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Economics of Intellectual Property

By jrincayc in Media
Tue Jan 08, 2002 at 04:48:36 PM EST
Tags: Software (all tags)

Information wants to be free. Free copying of music will destroy music. Those two statements don't fit together very well. Discussions of intellectual property and its ownership often come up on the Internet. However, the basics of the economics of intellectual property are rarely understood, by either side. Economics supports both arguments and neither argument.

First, I will explain in detail how economics works with traditional physical goods. I want you to understand trade so we can properly examine trade in the context of intellectual property without using analogies. Then I will describe trades in the context of intellectual property and problems with maximizing society benefit with intellectual property. Lastly, I will discuss possible solutions to the problems of maximizing society benefit with intellectual property.


The basic idea used to evaluate the benefit of a trade in economics is surplus. Consumer surplus is how much more the consumer values the good than they have to pay for it. Producer surplus is how much more the producer can sell the good for than they had to pay to produce it. For the purposes of this article, producer surplus can be considered the same as profit. Summed together they are called social gain . Here is a simple example:

  • Alice can grow a bushel of potatoes for $10.
  • Bob is willing to pay up to $45 for a bushel of potatoes.
  • Alice agrees to sell the potatoes to Bob for $25.
  • Alice is the producer and she gets $25 - $10 = $15 worth of producer surplus from the trade
  • Bob is the consumer and he gets $45 - $25 = $20 worth of consumer surplus from the trade.
  • The social gain is $20 + $15 = $35 from the trade.
  • Another way to calculate the social gain is $45 - $10 = $35 as this is the value to the consumer minus how much it takes to produce it. Notice that neither the price nor the recipient of the surplus affects the social gain, although the recipient of the surplus is affected by price. If the price is higher, more of the surplus goes to the producer. If the price is lower, more of the surplus goes to the consumer. In either case the social gain is the same.
  • As formulas:
  • Consumer Surplus = CS
  • Producer Surplus = PS
  • Price = P
  • Consumer Value = CV
  • Producer Cost = PC
  • Social Gain = SG
  • CS = CV - P
  • PS = P - PC
  • SG = CS + PS
  • SG = (CV - P) + (P - PC) = CV - PC

In other words, to figure out if a trade is economically beneficial, you calculate the consumer surplus and add it to the producer surplus. Or you take the value to the consumer minus the cost to produce. Of course things get more complicated when there are more people involved. For example:

  • Alice can grow one bushel of potatoes for $10 and only one bushel.
  • Bob is willing to pay up to $45 for one bushel of potatoes and only one bushel.
  • Carol is willing to pay up to $15 for one bushel of potatoes and only one bushel.
  • Dave can grow one bushel of potatoes for $40 and only one bushel.
  • Bob and Alice agree to trade the potatoes for $25.
  • Carol and Dave do not trade since $40 > $15.
  • Alice is the producer and she gets $25 - $10 = $15 worth of producer surplus from the trade
  • Bob is the consumer and he gets $45 - $25 = $20 worth of consumer surplus from the trade.
  • The social gain is $20 + $15 = $35 from the trade.

Notice none of the additional people in this example contributed to social gain. If Bob and Dave had traded one bushel for $45 and Alice and Carol had traded one bushel for $10 then producer surplus would be ($45 - $40) + ($10 - $10) = $5 and consumer surplus would be ($45 - $45) + ($15 - $10) = $5 with a social gain of $10. Not coincidentally this equals $35 + ($15-$40) since $-25 is the social gain if Carol and Dave had traded in the above example. Since the surpluses of this trade are negative it will not happen as long as everyone has the freedom to choose trading partners. Alice can underbid Dave so if there is only one trade it will be with Alice. Bob can outbid Carol so if there is only one trade it will involve Bob. (Of course if you put Alice and Carol on one side of a concrete wall and Dave and Bob on the other, then Alice would trade with Carol, and Dave would trade with Bob, and the concrete wall would have lowered the social gain to $10.) Surpluses allow two things:

  1. A method to determine if a trade will occur since trades will only happen when consumer surplus and producer surplus are not negative (CS >= 0 and PS >= 0).
  2. A method to determine how beneficial a trade is to society since it is the consumer's value minus the producer's cost. (SG = CV - PC). *

* Note that this assumes that all costs are taken into account. If there is some additional cost that is not paid by the producer or the consumer then a trade might still be harmful to society. This caveat would apply to things like burning a ton of coal with the attendant environmental costs.

Another important point is that social gain is maximized in this example merely by each of the individual parties trying to maximize their individual surpluses. This is an important point since freedom to choose trades and individual maximizing surpluses will maximize social gain as well as an all knowledgeable benevolent dictator could. Social gain is better maximized by selfish individuals with limited knowledge than altruistic individuals with limited knowledge. Most markets operate this way. Intellectual property markets are not one of the market types that maximize social gain with selfish individuals with limited knowledge.

So far I have done all the examples with money. If this bothers you, it can also be done with other scarce quantities. The most common alternative ways use time or energy. It is generally harder to do. An example would be:

  • Alice can grow a bushel of potatoes in 2 hours of work.
  • Alice can grow a bushel of beans in 4 hours of work.
  • Bob can grow a bushel of potatoes in 6 hours of work.
  • Bob can grow a bushel of beans in 5 hours of work.
  • Alice and Bob each want one bushel of potatoes and one bushel of beans.
  • Alice grows two bushels of potatoes and this takes her 4 hours of work.
  • Bob grows two bushels of beans and this takes him 10 hours of work.
  • Alice trades one bushel of potatoes for one bushel of beans from Bob.
  • Alice's gain is 2 hours of time since it would have taken her 2 + 4 = 6 hours to produce the beans and potatoes that she ends up with.
  • Bob's gain is 1 hour of time since it would have taken him 5 + 6 = 11 hours to produce the beans and potatoes that he ends up with.
  • The social gain is 2 hours of Alice's time plus 1 hour of Bob's time.
  • Note: 1 hour of Bob's time does not equal 1 hour of Alice's time since their opportunity costs are different. (What each of them can do with their time is different so when they gain an hour they can create different amounts of new things.)
Social gain can be calculated without ever using money. In this case the social gain comes from the fact that Alice and Bob take different ratios of time to grow beans and potatoes. Social gain is usually calculated with money for reasons of simplicity. Other factors like energy or time are then converted into money to do the calculation.

Hopefully by now you understand the concept of surpluses quite well. I will give you two more examples to help bridge the gap between normal goods and intellectual property.

This first bridging example talks about some of the details of social gain when combined with entry costs.

  • Alice can buy a loom for $35.
  • Alice can buy all the materials for a carpet for $10
  • Bob will pay up to $40 for a carpet.
  • Carol will pay up to $30 for a carpet.
  • Dave will pay up to $25 for a carpet.
  • Eve will pay up to $20 for a carpet.
  • The price for carpets is $25.
  • Bob, Carol and Dave all buy a carpet from Alice for $25.
  • The total consumer surplus is ($40 - $25) + ($30 - $25) + ($25 - $25) = $20.
  • The total producer surplus is ($25 - ($35 + $10)) + ($25 - $10) + ($25 - $10) = $10.
  • Note that the producer cost for the first is $45 since it includes the cost of the loom and the cost of the materials.
  • Social gain is $20 + $10 = $30.

The big thing to notice here is that sometimes there is a large cost associated with entering some market. This can sometimes cause the initial producer surplus to be negative. The trade may still take place if the total producer surplus is positive with more trades.

One more example, this time dealing with theft.

  • Alice has stopped growing potatoes.
  • Bob is willing to pay up to $45 for one bushel of potatoes.
  • Carol is willing to pay up to $15 for one bushel of potatoes.
  • Dave can grow one bushel of potatoes for $40.
  • Mallory is willing to pay up to $3 for one bushel of potatoes.
  • Dave plans to sell the bushel of potatoes to Bob for $43 dollars.
  • Mallory steals the potatoes and eats them.
  • The social gain is $3 - $40 = -$37 which is negative and less than the $5 possible social gain.
  • Decreased social gain is the first harm since 'trades' in which the producer cost is greater than the consumer value (PC > CV) can happen.
  • If Mallory were willing to pay up to $50 for the potatoes there still would be harm if he stole the potatoes.
  • Dave will not grow the potatoes in the first place if he thinks theft is too likely as his producer surplus would then equal -$40. (PC = $40, P = $0, PS = P - PC = -$40).
  • Note that if Mallory had stolen from Bob a similar result would happen since this would make Bob's consumer surplus -$45
  • Creating negative surpluses is the second harm.
  • A subtle third harm is creating a future disincentive to produce or consume.
  • The disincentive to produce or buy prevents the $45 - $40 = $5 social gain from ever happening even if no theft were to take place. This happens if Dave decides to not produce the potatoes at all.

Theft of physical property is bad since it almost always produces a negative social gain, creates negative surpluses, and decreases future production and consumption. That is why there are laws regarding theft. These produce enough of a disincentive to keep theft at a low level.

