem; serendipitous discoveries or epiphanies are not “costly” but to a large extent unpredictable. Hence we see the necessity of the idea of entrepreneurship not only in an economic theory of the market, but in institutional analysis as well. Before any spontaneously adjusting forces can come into play, someone has to have the idea to privatize his property.

From here, several things can happen. The primal privatizer can privatize his own land, taking on the negotiating and policing costs himself and convincing others to join him. As he succeeds or fails, he will either get others to follow his example, or those whom he had initially convinced will abandon the project. The important feature here is, it doesn’t matter whether the institutional entrepreneur has the right reasons for doing something: his success or failure speaks for itself. In this way, the development of land rights in Northeastern tribes can indeed be said to be an institutional adjustment to a new optimum.

But this is not the only way institutions are shaped. If the tribal leader suddenly makes a change to the set of property rights heretofore enforced, and if he has a police force to do so, the adjusting forces are seriously weakened. Here, it matters a great deal if the leader uses right reason: a suboptimal decree can only be overturned when its costs outweigh the costs of overturning his rule (whether by changing his mind or deposing him), and an entrepreneur exists to accomplish it.

Thus we would expect socially optimal property rights to emerge from something like a common-law or polycentric system, with small jurisdictions and many examples to follow. The Indian tribes had nothing resembling modern political authority structures, so one could reasonably expect their customary rights to be somewhat optimal. There is no reason, however, to expect statutory rights under a central political authority structure to be anything close to optimal. Democratic deliberation has much higher information costs than experimentation.

Thus we return to intellectual property. Intellectual property rights are by necessity statutory. They require wide police powers over a large area, an area which must become larger as the costs of information reproduction decline in they are to be effective. Hence we see the United States government pressuring foreign governments to adopt its own stricter intellectual property laws, since with practically costless reproduction over the internet, their laxer laws render its own ineffective.

There is simply no way for intellectual property rights to arise without a central and far-reaching legislative decree. Without it, any such right will be dead letters. Self-defense of one’s intellectual property is nonsensical: one cannot mark off an intellectual boundary and police it, and negotiation would be useless without the consent of every potential violator. To defend intellectual property requires a police apparatus and a central authority, making it practically impossible that such laws could ever reflect a social optimum in the same way that land rights did for the Indian tribes.

Intellectual property laws increase the incentive to create by hindering the ability to improve. By hinting at the former and ignoring the latter, and by ignoring the processes by which the contours of rights emerge, Demsetz is able to treat intellectual property as if it were “closely analogous” to land property, and as if “the relevant variables are identical”. In fact, the relevant analogy between the two cases are not the costs, by which they might appear similar, but the processes, by which they are clearly seen to be different.

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Hi, I'm C. Harwick, an economics PhD student in Virginia with an interest in monetary theory, web development, and folk music.

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