David R. Henderson  

Dynamic Free Markets

Genetic Determinism vs. Parent... Munger on Voluntary Exchange...

One interesting post and one interesting news article, seemingly unrelated, but actually quite related: both contain evidence of the dynamic wonders of free, or somewhat free, markets.

1. Making markets work even better:

LucyPhone, a smart-phone app and an online tool, was born out of the all-too-common experience of waiting for hours on end to speak with a customer service agent. Instead of staying on hold, the caller can use LucyPhone to keep their place in the queue. When a live person comes on the line, LucyPhone rings the caller and connects them.

"We were frustrated consumers that were facing a problem that we wanted to try to solve," said Tom Oristian, who founded LucyPhone last year with his brother and fellow Stanford graduate, Michael. "Why should a human being wait and listen to elevator music, wasting their cell phone minutes, when they could be off doing whatever they please?"

LucyPhone fields about 10,000 calls a week and reached a high of more than 30,000 a week during tax season. This summer, it plans to introduce new features that will help with another common frustration - navigating phone trees to reach the right person.

HT to Jeff Hummel.

2. David Friedman's Optimistic Insights on Book Publishing:

A Kindle at $2.95 pays about $2/copy in royalties--one consequence of the fact that the cost of making and delivering one more copy is close to zero. My Salamander seems to be selling about two copies a day at this point, and it looks as though the rate is drifting up despite no serious further promotion by me, possibly as positive word of mouth spreads. Suppose I assume, optimistically, that it makes it to ten copies a day, hardly a best seller. It could maintain such a rate for a very long time without significantly reducing the pool of potential fantasy readers who had not yet read it.The result would be an income stream of about seven thousand dollars a year--not wealth, but a sizable trickle for someone willing to live at a starving artist level. For an author who could add one more book each year to the inventory, the trickle would be growing.
Perhaps what is happening, perhaps what ought to happen, is price discrimination over time. Put your Kindle up at a nominal price--$2.95, $.99, perhaps for free. Leave it up at that price until it accumulates a significant number of sales and positive reviews. Then raise the price to something more like what people expect to pay for an ordinary paperback book. Ten copies a day at $10 a copy comes to royalties in the neighborhood of $25,000/year. Get a few more books up on those terms, move to somewhere with good weather and low living costs, and retire to a life of comfort.

Comments and Sharing

COMMENTS (16 to date)
PrometheeFeu writes:

@David Henderson:

I don't see how the second case describes an even slightly free market. Authors are granted a monopoly on the reproduction of their work which lasts forever for most intents and purposes. That is not what I call a free market.

Scott writes:

Why does Friedman assume he would sell the same number of book copies per day at $10/copy as he does at $3/copy?

PrometheeFeu writes:

@Scott: You didn't hear? The publishing markets are completely different. Marginal cost = Average cost, the demand curve slopes upward, government monopolies are free markets and complements are substitutes. It's a crazy world out there.

Charley Hooper writes:

So, PrometheeFeu, are you saying that free markets preclude property rights?

Free markets require some form of property rights to function. Why create or buy something that will be taken away from you? The government is simply defining and enforcing the property rights of writers in this situation.

PrometheeFeu writes:

@Charley Hooper:

You seem to be confused. Property rights mean that if you build a house nobody can take your house away from you. It does not mean others are prohibited from having the same house. Similarly, property rights mean that if you write a book, nobody can take that book away from you. It does not mean you can prevent others from writing the same words on their own paper using their own ink. That latter situation is called a government-granted monopoly.

Charley Hooper writes:

@ PrometheeFeu,

Both cases rely on the government or some other authority to prevent the theft of something. Squatters my try to move into my house, but the government will stop them. Other writers may try to copy my exact words, but the government will stop them. In both cases, I created something that someone else might want to steal, but the government stops the theft.

There are, of course, differences. One property is physical while the other is intellectual. One property--my house--can't be easily shared while my written words could be. But they are both fundamentally creations that require protection from those who want to consume without producing. In that regard, they are the same and deserve the same protection.

Both could be called government-granted monopolies.

PrometheeFeu writes:

@Charley Hooper:

Yes, you are right that both are government granted monopolies but there are important differences that I believe trump the similarities.

The difference is fundamentally that if someone copies the words that you wrote, you still have your book while if someone takes your house, you no longer have your house.