And then there was Intellectual Property

Now that we have all these wonderful new pieces of jargon, let's look at another example, only this time it involves the spiffy piece of software called Baz:

  • Alice is willing to pay $15 for Baz.
  • Bob is willing to pay $14 for Baz.
  • Carol is willing to pay $10 for Baz.
  • Dave is willing to pay $6 for Baz.
  • Trent can create Baz for $25.
  • Trent creates Baz and then sells it for $10 to Alice, Bob, and Carol.
  • Producer surplus is ($10 - $25) + ($10 - $0) + ($10 - $0) = $5 (hence Trent will produce it).
  • Consumer surplus is ($15 - $10) + ($14 - $10) + ($10 - $10) = $9.
  • Social gain is $5+$9 = $14.

And thus society gains since social gain is positive. Note that producer cost is very different in this example. The first copy of Baz costs $25 dollars to produce. The rest of the copies cost $0 to produce. The first copy of Baz sold has negative social gain since the producer cost is $25 and consumer value is $15 so social gain is -$10. This later evens out when more copies are created. As with the carpet example it is important to look at the total producer cost and compare it to the total consumer value to determine the social gain. This feature will have important implications.

But wait, Dave is a pirate

  • Alice is willing to pay $15 for Baz.
  • Bob is willing to pay $14 for Baz.
  • Carol is willing to pay $10 for Baz.
  • Dave is willing to pay $6 for Baz.
  • Trent can create Baz for $25.
  • Trent creates Baz and then sells it for $10 to Alice, Bob, and Carol.
  • Dave pirates Baz.
  • Producer surplus is $10 * 3 - $25 = $5 (hence Trent will produce it).
  • Consumer surplus is ($15 - $10) + ($14 - $10) + ($10 - $10) + ($6 - $0) = $15.
  • Social gain is $5 + $15 = $20.

And thus society gains even more because Dave pirates the software. Objection. Dave pirating Baz is bad since it does not increase Trent's income (producer surplus) . True, but it increases consumer surplus and so is beneficial to society. Pirating can never decrease social gain directly since the cost to produce that copy is $0. Since the producer cost is $0 the short term social gain of piracy is always positive (PC = $0, CV > 0, SG = CV - PC = CV so SG > 0). In other words, pirating software that would not be bought is economically beneficial.

But wait, Alice is a pirate

  • Alice is willing to pay $15 for Baz but will pirate it.
  • Bob is willing to pay $14 for Baz.
  • Carol is willing to pay $10 for Baz.
  • Dave is willing to pay $6 for Baz but will pirate it.
  • Trent can create Baz for $25.
  • Trent does not creates Baz since producer surplus could at most be $25-($14+$10)=$-1 (and that's assuming that he could get different prices).
  • Producer surplus is $0.
  • Consumer surplus is $0.
  • Social gain is $0+$0 = $0.
  • Note that if Trent had produced Baz anyway, social gain would still be $20, but producer surplus would be -$5 and consumer surplus would be $25.

And thus society gains less because Alice will pirate the software thus causing Trent to not produce the software since the producer gain is too little. Objection. Trent will produce Baz anyway out of the goodness of his heart. Maybe, but, first of all, businesses don't have hearts, and also Trent probably has other goals like getting food and writing another program. (Trent will probably not care as much about social gain and so will work on what he wants to write, instead of what is more needed. (Ever looked at how many IRC clients and bots there are listed on freshmeat ?)) So piracy can harm society when the software would otherwise be purchased but the producer never produces the software in the first place since expected piracy levels are too high.

The Double Edged Sword of Piracy

If there is no piracy and the price is fixed, then there will be lost social gains because the software producer will not sell to people who value the product less than the price (i. e. the price is higher than they are willing to pay). Giving the consumer the product would increase social gains since the cost to produce is less than the consumer's value of the software. In other words, social gain is not maximized when the price of some intellectual property is greater than zero (when PC = $0 and SG = CV - PC then SG = CV so each time the intellectual property is used SG increases).

On the other hand, if there are no restrictions on piracy then some software will not be produced that could increase social gains. One of the earlier statements of this is Bill Gate's open letter to hobbyists . No restrictions on piracy harms society since software that could increase social gains will not be produced as the producer surplus is negative.

In a nutshell, piracy always increases social gain in the present and may decrease social gain in the future.

So the problem is that both rampant piracy and no piracy harm society. There are no practical perfect solutions to this problem.

Possible Solution 0: All Knowing Benevolent Dictator

Let's play an economist trick. Assume that there is an All Knowing Benevolent Dictator (AKBD) who knows how much a given piece of software will take to write and how much each subject in the country values the software. Now we will revisit the previous example with this individual.

  • Alice is willing to pay $15 for Baz.
  • Bob is willing to pay $14 for Baz.
  • Carol is willing to pay $10 for Baz.
  • Dave is willing to pay $6 for Baz.
  • Trent can create Baz for $25.
  • The AKBD pays Trent $30 to create Baz.
  • The AKBD makes Alice pay $10, Bob pay $10, Carol pay $6, and Dave pay $4 and gives them Baz.
  • Producer surplus is $30 - $25 = $5 (hence Trent will gladly produce it).
  • Consumer surplus is ($15 - $10) + ($14 - $10) + ($10 - $6) + ($6 - $4) = $15.
  • Social gain is $5+$15 = $20.

The important thing to notice is that the AKBD has maximized the social gain. Since the AKBD knows the producer cost and the consumer value the AKBD can create any project that increases social gain. Also since the AKBD knows how much each consumer wants the product the AKBD can choose some scheme to divide the cost among the consumers so that none of them pay more than they would be willing to pay.

Of course, this solution has a serious problem. There is no AKBD. The knowledge needed is difficult to find out. Finding the consumer value is tricky. When consumers are required to pay based on their own estimation they will tend to underestimate so that they pay less. This is even worse with large numbers since it is a form of prisoners dilemma. On the other hand if a consumer is not required to pay based on their estimation, then they will tend to exaggerate it so as to increase the chance that the software is written.

Another problem with implementing this in real life is that it seems unfair. In the above example Alice and Bob pay more than Carol and Trent. If everyone trusts the person setting the price then this works but rarely is this the case. For example the DVD region encoding can increase social gain by allowing some people to pay less, but quite a few people don't trust the people in control (and there are good reasons not to trust them, but that is another article).

This solution works theoretically but in practice is almost useless. It might work if some piece of software were specialized enough and valuable enough that all the interested parties could come together in a meeting and work out a deal. However, if there were forgotten parties then the social gain would not be maximized. In most cases it would not work properly anyway since the knowledge is spread among too many individuals.

Possible Solution 1: Free Software

Let's assume that the software has been produced. Using the four freedoms defined by the The Free Software Definition of the GNU Project will maximize consumer surplus. (Note that freedom refers to the ability to act without certain restraints, not lack of price.) They are:

Freedom 0
The freedom to run the program, for any purpose.
Freedom 1
The freedom to study how the program works, and adapt it to your needs. Access to the source code is a precondition for this.
Freedom 2
The freedom to redistribute copies so you can help your neighbor.
Freedom 3
The freedom to improve the program, and release your improvements to the public, so that the whole community benefits. Access to the source code is a precondition for this.

Freedom 0 allows the consumer to get some benefit out of the program. Any limitation on personal use of the program will decrease the value of the program and so decrease consumer value.

Freedom 1 allows the consumer to improve the program to meet personal needs and desires. This increases the benefit of the program to that consumer and so increases consumer value. Access to the source code also allows the consumer to more accurately know what the program does. This will improve the value of the program if the program does what the user expects.

Freedom 2 allows consumers to distribute the software to other users and thereby create more consumer surplus by providing the software to other consumers who would not otherwise have it.

Freedom 3 produces increased consumer value by leveraging freedoms 1 and 2 to increase the program's value and distributing it.

Combined together these freedoms will maximize total consumer surplus since they allow the price to be zero and allow consumers to maximize their personal consumer value.

The biggest problem with free software is that it is very hard to correctly reward the creators of it. The freedoms prevent the typical method of charging each user. The first users can be charged for the software but after that both they and the originator are free to give it away. This decreases producer surplus and thus we would expect that less software is written as free software than the optimum amount since the producer can only get part of the value of the software back. This creates an underproduction problem.

On the other hand free software has increased consumer value. If the producers of the software can get some of this increased consumer value, a higher producer cost can be supported so there will be social gain and more software will be produced.

The increased consumer value increases the amount of free software versus non-free software. The fact that the producer receives a decreased proportion of the consumer value decreases the amount of free software versus non-free software. These two effects counteract each other and it is hard to tell which is more dominant. However, since there is much more non-free software than free software, the decrease in producer portion of the surplus would seem to be the dominant effect.

However, for many things the increased consumer value sufficiently exceeds producer cost (CV >> PC) so free software will be profitably produced.

