Trading with intellectual property

February 14, 2013 § Leave a comment

By Flickr user sneetchbeach

By Flickr user sneetchbeach

A rationale for trade

When humans started trading thousands of years ago, it meant that people could specialise in producing certain goods or services and then obtain goods1 that they themselves did not produce by means of trade. A farmer could exchange grain for silk, if somebody else was willing to exchange silk for grain at a mutually agreed-upon rate. Only goods that were in limited supply (or required time, energy etc.) — scarce goods — would be traded. A small village situated next to a stream would have no shortage of water, so there would be no point in trying to exchange virtually unlimited2 water for some scarce product if all potential trading partners also could get water easily from the water source.

Thus it’s natural that only scarce goods are traded, and anything that isn’t scarce has no trade value. Now let’s say there’s an aspiring water trader in the previously mentioned village. He hires guards to prevent the other villagers from taking water from the stream, so that they now have no option but to trade with him if they need water. We have now introduced artificial scarcity, or in other words a kind of monopoly. This arrangement would only benefit the monopolist. If on the other hand there was no monopolist but instead one more person producing scarce goods, that activity would benefit the community in addition to the water being freely available to everybody. This example is crude, but it may serve to illuminate basic principles of trade.

Along came intellectual property

Over the last few centuries, new ideas about ownership have come to change trade fundamentally. These ideas advocate the concept of intellectual property (IP). When IP was introduced in the US, it was for the express purpose of encouraging innovation, and IP rights were not awarded unless they were deemed to serve that purpose. In contrast, nowadays IP rights can apply to a wide range of intangible things, and legions of lawyers in a state of perpetual warfare uphold the system. There are two main problems with IP rights. Firstly, IP rights are exclusive — the rights owner enjoys a monopoly situation. Secondly, there is little value in trying to trade with a product that is not scarce, or rather, something that is unlimited. If any number of people can benefit from some mind creation without any additional work being required, why would people have to trade something (money) for it in the first place? The original creator has made an effort to create the content, and if there is demand it seems reasonable that trade agreements can be made. However, the agreement should be concerned with theĀ service of creating content (or possibly the providing of content in a value-adding way, not simply copies) instead of the actual content since it’s by nature unlimited after having been created. Yet people often do pay for IP content itself, and that’s largely because monopolies artificially constrain the supply and arbitrary laws stipulate harsh punishments for those who obtain IP material without paying for it or gaining special permission from the exclusive owner.

Justifications for IP rights

Now comes the objection that IP creators should be able to make money off their works. This kind of objection is unfounded — there is no moral right whatsoever for anybody to make money from a particular activity. As long as there is demand for a certain product or service, it will be possible to make money off them. Non-scarce goods or services without forced scarcity have no trade value, so simply selling copies is neither productive nor is it likely to be a successful business model.

Then comes the assumption that if current IP regulations would be dissolved, nobody would create any intellectual content any more. This argument is often heard in discussions about patents or the film, music and literary industries, especially when the type of IP in question requires substantial expenses to develop. At the risk of stating the obvious, many people create intellectual content without the intention of making money off it. On the other hand, a full-scale Hollywood project is off-limits for the great majority of people because of the costs involved, and it will no doubt be more difficult to earn vast amounts of money when people are not required to pay for copies. Perhaps crowd funding will offer one solution. Business models will have to change, and it’s not unlikely that many people earning their living from copies or artificially imposed monopolies will need to find other ways. Different industries will face different changes, some of them already underway, but scenarios of a post-IP world is out of scope for this post.

Footnotes
1. What is written about goods throughout the article also applies to services.
2. In the real world fresh water, like any other natural resource or anything made from natural resources, is not a strictly unlimited resource.

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