There are 2 broad categories of arguments against intellectual property rights:

The first one is ethical: According to that argument, the argument that justifies property rights is that you have a right to not have the fruits of your labor taken from you as you depend on those for your own enjoyment. Since someone copying what you wrote does not stop you from enjoying your own writings, there is no ethical basis for you to stop others from copying what you wrote.

The second one is more practical and has to do with the individual liberties implications of enforcement: If I steal your car, you will rapidly notice that your car is gone. At that point, you can report it to the police, investigate by asking around if anyone saw me stealing your car and eventually gather evidence that I stole your car. You might have to break into my garage to eventually get the final proof and get your car back, but this infringement upon my liberties can be very narrowly focused by requiring that you bring evidence that I stole your car first.

If I copy the book you wrote and give that copy to a friend, the only people who know are me and my friend. Presumably neither of us is inclined to inform you or the police of our violation of your "intellectual property rights." The only way to reliably enforce such a monopoly is for you or some authority to violate my privacy in a very broad way. After all, any communication I make could be an act of infringement. The logical conclusion is significant harm to individual liberties as third parties are allowed to intrude on our privacy without cause.

Tracy W writes:

Property rights mean that if you build a house nobody can take your house away from you. It does not mean others are prohibited from having the same house.

Surely it does, if we include in the word "house" things like the location. For example, only one house can be the first house on the left-hand side of the street when approached from the East. Two houses may be built to the same design, but they can't be built in precisely the same location while still being two houses.

On your other categories:
1. The right to enjoy your own property often includes the right to trade it with others for other resources. If someone copies your words then you can't trade with them using your words, so it does stop you from enjoying all of the fruits of your own property.

2. Your argument here appears to turn on how difficult it is to find out about the theft of property rights. But the distinction is not clear, very often a IP owner might be well informed about the theft, while an owner of physical property might not be. For example 19th century British authors' work could be copied by American publishers, and every now and then when reading their works they refer to their work being widely read in the USA, and them not earning any money from it (being British, these references were typically self-deprecating). The British authors were getting letters from American readers, newspaper clippings with reviews of their books, etc. In modern days, I understand that movie company owners are well aware that their movies can be bought in parts of SE Asia with no royalties being paid back. Meanwhile, theft of physical property might take a long time to become known. For example, a classic car collector wishes to spend a year travelling overseas, and stores his favourite cars in a garage, where they are stolen shortly afterwards. Or, a neighbour can, either intentionally or unwittingly, build onto their neighbour's land, and this only be found out years later when the land is sold and the new owners get a survey done (this comes up frmo time to time in legal cases). Or in the case of Bernie Madoff

The only way to reliably enforce such a monopoly is for you or some authority to violate my privacy in a very broad way.

However, property rights don't have to be reliably enforced to be useful. For example, if someone wishes to sell something to a mass audience, they have to advertise it, be that by hanging out a sign on their stallfront saying "DVDs for Sale! Cheap!" or by conducting a massive advertising campaign with ads on TV, posters up in public spaces, reviews in newspapers. It's hardly violating someone's privacy to notice their ad campaigns. And that's the sort of copyright violations that the 19th century British authors were bothered by, not one person giving a copy of their book to another (well, not the TV ads, of course).

Compare with landed property. If I own land, I have a right to stop other people from building on that land, or trespassing it, but I don't have a right to stop someone from breathing out near my border and letting their exhaled breath float across my border. Or, for that matter, building a power plant that emits pollutants at levels that I don't like, but the government has decided is permitted.

This is not to defend every aspect of IP law, of course. IP does differ from many forms of property in that it can be copied without diminishing the original. And governments can pass ridiculously overbroad laws. But your comparisons aren't convincing in and of themselves.

Guy writes:

What does HT stand for?

[HT stands for hat tip or thank you.]

Charley Hooper writes:


Good points, but I don't think that's the end of the discussion.

Regarding your second point, the police could nightly search our houses to find illegal copies of books and, yes, that would be a gross violation of our individual liberties. (And quite expensive, too.) That's why giving a copy to a friend is never (?) punished. However, if you were selling copies of the book to millions of others, that's easy to catch without searching our houses. Marketing a book is a very public act and therefore it is relatively easy and cheap to discover.

Regarding your first point, if all I want to do is write a book and then enjoy reading it myself, I would agree with you. However, what if I want to write a book and make my livelihood selling it to others? Then I certainly am hurt by others stealing my words. I see that as an ethical breach.