The main cause of free software is that some consumers value it enough that they will produce it themselves. TeX is a good example of this. Donald Knuth valued high quality typesetting so much that he was willing to devote over a decade of his life to creating TeX for this purpose. His own value of TeX was great enough that the cost of producing it was less than his personal consumer value for it. Making it free software increased his value of it since it enabled him to see more mathematical papers beautifully typeset. If the producer is also a consumer, and the value to that entity exceeds the production cost, then free software can be produced that way. Producer surplus is already positive so there is no need to increase it monetarily, especially if charging money will be a hassle. Altruistic desires can also increase personal consumer value enough that it will be created and released.

Freedoms 1 and 3 are the most important freedoms for the production of free software. These freedoms allow any consumer to become a producer if they so choose. This creates an opportunity for social gain any time there is an improvement to the software where the producing cost is less than that particular consumer's value of the improvement. With freedom 3 the improvement can then be sent outward to whomever wants it, increasing the consumer value of the whole software. This can cause continual improvements to free software that are much less likely to occur in non-free software.

Free software maximizes consumer surplus for every piece of it that is produced. However, it still has the problem of underproduction. There are some advantages to free software that help it to be produced. Unfortunately it is unlikely to produce all the software that is needed do to its underproduction problem.

Possible Solution 2: Government Incentives

Sub Solution: Copyright law reform

The purpose of copyright is to increase social gain. It does this by:

  1. Providing protection from piracy so that producers have improved odds of getting producer surplus.
  2. Expire so that the works that are produced maximize their social gain by becoming free after a certain amount of time.

Unfortunately copyright law is doing the second purpose pretty poorly. The 95 year time limit in the United States is far too long to maximize social gain. After 95 years very very few works still have social gain left to be gained by the freedom. Also there is no requirement that the full source code be provided at the expiration of the copyright. This means that for a piece of software it will take 95 years to get freedoms 0 and 2, and freedoms 1 and 3 will never happen unless the publisher wishes them to.

A law that would improve social gain without significantly decreasing producer surplus would be something along the lines of:

  • There is an automatic 5 year copyright on everything that is put in a fixed medium (saved to disk, written to paper ...)
  • After 5 years the copyright will expire unless it is reregistered
  • Registration requires:
    • A method to contact the copyright owner for licensing purposes. (After 95 years it can become almost impossible to find out who is currently the copyright owner. This makes it hard get permission to use the work.) This information will be made public.
    • The source for working with the item (source code if a program, sheet music for music, a word processing document for a PDF) etc. Also, it must be the complete source and capable of generating the final product
    • The actual work.
    • Electronic copies must be on a reasonable medium (no 8 inch floppies, no copy protection).
  • Any lawsuits to enforce the copyright require that the work must be registered. Otherwise registration is optional.
  • A maximum of 19 registrations (95 years maximum).
  • After the copyright expires the source will become publicly available.

This law would substantially improve the social gain. The reregistration requirement will ensure that there are usable copies still in existence when the copyright expires. The source requirement ensures that freedoms 1 and 3 can be used. The reregistration requirement also ensures that when the creator or publisher is no longer interested in the work, the work soon gains freedoms 0 through 3, giving the task of maximizing consumer surplus to the public.

The only downside to these reforms is that it slightly increases producer cost since it adds a registration and reregistration requirement and the Library of Congress is required to store more stuff. However, if the registration cost (medium and mailing cost) is higher than the producer wants to pay, that is probably a good indication that the copyright should expire since that means their remaining producer surplus is low, so the public should get a chance. The Library of Congress is already in charge of storing all the books copyrighted so storing more stuff is reasonable.

Sub Solution: Other incentives

The most important thing that the government can do is make sure that the laws are reasonable to allow creation of intellectual property. Laws that allow fair use, reverse engineering, parodies, and derivations permit the creation of reasonable derivatives of existing intellectual property and improve social gain. Also, the laws need to be flexible enough to uphold a license like the GNU General Public License so that experimentation can happen that might find new methods of intellectual property creation. As long as the laws allow free intellectual property to be created some will be. Laws that protect non-free intellectual property at the expense of free intellectual property need to be examined very closely to make sure that they are beneficial. Laws such as the SSSCA would be very damaging to social gain (and freedom in general) if passed.

Another way that the government could help would be to help lower the producer cost of free intellectual property. One key way of helping support free electronic intellectual property would be to provide free web/ftp hosting through the Library of Congress for free intellectual property and expired copyright works. This increases the distribution of free intellectual property and provide an incentive for making intellectual property free so it can get the free hosting.

The last method is direct funding of the development. Since free intellectual property has more consumer value than non-free intellectual property, much of the intellectual property that the government develops should be free. Grants to produce free software can often benefit society since they raise social gain by the amount that the consumer value is increased.

Solution Conclusion

Governments can help free intellectual property development by making sure that laws are supportive of such property creation. Since free intellectual property has higher consumer value it should be preferred to non-free intellectual property. Both types of intellectual property should be supported by law since each can be valuable in different situations. Intellectual property that the government creates should be free due to the higher consumer value and therefore higher social gain.

Possible Solution 3: Escrowed Multiway Auctions and Other Untried Ideas

One final possibility for funding free software would be a escrowed multiway auction. Basically someone would propose a software project and provide requirements and a deadline for it. Either a software developer could propose a product that they want to work on, or a user could propose an idea that they would like to use. From then on potential users could put money up to be escrowed to pay to anyone who developed the software. If the software is successfully developed by the deadline, the first team to develop a solution would get the money. If the deadline passes, the potential users get their money back, possibly even with interest.

One key to working this properly is copious communication. Developers need to know how much they can get for a project and what the project is. Developers need to communicate how they are progressing and that they plan on trying to obtain the reward money. Keeping two development teams from trying for the same prize is one of the possible problems. Developers also need to communicate if they think the payment is too low. Ample communication is the key to eliminating the problems of this type of solution.

Theoretically, this solution can maximize social gain since anyone who gains consumer value can put money into the project reasonably risk free and there is no incentive to lie about their consumer value. Overproduction does not happen since there will not be sufficient money. Underproduction will not happen since potential users can continue to add money (up to their consumer value) to the reward until some team decides to go for it.

There are problems to this approach. If two or more teams end up working on different solutions to the problem, somebody won't get the prize money. (Publicly available software subgoals and the teams that have met them would help to lessen this problem by showing the progress of various teams.) This will take somewhat longer to produce software than a standard contract since there is more complication in figuring out which team is capable of producing the software and will produce the software. Also, splitting up the money within the team will be problematic (how much should Linus get? how much should Alan get? ...).

This solution might work, or it might not. Either way, I think it is an interesting idea to get people thinking about solutions to the problem of maximizing the social gain of intellectual property.


Intellectual property is problematic. The only practical solution to maximize consumer value is to give it the four GNU freedoms. The primary method for producing it requires it to have a definite non zero cost and forbid copying. Maximizing social gain with either is difficult. More thought must be given to how to do this. The two simple solutions of no copyright and absolute copyright both fail to maximize social gain. I have never heard of any practical alternative solution that is in use and maximizes social gain.

Thanks to Elizabeth Cogliati for the extensive proofreading (any mistakes left are my own fault.)

Copyright 2002 Josh Cogliati

Permission is granted to anyone to make or distribute verbatim copies of this document as received, in any medium, provided that the copyright notice and permission notice are preserved, and that the distributor grants the recipient permission for further redistribution as permitted by this notice.

Permission is granted to distribute modified versions of this document, or of portions of it, under the above conditions, provided also that they carry prominent notices stating who last altered them.


Voxel dot net
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Related Links
o Freshmeat
o freshmeat
o Bill Gate's open letter to hobbyists
o The Free Software Definition of the GNU Project
o Also by jrincayc

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Economics of Intellectual Property | 74 comments (67 topical, 7 editorial, 0 hidden)
Just a note... (3.44 / 9) (#2)
by RareHeintz on Tue Jan 08, 2002 at 12:49:21 PM EST

Actually, some escrow solutions (e.g., the Street Performer Protocol) have been tried (e.g., by Stephen King as a method of getting paid for a serialized novel). Similar efforts have been made toward software production, music, etc.

There is one issue I have with your conclusions: They carry the assumption that anyone gives a damn about social gain, except in the abstract. When it comes down to it, you're going to have to find a way of doing things that allows maximized individual gain for all involved. Currently, the law favors the individual gain of record company execs, and the technology (Napster, digital copying) favors individual gain of content consumers. What I think needs to happen is to find a way to cut out the middlemen (record companies and producers of physical media) and facilitate direct transactions between content and software producers and their consumers.

Of course, I don't claim to have solved that problem, but I think it's pretty self-evident from everyone's behavior around the Napster issue that only a solution maximizing individual gain for all parties to a content transaction is going to be sustainable. Framing the solution to the current content payment crisis in terms of maximizing social gain may be a fun intellectual exercise, but such solutions won't fly any better than any other idea involving getting people to structure their economic transactions for the common good.