HT is short for hat tip, to express recognition.

PrometheeFeu writes:

@Charley Hooper:

This discussion makes me wish EconLog had a forum section so it would not be buried under all the other articles that are coming out.

You are of course right that nightly house searches are not carried out (thankfully) and that copying a book (or more likely today a CD) for a friend is not generally punished simply because nobody finds out about it.

However the protection of IP rights is used to push legislation which does undermine privacy rights. Most recently in California a law is being considered to allow warrantless searches of facilities that produce CDs in order to ensure that copyright is not being violated. France has required that websites enable substantial logging of personal information in large part to facilitate catching copyright infringers. On the free-speech front we have COICA which failed to pass and PROTECT IP which is currently being considered which would take down websites without due process. (Or ICE's "Operation In Our Sites" which is basically the same thing) We have so-called "three-strike" laws in many countries where mere accusations can result in the loss of your internet connection. We have civil lawsuits which can get lots of information on an individual simply because their IP address was used in connection with infringement. We also have the bans on the creation and dissemination of "circumvention technology" because it could be used to bypass DRMs: A teenager's house was raided and he was arrested for publishing software that can decrypt DVDs. Sony was able to get information on all people who viewed a video which showed how one can "jailbreak" a Playstation despite the fact that many of us do not own a Playstation and therefore cannot have broken their terms of service.

Sorry for the laundry list. I will gladly provide links if you request them. I would imagine that you would consider many of these things to be unacceptable abuses and examples of copyright maximalists going too far or being used by third parties for their own purposes, but I think that intellectual property rights do push in this abusive direction by their very nature, because of the fact that transactions involved in copyright infringement are voluntary.

On the ethical issue, I think that you are starting with the assumption of IP rights being ethical rights which leads you to the conclusion that their breach is an ethical breach. The fact that you want to make your livelihood by selling books does not give you a right to succeed in doing so. I want to make my living as a computer programmer, yet, it is not unethical for others to train as computer programmers even if that hurts me. It would not be unethical either for someone to figure out how to automate computer programming and make it impossible for me to make my living as a computer programmer. Similarly, it is not unethical for my copying to render you incapable of making your livelihood by selling copies of your book.

There is another point which I would like to bring up. Another argument often brought up in favor of IP is that because they are public goods (in the non-excludable, non-rival sense) they would not be provided if it wasn't for this subsidy in the form of copyright protection. I would respond that they have significant associated scarcities that can be captured: For art, authenticity can be very important. An author-signed copy of a book, a live performance of a band or a limited edition DVD release are things which have value which cannot be copied and is actually the way many artists make most of their income anyways. In business products, access to the expertise that was developed in the creation of the product is very valuable. I know you didn't bring up this argument, but it is common enough that I felt the need to address it.

Charley Hooper writes:


More good points, but from your examples, I can say that one wrong policy turn doesn't necessitate another.

Them: "We must have universal health care because hospitals are required to treat patients who can't pay."

Me: "Well, then repeal the law that requires hospitals to treat indigent patients."

Them: "We must have motorcycle helmet laws because their medical costs are reflected in my insurance rates."

Me: "Then talk to your insurance company about charging you less and motorcyclists more."

The problems you point out are policy abuses, not necessary conditions for protecting IP. And it follows that the existence of some abusive policies are not reason enough for ceasing IP protection.

Regarding your appropriate example about programming, there's a fundamental difference between someone who learns to program and entices my clients away and someone who outright steals my code. They both hurt me, but I have no right to future business from my clients, because that would limit their rights. However, I would argue that I do have a right to the code I have created.

The existence of IP causes cool things to be built. I work in the drug industry and drug patents are so limited that many promising drugs never get developed. Why should they if the company expects to lose money?

PrometheeFeu writes:

@Charley Hooper:

Those are interesting points.

"The problems you point out are policy abuses, not necessary conditions for protecting IP. And it follows that the existence of some abusive policies are not reason enough for ceasing IP protection."

You are correct that in and of themselves those abuses are not a sufficient argument to cease IP protection. However, my argument is that IP inherently pushes in that direction because it limits voluntary transactions. Let us look at other policies that are aimed at limiting voluntary transactions such as the war on drugs. The abuses that emerge in both cases are I believe very similar and I would argue that is an inherent feature of policies aimed at limiting voluntary transactions. You cannot carry out effective enforcement without significantly abusive policies.