- B
http://www.bradheintz.com/ - updated kind of daily

Feedback System (4.00 / 2) (#18)
by bugmaster on Tue Jan 08, 2002 at 05:50:31 PM EST

There is one issue I have with your conclusions: They carry the assumption that anyone gives a damn about social gain, except in the abstract.
Actually, the original article says:
Another important point is that social gain is maximized in this example merely by each of the individual parties trying to maximize their individual surpluses (bolding is mine).
That's what makes capitalism (well, ideally) actually work better than socialism, or some other "all knowing benevolent dictator" system: the economy is self-adjusting. No one has to care explicitly about maximizing social gain, and yet the basic rules of the system are set up in such a way that increased social gain is always a side-effect of increased individual gain. The system may not be perfect, but it is very robust.
[ Parent ]
We agree that it's not perfect. (4.00 / 2) (#19)
by RareHeintz on Tue Jan 08, 2002 at 06:06:32 PM EST

The system may not be perfect, but it is very robust.

Don't get me wrong, I'll take capitalism over a centrally-planned economy any day. But, you paint a rosy picture of the feedback mechanisms wired into capitalism.

What you describe only works when all parties to a transaction have equal bargaining power. When one end of the transaction is handled by a corporation with monopoly power (e.g., Microsoft) or a colluding trust of supposedly competing companies (e.g., the RIAA), or some entity wealthy enough to buy a favorable regulatory environment, someone on the other end of the transaction is getting screwed on product quality, price, or both.

The idea of a low-overhead system whose natural steady state is one where everyone gets what's best for them sounds nice, but laissez-faire capitalism ain't it.

- B
http://www.bradheintz.com/ - updated kind of daily
[ Parent ]

In Theory .... (4.00 / 2) (#49)
by root2 on Wed Jan 09, 2002 at 05:11:48 AM EST

But all parties DO have equal bargaining power in the rawest sense of the word. (As long as one person, one vote is retained, that is). Look at it this way. You mention entities "buying" a favourable regulatory environment. I presume what you are referring to is campaign contributions etc. to politicians who then vote in favour of these entities' interests.

The fact of the matter is, though, that the direct interest of the politician is getting re-elected. The campaign contributions are an indirect mechanism of getting re-elected (campaign funds are needed for the media blitz). The _direct_ power remains in the hands of the voters (the consumers in this transaction). Just because the consumers may be considered stupid for being conned by the media blitz, doesn't mean they don't have power - it just means they haven't exercised it, and in the absence of that exercise, the buying entity has exercised _its_ power - funds.

To give another example on monopoly power : consider Microsoft. While we would all agree that MS is the primary OS provider, it's not like it's impossible for a sufficiently pissed off consumer to use another OS. Is it easy ? No. Is it possible ? Yes. In terms of the original post, the consumer surplus of Linux, etc. to the ordinary Joe is is smaller than 0, when you count the individual's perception of the value of his effort in learning to use Linux (i.e. our desire to be lazy must be factored into the consumer surplus). For those sufficiently pissed off, consumer surplus is greater than 0, hence they learn and install Linux. So MS's "monopoly" is the result of people's desires (remember : factor in _all_ desires. I may want a Ferrari. I may also want to eat. I use my money to eat, and hence have no Ferrari. The fact that I have no Ferrari is a result of my choices, notwithstanding that absent any other considerations I would have wanted a Ferrari._

So, to sum up, people get the environment they deserve. If people want IP reform sufficiently, they'll vote for politicians who will enact such reform. If they don't so vote, ipso facto, they don't want it _enough_ (consumer surplus of so voting is less than 0)
If I had a .sig, it would go here.
[ Parent ]

A problem... (5.00 / 1) (#64)
by r00t on Wed Jan 09, 2002 at 05:10:01 PM EST

"Just because the consumers may be considered stupid for being conned by the media blitz, doesn't mean they don't have power"....

Herein lies the problem. We live in a democracy where the majority rules, lets assume that "smart people" are those that could get into Mensa. This by definition is only 2% of the population, a small minority, but the ones who would want IP reform so that they may be allowed to think and innovate. The "stupid people" could care less because they do not have that innate ability to learn and apply knowledge. The democracy thereby screws intelligence in the ass, and the IP reform wanted by the "smart people" ain't gonna happen because the "stupid people" are happy buying from large corps, trust them, and will therefore vote for the same style government time and time again (The con job).

"So, to sum up, people get the environment they deserve. If people want IP reform sufficiently, they'll vote for politicians who will enact such reform."

So do "smart people" deserve to live in an environment dictated by dumbass's.

-It's not so much what you have to learn if you accept weird theories, it's what you have to unlearn. - Isaac Asimov
[ Parent ]

Copyright regulates the market (none / 0) (#67)
by Secret Coward on Thu Jan 10, 2002 at 07:05:12 AM EST

By capitalism you mean free market?

Copyright would not exist in a free market. In a free market, anyone could copy and sell anything they like at whatever price they like. Copyrights create artificial scarcity. In a free market, people would pay for the scarce resource (content creation), rather than an artificially scarce resource (copy of content).

If you believe in a totaly free market, then you must support the abolishion of copyright altogether. As the article demonstrates, abolishing copyright does not maximize social gain.

[ Parent ]

not entertainment execs. (none / 0) (#37)
by gps on Tue Jan 08, 2002 at 08:00:06 PM EST

current law favors individual income for politicians of the monetary and reelection kind. they just happen to get large sums of money from entertainment execs so they are encouraged to support laws building that as an industry rather than gains for individual voters who don't give them much. eventually a balance will be hit where enough individual voters are pissed off, unfortunately the balance is a likely a ways off. the majority of individual voters aren't aware of the whole picture of who really supports who and the big media companies capable of educating (brain washing) them one way or the other aren't likely to encourage such dissenting thoughts.

[ Parent ]
stephen king's method != street performer protocol (none / 0) (#66)
by sayke on Wed Jan 09, 2002 at 07:22:43 PM EST

the street performer protocol is being implemented by openculture.org, but what stephen king did didn't resemble the street performer protocol at all. imho, king's little experiment with "the plant" doesn't prove anything whatsoever.

it's no wonder "the plant" didn't work out as well as king wanted it to; he expected people to be honest when it wasn't in their best interest to do so! silly stephen king. anyway, i ranted about that here. i say the mark of a well designed system is that it doesn't require vast amounts of honesty from any of the parties involved. by that benchmark, the "the plant" experiment was decidedly not well-designed, so it failed. that it failed says nothing at all about the future of well-designed methods of rewarding pattern-weavers, and other creators of public goods.

in fact, in a very important sense, king's experiment may have done more harm then good. by poorly designing an experiment to test a method of rewarding creators of public goods, he caused an association to be formed in many people's minds along the lines of "it is impossible to reward creators of public goods without resorting to 'intellectual property', because stephen king tried and failed; and if he tried and failed, i have no chance in hell." this sucks, a lot, and really is not a fair representation of the situation... but, thanks to stephen king, it has become a common perception. grrrrr.

sayke, v2.3.1 /* i am the middle finger of the invisible hand */
[ Parent ]

Solution 4 (3.28 / 7) (#4)
by Pac on Tue Jan 08, 2002 at 01:09:14 PM EST

We don't produce peer-to-peer trading software clients for any version of Windows, making it clear who is Dave and who are Carol, Alice and Bob. Since without a Windows version it is virtually impossible for Alice, Carol and Bob to trade Baz, they are kept in line and Trent, Dave and the society are happy.

On the other hand we can also give all those bushels from the first half of the article to Trent, so he will be happy and make Baz and eat a lot of potatoes. In this case, he will not mind Windows versions because he got the potatoes.

In conclusion, happiness is attained either without Windows or with potatoes.

Evolution doesn't take prisoners

Length of Copyright (4.18 / 11) (#5)
by Bad Harmony on Tue Jan 08, 2002 at 01:30:09 PM EST

My biggest gripe with the current copyright regime is the way that "limited time" has been stretched beyond recognition. A work that was copyrighted a few years before my birth will still be copyrighted when I die, unless I am extremely lucky and live to a very old age.

I would like to see the law changed back to the original rule of 14 years plus a 14 year renewal. It could probably be shortened to a non-renewable term of 5 or 10 years without any major problems.

54º40' or Fight!

Berne Convention says no (3.50 / 2) (#34)
by pin0cchio on Tue Jan 08, 2002 at 07:50:09 PM EST

I would like to see the law changed back to the original rule of 14 years plus a 14 year renewal. It could probably be shortened to a non-renewable term of 5 or 10 years without any major problems.

I agree with you: May Sonny Bono rot in he11. But it's not gonna happen. The United States is a net exporter of copyrighted works and must keep copyright term at least life plus 50, or other nations will kick the US out of the Berne Convention and refuse to recognize US copyrights.

I don't agree with the precise terms of the Berne Convention, but I wasn't old enough to vote for the Senators who approved it.

[ Parent ]
Conventions can be renegotiated.... (4.50 / 2) (#50)
by maroberts on Wed Jan 09, 2002 at 07:08:09 AM EST

As the largest beneficiary of the current copyright laws, if the US decided it wished to reduce the length of copyright in the name of consumer benefit, I would hardly see the other signatories to the Berne Convention queueing up to block an amendment. Huge numbers of countries would be in favour of reduced copyright durations, (or they should be if they had any sense). Whilst some period of copyright protection is definitely required to encourage innovation, in publishing, music and software there is little to be said for a term beyond 15 years. Whilst the descendants of the original producer certainly benefit hugely (Christopher Tolkien should be laughing his socks off at the moment), it can hardly be said that the consumer benefits from the current timeframe.
The greatest trick the Devil pulled was to convince the world he didn't exist -- Verbil Kint, The Usual Suspects
[ Parent ]
Econmics question (3.44 / 9) (#11)
by murklamannen on Tue Jan 08, 2002 at 03:24:26 PM EST

So Social Gain is supposed to be a measure of how mich wealth is generated from trade?

And it is used to measure how good a societies economy is?

The problem with this is that social gain does not account for how spread the wealth is.
In a good society you would want to have the gain(and work) spread reasonably equally among the population.
Is there some kind of measure that can "the spread"?

It's not supposed to (4.00 / 1) (#23)
by valency on Tue Jan 08, 2002 at 06:12:41 PM EST

The problem with this is that social gain does not account for how spread the wealth is.

That's like saying that outdoor temperature doesn't take into account the IQ of the people nearby. It's not supposed to. We have other terms for those things.

If you disagree, and somebody has already posted the exact rebuttal that you would use: moderate, don't post.
[ Parent ]
You're being highly disingenuous (5.00 / 1) (#35)
by SIGFPE on Tue Jan 08, 2002 at 07:54:39 PM EST

Gain is being used simultaneously in two senses. One sense is mathematical - it is defined as such in the article. The other is a more informal sense of the improvement of the society. I think there is an unstated assumption in the original article that they are one and the same thing. It's a highly nontrivial assumption.

For example it suggests that A receiving $10 and B receiving $10 is better for society than A receiving $7 and B receiving $12. That's nontrivial because it's making interpersonal comparisons - it's assuming that $1 going to A is just as good as $1 going to B, even though B already has more than A. Some people may believe that - but not all - and it certainly needs to be stated as an assumption.
[ Parent ]

Call it the X factor (4.00 / 2) (#26)
by tudlio on Tue Jan 08, 2002 at 06:19:58 PM EST

Clearly the word "social" in the term "social gain" has all kinds of implications beyond how it's being used in the story. If I remember my Intermediate Macroeconomics, the term social gain is simply meant as a yardstick to measure how much benefit can be accrued by a society in aggregate by trading goods and services.

By that definition, it doesn't matter to whom that gain accrues. What you're talking about is an equitable society, but I'd even dispute your suggestion that a "good" society is an equitable society. What society is better off: one in which 10 percent are very poor, 80 percent are poor, and 10 percent are not so poor, or a society in which 80 percent are not so poor and 20 percent are fabulously wealthy? I'd argue (obviously) for the latter.

insert self-deprecatory humor here
[ Parent ]
Nope (none / 0) (#45)
by gnovos on Wed Jan 09, 2002 at 01:54:55 AM EST

"Wealth" in this example is exchangeable for pobble beads ot tic -tacs or whatever makes you happy. This argument assumes that money makes people happy, but it works for anything. If I value your backpack at 7 pobble beads, and you sell it to me for 3, then we are collectivly up 4 beads. Assuming we enjoy beads then we're in luck.

A Haiku: "fuck you fuck you fuck/you fuck you fuck you fuck you/fuck you fuck you snow" - JChen
[ Parent ]
The "spread" can be measured with (none / 0) (#55)
by fhotg on Wed Jan 09, 2002 at 10:20:44 AM EST

the "Gini - Index of Income Inequality" for example.

Gitarren für die Mädchen -- Champagner für die Jungs

[ Parent ]

Why I Don't Like Economics (3.91 / 12) (#12)
by snowlion on Tue Jan 08, 2002 at 03:45:04 PM EST

...anything that's not in the numbers doesn't count.

It's a good article, and I voted it up. However, it has a number of problems that I don't see addressed, or even given token acknowledgement.

  • If the consumer gain is $0 and the producer gain is $100, the "social gain" is $100. That doesn't sound like the right terminology for me, if there are 1,000's of consumers, but only one producer.
  • The effects of advertising and marketing are not taken into account.
  • If someone can get people to buy crap, regardless of what it is, that is a "social gain". I disagree, and might note that some music, books, and other "goods" could be considered as to the mind as tobacco is considered as to the body. I'm not going to go banning things, but you should keep this in mind and perhaps reconsider renaming "social gain" to something else, and not be so intent on maximizing it... Don't get too theoretical.
  • The examples are warped. On CD's, the "social value" is terribly towards the producer. The vast majority of consumer gain is due to piracy. (That means, the only way "we" on the consumer side get anything significant out of the deal (any gain) is by pirating.) The consumer gain due to honest purchace is near negligable, compared to the producer gain.
  • Factor in marketting, and you find that the pirates are contributing to the marketting effort.
  • Consider the Grateful Dead, a marvelously economically successful producer, with legions of "pirates" (they allow tape trading and copying). According to your model, they should never have been paid.

You rightly noted that the situation is fucked. When you get a new technology that allows infinite reproduction, that should be good for consumers, right? Except that almost all of the "social gain" is going to the producers.

You factor in power structures, and the propaganda value of money, and you find that the producers here have the ability to almost infinitely cushion their power. Rather than copyright terms shortening, they are going longer. And if you argue with your average Joe about IP laws, they think that copyright should be even longer, against their best interests! Indeed, many suggest that IP should last FOREVER. This is clearly the work of propaganda, since no reasonable person would argue so vehemently against their interests, on both ethical and economic grounds.

Well, that's my take on it at any rate.

Map Your Thoughts
The right terminology (3.75 / 4) (#14)
by theantix on Tue Jan 08, 2002 at 05:02:03 PM EST

If the consumer gain is $0 and the producer gain is $100, the "social gain" is $100. That doesn't sound like the right terminology for me, if there are 1,000's of consumers, but only one producer.
In fact, it is the right terminology by your very own reasoning. If the per-consumer gain is $2 and the producer gain is $98, if there are 2,000 consumers the social gain is $4,098, far in excess of the $100 social gain in the first scenario.

You sir, are worse than Hitler!
[ Parent ]
Let's check this- (3.66 / 3) (#33)
by snowlion on Tue Jan 08, 2002 at 07:48:11 PM EST

Okay, we have 2,000 consumers, and you're saying that the per-consumer gain is $2. So, the consumer gain is $4,000, yes?

Okay, now the producer gain. The producer spent, say, $500. ($500 isn't realistic, but then, neither is 2,000 consumers). The producer received, say, 2,000 copies * $10/copy, right? Okay, so the producer gain is 2,000*10 - 500, or 20,000-500, or $19,500.

So the social gain is $19,500 + $4,000, or $23,500, as the sum of the producer and consumer gain. And the skew is largly for the producer here. If The more copies sold, the closer you get to a 10:2 ratio.

That's not a social gain, that's a producer gain. I'm saying the terminology sucks: The producer is hardly society, but rather, a miniscule agent in society.

The public is being ripped off, hard core.

Map Your Thoughts
[ Parent ]
Right (producer gains) (none / 0) (#57)
by theantix on Wed Jan 09, 2002 at 11:35:03 AM EST

You are right, I screwed up. I ignored the increased gains of the producer, that was my mistake. But the problem still remains: the social benefit is increased, even if the social benefit is skewed. If the consumers benefit, and the producer benefits, there is a net gain to society (a social gain). Of course in many sitations the gains will be uneven, but so long as there are win-win situations we are better off that the production is taking place. This is the foundation of trade economics, by the way.

You sir, are worse than Hitler!
[ Parent ]
Sounds right to me... (3.50 / 2) (#25)
by Danse on Tue Jan 08, 2002 at 06:18:53 PM EST

The examples are warped. On CD's, the "social value" is terribly towards the producer. The vast majority of consumer gain is due to piracy. (That means, the only way "we" on the consumer side get anything significant out of the deal (any gain) is by pirating.) The consumer gain due to honest purchace is near negligable, compared to the producer gain.

I've been saying for quite some time now that copyright has become horribly warped in favor of the producers rather than being balanced in favor of society as a whole. Consumers see practically no benefit at all from copyright law as it stands today, while the producers receive huge benefits. It seems quite likely to me that the only way that consumers get anything significant out of the deal is by piracy.

An honest debate between Bush and Kerry
[ Parent ]
On music .. (none / 0) (#41)
by Highlander on Tue Jan 08, 2002 at 09:26:47 PM EST

The most ridiculous point here is to decide when music sequence A matches music sequence B, especially when you factor in that everything resembles the music of Joe Cage.
If your right to copy music gets taken, then just make your own music.
On the other hand, if you make Music like Cage, the audience might not like it.

Moderation in moderation is a good thing.
[ Parent ]
...and (5.00 / 1) (#43)
by calimehtar on Tue Jan 08, 2002 at 10:41:10 PM EST

Don't forget the money that Dave can make by selling advertising on his software piracy application, Bazster. And Steve who Dave paid to write Bazster. And the money Frank the lawyer gets to sue Dave's ass for Trent. I think we can see pretty clearly the social advantage of piracy.