"Regarding your appropriate example about programming, there's a fundamental difference between someone who learns to program and entices my clients away and someone who outright steals my code. They both hurt me, but I have no right to future business from my clients, because that would limit their rights. However, I would argue that I do have a right to the code I have created."

I am not convinced by the way you differentiate a "right to future business" and your "intellectual property right" in your code. By enforcing IP rights, you are limiting the rights of others to write the exact same code as the one you wrote. In both cases, you are limiting what people are allowed to do with their own property. The only difference I see is that in one case you are prohibiting an exchange between two people while in the other case you are prohibiting someone from writing something on a file on their own computer. I don't see one as being less of a violation of that person's liberty.

"The existence of IP causes cool things to be built. I work in the drug industry and drug patents are so limited that many promising drugs never get developed. Why should they if the company expects to lose money?"

I think the drug industry is a prime place for the argument that you detailed above. Much of the costs of bringing a drug to market have to do with highly burdensome regulations.

As to drugs that do not fall within patent laws not being developed, I would argue some of that must be blamed on patents. The pharmaceutical industry does not have an infinite amount of resources and so it must choose where to spend its resources. Patents artificially inflate the returns on certain drugs making those drugs relatively more desirable research topics than other drugs which may be just as good but are not subject to patents. Also, because patents reward large leaps of innovation relative to incremental improvements, it may be that some drugs we do have today would have received much more research money to be improved upon had it not been for patents.

Charley Hooper writes:


Just a few quick points.

I'll have to think more about the drug war/illegal selling of books example to determine if abusive police actions are required in both cases.

It is extremely unlikely that two programmers would write the exact same code. If a program has thousands of lines of code, what are the chances that two people would write those same thousands of lines?

With the pharmaceutical example, I was referring to how the limited extent of patent protection causes companies to forgo developing good drugs. If the patent life is 20 years but 13 years are taken with development and regulatory approval, those seven remaining years of patent protection may not be sufficient to return the investment needed, especially when risk is considered. I was using it as a very real example to show how the lack of good IP prevents the development of potentially life-saving medicines. I know--I've personally recommended against the development of some promising drugs.

PrometheeFeu writes:

@Charley Hooper:

Just a few clarifications and I look forward to reading your response:

I am not denying that two programmers would not come up with exactly the same code without one copying the other. I was simply re-framing the actions of the copying programmer: He is touching only his own property (his computer) and not coercing anyone to do anything. What makes his actions illegal under an IP regime is that he is arranging his property in a particular way which has the same semantics as the way another person has arranged their own property. I find that restriction equivalently infringing on his liberties to preventing him from exchanging his property in the future with someone else.

But this does bring up the issue in patents of independent invention which is a very common issue in technology nowadays. Though given your arguments so far, it seems you would find abusive to have independent inventors also be prohibited by the patent. Am I correct?

On drug patents, I definitely agree that especially given the current regulatory framework, some drugs are just not going to be worth the cost of their development. I also readily admit that most likely, some drugs which were developed would not have been developed had there not been patents. However, the presence of patents and the FDA have pretty much eradicated any incentives for drug companies to experiment with a variety of business models. In a world without patents and without the FDA (or a much smaller version of the FDA) the name on the label would be very important as a guarantee of quality giving some market power to some firms and allowing them to charge above the marginal cost. There would also be some benefits to being first to market, especially if drug researchers vertically integrated with hospitals, doctors, insurance companies etc acquiring a reputation for being "on the leading edge" and drawing more patients to them. Also, I would not be surprised if in a world without patents the price of doing research would fall. Much of the equipment researchers use is patented and has few alternate uses. Without patents to guarantee themselves a monopoly and with drug companies earning a more modest return on their drug production, the price of all that equipment and even scientific personnel would have to fall.

Charley Hooper writes:

@ PrometheeFeu:

Doesn't the way you set up the problem lead to it's solution? You are making it sound as if the copying programmer is keeping his hands to himself, when in fact he has copied the code of another. If he truly touched only his property, how did he take control of the property of another?

I would have to think more about your second point, but a major problem with "independent" inventors is making sure they never saw the other invention first. It just seems easier to give the patent to the first inventor, however that is defined.

You do make some good points about the FDA and drug patents.

Comments for this entry have been closed
Return to top