The whole point of the Doomsday Machine is lost if you keep it a secret.

[ Parent ]
Buying crap (none / 0) (#59)
by jrincayc on Wed Jan 09, 2002 at 12:09:30 PM EST

If someone can get people to buy crap, regardless of what it is, that is a "social gain". I disagree, and might note that some music, books, and other "goods" could be considered as to the mind as tobacco is considered as to the body. I'm not going to go banning things, but you should keep this in mind and perhaps reconsider renaming "social gain" to something else, and not be so intent on maximizing it... Don't get too theoretical.

If the consumer value of something is negative and the producer cost is positive, then the social gain (SG = CV - PC) is negative (remember, price doesn't matter when calculating social gain). This is a problem with intellectual property since very often you can only find out how valuable the product is by buying it and using it.

If the consumer value of a product is negative, then the way to maximize social gain is to not pay money for it. Maximizing social gain is still the correct choice, you just need to put the correct numbers on the values.

[ Parent ]
Maximizing Social Gain (3.35 / 14) (#13)
by Reese'sPeanutButterCommunism on Tue Jan 08, 2002 at 05:00:13 PM EST

Wait a tick! Let's say little Suzie down the block can produce a glass of lemonade for a nickel. I get really thirsty sometimes, so I'm willing to pay $5,000,000 for a glass of lemonade. So, when Suzie sells me the lemonade for a quarter, my surplus($4,999,999.75) plus her surplus(20cents) gives us a social gain of $4,999,999.95, eh? Think of all the homeless people who should be helped by this transaction! Or I could be willing to pay a few hundred trillion dollars for the lemonade, and eliminate all poverty everywhere!

Ah, but lucky me! I've discovered the secret to Suzie's Secret Lemonade Formula (two drops of vanilla extract per litre) and am now pirating it! The social gain increases! Life is good everywhere now. Trillions and trillions of dollars in social gain, hooray! Social gain! Huzzah!


Yeah good point... (4.33 / 3) (#21)
by gauntlet on Tue Jan 08, 2002 at 06:10:33 PM EST

the model presented does, in fact, presume that the values they assign to things are reasonable. That's not an unreasonable presumption, IMHO.

Into Canadian Politics?
[ Parent ]

hmm (4.00 / 3) (#22)
by Danse on Tue Jan 08, 2002 at 06:11:49 PM EST

I suppose if you actually had that much money, and you actually valued the product that much, then it may hold true. Absurd examples such as yours would only illustrate a flaw in his theory if people behaved in such absurd ways. I don't think that anyone who behaves in such absurd ways would have that kind of money, so your example does not poke any holes in the theory. At least that's my take on it.

An honest debate between Bush and Kerry
[ Parent ]
"Should"? (3.00 / 1) (#24)
by valency on Tue Jan 08, 2002 at 06:18:16 PM EST

Think of all the homeless people who should be helped by this transaction!

Should? Who made you the AKBD?

If you disagree, and somebody has already posted the exact rebuttal that you would use: moderate, don't post.
[ Parent ]
monetary values (4.00 / 1) (#60)
by mattpfeff on Wed Jan 09, 2002 at 12:49:07 PM EST

If you actually valued a cup of lemonade at $5,000,000, you'd accordingly be willing to trade your house, car, worldly possessions and future income -- up to $5 million -- to the girl.

Still thirsty?

[ Parent ]

Social Gain / Consumer Surplus (5.00 / 2) (#61)
by whoozit on Wed Jan 09, 2002 at 01:27:02 PM EST

As other people have said, using ridiculous numbers like this isn't very productive. I have never taken an Economics course, so I may be completely off base here, but to me the idea of 'consumer surplus' is that the money 'left over' that you would/could have paid for the item - but did not - can then be spent on other things or invested or whatnot, producing a beneficial gain for the consumer and others.

Following your above example, if you truly had $5million to spend on a glass of lemonade and only had to spend a nickel, you WOULD have a ton left over that you might spend on something else, maybe to donate to homeless starving people, or whatever.
Since I very much doubt a glass of lemonade is worth $5million to you, this is an example of (grossly) overestimating consumer value! ;)

...Experience is what you get when you don't get what you want.
[ Parent ]
Copyright law reform suggestion (3.80 / 5) (#15)
by squigly on Tue Jan 08, 2002 at 05:14:37 PM EST

There is no need to require the copyright holder to re-register the copyright. Simply make the act of publishing and allowing people to purchase a work at a reasonable price all the work needed to extend the copyright (up to a maximum). So once a work is out of print for 5 years, it enters public domain. No work for the library of congress, more chance of being able to track down an author if a work is still in print, and the right to distribute copies of data that is no longer commercially viable, but of historical interest (for example anciant computer games).

But what about access? (5.00 / 1) (#42)
by chrylis on Tue Jan 08, 2002 at 10:31:37 PM EST

The purpose of the reregistration would be to force the copyright holder to provide a reasonable means to access the work. Sure, a word-processing or even typesetting document on CD might be fine now, what are the odds anyone's going to have a working CD-ROM in 50 years?

[ Parent ]
Information wants to be anthropomorphicized (3.42 / 7) (#16)
by khym on Tue Jan 08, 2002 at 05:29:10 PM EST

Geez, information doesn't want to be anything, it's not alive nor sentient. Stop using that stupid saying.

Give a man a match, and he'll be warm for a minute, but set him on fire, and he'll be warm for the rest of his life.
It's not an uncommon kind of analogy (4.50 / 4) (#17)
by PresJPolk on Tue Jan 08, 2002 at 05:40:21 PM EST

Ever hear about how evolution wants species to reproduce, or how the universe wants to increase entropy? It's not accurate, no, but sometimes a force is just so strong that it looks like there's a mind behind it that wants an outcome.

Information tends to spread, and as technology improves it spreads more and more easily. It spreads so easily now that it looks like it "wants to be free."

And any business that doesn't take this into account deserves to fail.

[ Parent ]
info free... (4.00 / 3) (#20)
by kingcnut on Tue Jan 08, 2002 at 06:09:15 PM EST

"information wants to be free" == "data is subject to diffusion"

[ Parent ]
Another... (2.00 / 1) (#38)
by Danse on Tue Jan 08, 2002 at 08:17:14 PM EST

I don't know who said it first, but I always liked the tagline "Information wants to be anthropomorphized." :)

An honest debate between Bush and Kerry
[ Parent ]
No, think... (3.66 / 3) (#44)
by gnovos on Wed Jan 09, 2002 at 01:50:47 AM EST

"Information wants to be free" is the equivilent of saying "Water wants to flow downhill"... and YOU KNOW THAT. You understand perfectly the connotations of both those phrases. Stop arguing for the sake of arguing, it makes the world suck.

A Haiku: "fuck you fuck you fuck/you fuck you fuck you fuck you/fuck you fuck you snow" - JChen
[ Parent ]
That saying in full... (5.00 / 2) (#51)
by Jetifi on Wed Jan 09, 2002 at 07:31:16 AM EST

"Information Wants To Be Free. Information also wants to be expensive. Information wants to be free because it has become so cheap to distribute, copy, and recombine - too cheap to meter. It wants to be expensive because it can be immeasurably valuable to the recipient. That tension will not go away. It leads to endless wrenching debate about price, copyright, 'intellectual property', the moral rightness of casual distribution, because each round of new devices makes the tension worse, not better."

...comes from a Stewart Brand's 'The Media Lab: Inventing the Future at MIT', presented at the first Hackers Conference in 1984 (thx [wunderhorn1])

Anthropomorphicising something isn't necessarily a bad thing, if it helps you get a point accross. Taking someone elses words and quoting them out of context to reinforce an argument, on the other hand, is a bad thing :-)

[ Parent ]
Solution 2 (3.20 / 5) (#27)
by K5er 16877 on Tue Jan 08, 2002 at 06:22:47 PM EST

I'm a software programmer. I see a need for a program called Futz. I write Futz and release it on Jan. 1, 2005. I register with the Library of Congress by sending in a burned DVD with the source.

I sell a number of copies and get user feedback. Based on the feedback, I start churning out releases every six months. Each release requires me to get a new copyright (under current copyright registration procedures).

By Jan. 1, 2010, I've amassed a number of versions of Futz. Futz has seen ten releases. Now I need to start reregistration. Every six months, I now need to send in my new registration and my reregistration. Not only that, but I have to find the original source for Futz 1.0 and reencode it on a new media. Burned DVDs are no longer popular, so I have to use memory sticks. By this time, I've even started a small software company and have three other projects going.

By Jan 1., 2015, I've managed to build my company to a decent size software house of about 50 people. We have 12 different titles each with multiple releases. By now, I've needed to hire a person whose sole job is finding the source to old versions and reencoding them on holographic cubes for copyright reregistration.

Additionally, rebuilding a software product after 15 years (when a copyright lapses) may not be possible. Getting the complete source for regenerating the product may be a nightmare. Futz 1.0 linked with a beta audio SDK release and required a development environment that is no longer on the market. Even if you were able to find the audio SDK, get the dev environment, and port the program to a current OS, the custom make file I used for Futz 1.0 wasn't included in the source. Software source dies of bitrot pretty quickly. Even five years can be a very long time. Good luck rebuilding Futz.

Yeah... I didn't like that either... (2.50 / 2) (#30)
by Danse on Tue Jan 08, 2002 at 06:40:53 PM EST

I would say no registration required. All copyrights expire 5 years after creation. (Maybe 10 at the most, the term limit is debateable, and I'm not sure there is a one-size-fits-all solution to it). The problem with that is that the creation may have lost its value by then. Especially in the case of software. What value would 5 or 10 year old software be, especially if it doesn't include full source code?

So how about this instead? One-time registration, no renewals. For certain types of works, the source (source code, sheet music, etc) will be required, or a penalty will be assessed against the term limit. Say you register a piece of software with the source code. You get a 5 year copyright. Now, if you register it without providing full source code, you only get a 3 year copyright. Something along those lines might work better.

The other part I had a problem with was that he said that anything that is created and recorded somehow, whether it be on paper, floppy disk, CD, or whatever, is automatically copyrighted. Then he says that if they aren't registered, then they aren't enforceable. So what's the point then? Just make everything copyrighted, but registered things get longer terms.

An honest debate between Bush and Kerry
[ Parent ]
Too software-centric (3.50 / 2) (#53)
by losthalo on Wed Jan 09, 2002 at 09:30:55 AM EST

I'm a visual artist. If my work goes into the public domain, no matter what, in a period of five or ten years, odds are that I've already devoted years of my life to producing a LOT of public-domain work; for free. Due to the long "percolation" many visual artists go through before their work is known or valuable (since it generally increases rather than decreases over time, and starts low rather than high) I would lose big with such a short copyright period.

The world is its own place, and can make a saint out of a sinner, or a sinner out of a saint.

[ Parent ]
So what? (4.50 / 4) (#32)
by thotherhw on Tue Jan 08, 2002 at 07:17:25 PM EST

So, the easy solution is to not re-register Futz v.1 in 2015. Saves you trouble, and the program goes into the public domain where it increases social gain. Plus you don't care because no one is buying Futz v.1 from you because they're all busy buying Futz v.9 or 10. And no one is going to put you out of business buy reverse engineering Futz v.9 or 10 from Futz v.1 because (for all the reasons you stated) they will be radically different from each other by that time.

So, what's the problem?

Don't take out the nospam string in my email address.

"Americans, while occasionally willing to be serfs, have always been obstinate about being peasantry." -- Nick Carraway narrating in F. Scott Fitzgerald's The Great Gatsby

[ Parent ]

copyright filing is done by HARDCOPY (4.00 / 3) (#48)
by Sleepy In Seattle on Wed Jan 09, 2002 at 04:45:24 AM EST

I happen to have a copy of United States Copyright Office Circular 61, "Copyright Registration for Computer Programs", on my desk at the moment. In order to register your program for copyright, you do NOT have to provide it in machine-readable form. (In fact, the exact wording is "a form visually perceptible without the aid of a machine or device" -- my emphasis). What's more, you don't even have to provide the ENTIRE program, just 50 pages of it. Either the first 25 and last 25, or for derivative works, 50 pages that include "pages representative of the revised material".

Re-registering should not be too difficult, either: Just keep a file with a photocopy of the 50 pages you sent the first time around. No need to worry about rebuilding or whatever. Just run the pages through the copier and you're set.

Anyway, there are plenty of things to worry about with regard to copyright law, but the mechanics of filing are certainly not high on my list.

[ Parent ]

That's a problem with copyright law (5.00 / 2) (#58)
by jrincayc on Wed Jan 09, 2002 at 11:40:11 AM EST

I consider that a flaw in copyright law. This means that the source code for a program may never be given to the public. I think that only requiring 50 pages of the code in hardcopy means that for most products the source code will be lost long before copyright expires, thus losing the chance to benefit from the source code. Losing the source code is a flaw in the mechanics of filing.

If the library of congress had the source code in a machine readable format, putting it online when copyright expires is trival. If it is only in hard copy then most likely the source code will decay in the basement. If only part of the source code is available, then the source code will probably be lost forever since there is very little incentive for the producer make it public.

[ Parent ]

Yes, but... (none / 0) (#62)
by K5er 16877 on Wed Jan 09, 2002 at 01:35:43 PM EST

Yes, the current method is 50 pages of hardcopy. The solution 2 presented in the original article, however, required full source on a machine readable media. I was referring to the cumbersome solution 2.

[ Parent ]
That took 11,455 words? (2.33 / 3) (#28)
by valency on Tue Jan 08, 2002 at 06:24:08 PM EST

I can't say I disagree with anything in the article, but it basically boils down to:
  • Remedial microeconomics
  • A suggestion that won't really solve any problems except for AbandonWare (which is far from the biggest problem with copyright)
  • A brief mention of bounty-funded software, which has been around for years now.
I dunno, I can't see why this is front-page material.

If you disagree, and somebody has already posted the exact rebuttal that you would use: moderate, don't post.
Nice microecon primer (none / 0) (#36)
by pin0cchio on Tue Jan 08, 2002 at 07:59:01 PM EST

but it basically boils down to: Remedial microeconomics

I see the microecon primer itself as worth the price of reading this article, especially considering that the author has released it under an open-content license.

A suggestion that won't really solve any problems except for AbandonWare (which is far from the biggest problem with copyright)

Then what's bigger? Note that DMCA isn't strictly a copyright law, that is, DMCA violations are not the same offence as copyright infringement.

However, it may not be possible to completely regenerate a sound recording from sheet music, as that often requires instrumental or vocal talent, and you can't just bottle up 98 Degrees (the only boy band remotely worth listening to) and send them to the Library of Congress. Similar arguments apply to motion pictures.

[ Parent ]
More important issues than AbandonWare (4.00 / 1) (#39)
by valency on Tue Jan 08, 2002 at 09:13:08 PM EST

Then what's bigger?

Two off the top of my head:

  • confusion of right to profit from and right to control one's work (the former is good, the latter is bad).
  • inefficiencies in the event that the profit-maximizing price is X, yet some people derive a positive amount of value Y < X from the work. Such people would benefit from the work, and it would cost less than $Y to provide them with it, yet under the current system they fail to recieve it. Thus a mutually beneficial transaction fails to occur; this is a serious inefficiency.

If you disagree, and somebody has already posted the exact rebuttal that you would use: moderate, don't post.
[ Parent ]
What about compulsory licensing? (none / 0) (#54)
by pin0cchio on Wed Jan 09, 2002 at 09:47:38 AM EST

[Problem:] confusion of right to profit from and right to control one's work (the former is good, the latter is bad)

So would you advocate a system of compulsory licenses, especially further down the copyright term?

[ Parent ]
Recursiveness (3.00 / 5) (#29)
by gauntlet on Tue Jan 08, 2002 at 06:24:44 PM EST

It seems to me that for something like music, there's a limited gain to be had, and even reducing the copyright to 5 years likely would have very little effect. But for something like production software, that (supposedly) reduces the costs of producing something, there are further gains to be had if the person pirating it gains a reduction in their production cost for something else.

Into Canadian Politics?

Interesting... (3.00 / 5) (#31)
by gauntlet on Tue Jan 08, 2002 at 07:06:13 PM EST

I was arguing with a buddy at work here about this issue last week. He was of the opinion that pirating software increases prices. I argued that pirating something with no production cost that I would be unwilling to pay for does nothing to the production cost.

We eventually came to the conclusion that the number of people that would have been willing to pay the cost, but decided to pirate it instead, will have an impact on the cost, because those pirates actually reduce the producer's surpluss.

It seems to me now that if you want to maximize your producer's surpluss on a given intellectual property at a given price, you just make the cost in effort of pirating it equal to the cost of purchasing it. Any further effort in preventing piracy is wasted. Any less effort will result in people pirating it that otherwise would have been willing to purchase it.

Part of the "effort" involved in pirating it includes the risk involved with breaking the law, so you can also manipulate the law in order to maximize the social benefit. If 1% of the piraters get caught, and the criminal record is considered to have a negative value of 100 times the price of the product, then you don't need to put any effort into piracy protection at all.

So essentially, what we need to do, is kill anyone found guilty of piracy, but only kill a few people a year. Then the people that could pay for it will, and everone else will continue pirating.

Yeah, OK, that's probably not the best all-round strategy. :)

Seems like a good basic premise, though: All you have to do to eliminate losses through piracy is make the cost of pirating it (in time, effort, risk of being caught, etc) larger than the price for the large majority of people.

Into Canadian Politics?

Value of things. (3.50 / 2) (#47)
by Znork on Wed Jan 09, 2002 at 04:07:15 AM EST

Well, the way we're going any and all software will be so boobytrapped with ET-phone-home checks that piracy prevention or law enforcement actions against consumer piracy will be possible. (Oh, by the way, there is a reverse lottery effect active when you deal with crime. If 1% gets caught and the value is 100 times negative, then people will argue they wont get caught anyway... crimerates are closely related to how likely you are to get caught, and almost completely unrelated to the punishment, altho they do have a stronger effect on premeditated minor crimes among lawabiding citizens (speeding, littering, piracy, etc. Execution or lifetime imprisonment would be a deterring factor in that type of crime)).

Of course, the result of that will simply be a major influx in free software users. A consumer will not buy a piece of software if the cost exceeds what they're willing to pay. The only gain for the producer are those people who are willing to pay, but more willing to resort to piracy, and since they would gain even more value from also using free software, it is unlikely.

[ Parent ]
An oversight I haven't seen mentioned yet... (2.66 / 3) (#40)
by Aaorn on Tue Jan 08, 2002 at 09:23:34 PM EST

(Although I didn't read quite ALL the comments yet, so someone may have pointed this out already:) When the 'consumers' gain $95 and the 'producers' gain $5, saying that the Social Gain is $100 is misleading. Every consumer with money to spend must obviously be gaining his money through producing - so that if ALL producers earned only the $5, they wouldn't be ABLE to spend (or theoretically spend) that $95 for very long. In order for a cyclical (earn, spend, earn, spend) economic system to prosper, the gains of the Producers should roughly match the gains of the consumers - because all people are both.

Not an oversight (5.00 / 1) (#56)
by jrincayc on Wed Jan 09, 2002 at 11:22:52 AM EST

The social gain in your example is $100. If you take it to apply to every trade in society, it still can be true. For example, if it costs a farmer $5 for a bushel of wheat, and then it is bought by a cereal company that values at it $95 dollars. The cereal company takes the wheat and converts it into cereal for $5 and then sell it for $100. In this case the consumer value would be $95 dollars since that is how much profit could be made on it. As long as the consumer is doing something valuable with the product this is not a problem (saving time and having fun can be valuable to). Yes, if the people are just trading real estate and not using it for anything, $5/$95 is unsubstainable. However if the consumers use the traded item for something more valueable than the cost, it can work.

[ Parent ]
One small mistake with this... (4.66 / 3) (#46)
by gnovos on Wed Jan 09, 2002 at 01:58:38 AM EST

...is that it assumes that the subjective value that a particular consumers places on things are not directly related to the the value that another consumer pays. If there is any communication between the consumers, then when they find that person X pays 0 for item Y while they are still paying 100, then they will signifigantly reduce thier valuation...

A Haiku: "fuck you fuck you fuck/you fuck you fuck you fuck you/fuck you fuck you snow" - JChen
Good points, but: (5.00 / 1) (#52)
by Jetifi on Wed Jan 09, 2002 at 08:21:35 AM EST

Intellectual property is the term for a number of different legal entities. The original purpose of copyright (one of those legal entities) was to grant a limited monopoloy on distribution of a work, to encourage the author to create more work - for the good of 'society'.

The Sonny Bono Copyright Act changed that by allowing congress to extend the duration of copyright - Mickey Mouse being a good example of why a business such as Disney might want this done. The court opinion is that as long as there are limits on duration of copyright, congress can play around with them.

But nowhere in law (except the DMCA (and there only by implication (the infamous 1201.a.1))) is the concept of ''intellectual property'' recognized. The various different types of protection granted to creators (patents, copyrights, trademarks, trade secrets, etc.) all have different aims, special cases, and exceptions.

So when you talk about selling intellectual property, I think you're actually talking about an owner selling copies of their coprighted work. Patents, trademarks and commercial secrets all have a different kind of commercial value, and are rarely sold, or subject to 'piracy', on such a large scale.

What about using some real life figures? (4.00 / 1) (#63)
by Maclir on Wed Jan 09, 2002 at 03:23:40 PM EST

Ok, what if you put the following into your "social gain" formulas:
  • Cost to develop product (design, tooling, whatever): $10,000,000
  • Cost to replicate individual units: $0.50
If I think I can sell one million units, then I can amortize my development costs over these one million sales, so the cost to produce each unit is $10.50. While some people may claim the cost to produce additional units of "information" products (software, music CDs) is negligable, they forget that there is a substantial development cost.

The same applies in other "traditional" products - how much does GM or Ford spend to design and develop their next model SUV? These costs are all amortized over unit sales.

So, if I budget on selling one million units, I can cover my development cost across all these sales. But, if I only sell 100,000 units, because once the produce is available, lots of people start "sharing" their copies, I am $9 million out of pocket. Have these people that benefited from "sharing" someone else's copy contributed to the development cost? I think not.

People who rail against paying for information products, claiming that the cost of production of an existing work is essentially zero, are missing this fundamental point.

Waitasec... (none / 0) (#71)
by kraant on Fri Jan 11, 2002 at 03:02:25 AM EST

The same applies in other "traditional" products - how much does GM or Ford spend to design and develop their next model SUV? These costs are all amortized over unit sales.

But strangely enough GM and Ford spend large sums of money on designing these cars without being able to patent them.

Big hole in your argument there buddy.
"kraant, open source guru" -- tumeric
Never In Our Names...
[ Parent ]

Where did I mention patents? (none / 0) (#74)
by Maclir on Mon Jan 14, 2002 at 04:02:35 PM EST

But strangely enough GM and Ford spend large sums of money on designing these cars without being able to patent them.
I wasn't talking about patenting a design. I was talking about how the designer / developer of a product will amortize the (often considerable) up front costs over a large number of unit sales. Whether or not the designer can or choses to apply for a patent does not matter. Now if some other manufacturer took a Ford or GM design, and simply copied that design exactly without the approval of the original designer, that would be another matter.

Maybe ask around at the Royal Melbourne Instutite of Technology about what plagiarism consitutes?

[ Parent ]

Financial argument against Patents and Copyright (4.20 / 5) (#65)
by jneves on Wed Jan 09, 2002 at 06:25:50 PM EST

Using the same reasoning and basing myself on 2 real-life cases here is why I believe that both copyright and patent legislation can do more harm than good.

This one is based with what happened with the LASER patent:

  • Alice researchs and discovers the LASER technology for $100. She files and is granted a patent on it.
  • Bob is interested in the application of LASER technology and will pay $80 for the patent fee and technical advice.
  • Carol is also interested in the technology and will pay $70 for the patent fee and technical advice.
  • Alice accepts to license the technology and provide technical advice for $60.
  • Dave proves that he has invented LASER 6 months before Alice and get's the right to the patent. Dave has also spent $100 in research.
  • Alice has to pay $100 in patent rights to Dave.
  • Social Gain = ($20 - $100) + ($100 - $100) + ($80 - $60) + ($70 - $60) = $-50
If there were no patent law Dave wouldn't be able to hijack the deals from Alice.

This one is based on a case in which Oasis sued and win a case against a music group that had a song that used some of the keys of a song from Oasis.

  • Alice composes a song and rehearses it for $100.
  • Bob believes a live singer in his club will add $20/night to his business.
  • Bob will play Alice to play it at his club fro $10/night.
  • Alice signs a deal with Bob.
  • Carol finds out that some of Alice's song keys are like a song of its own, she sues Alice and wins.
  • Social Gain = $-100
Obviously this doesn't take into account the loss of potential Consumer Surplus of $10/night for Bob and the loss of a potential Producer Surplus of $10/night after the first 10 nights.

Note: as most financial figures these numbers do not reflect all reality and all possible scenarios.

Oops I posted to the wrong story (none / 0) (#68)
by Curby on Thu Jan 10, 2002 at 07:19:34 AM EST

Thank you for your well-written article. It has helped me broaden my understanding of the issues, which is something I always try to do. I happen to agree with your general train of thought, or at least some of the underlying principles. I have explained myself (though less articulately) in another post since I thought it was a good place to discuss what I brought up. After I posted, I saw this article here. Please read my original post, as it fits into this discussion a lot better.

http://www.kuro5hin.org/comments/ 2002/1/8/22212/89322/61#61


I just wanted to pick a few nits. (5.00 / 2) (#69)
by Loyal Opposition on Thu Jan 10, 2002 at 02:51:51 PM EST

Consumer surplus is usually given in terms of how much a consumer would be willing to pay for a unit of a good or service rather than how much the consumer valued it. Bob may value lager quite highly, but may not be willing to pay much since he must retain enough money for yams to fend off starvation.

Producer surplus is the price less how much he would be willing to accept for a unit of a good or service. By defining it rather in terms of the cost to produce you ignore the possibility that the producer may be willing to sell at a loss.

Both producer and consumer surplus are usually couched in terms of the nth unit or the next unit of the good or service in recognition that Alice may be willing to pay quite a lot for the first six raw oysters, but unwilling to pay anything for the forty-ninth through fifty-fourth raw oysters.

The total of producer and consumer surplus has already been given the name "total surplus." In giving it the name "social gain" you, perhaps unintentionally, bring into the equation a considerable amount of emotional baggage. Not least of which is the difficulty of adding USD to USD. Suppose for example that Carol were to donate one USD to Dave. Under your scheme there is no net social gain because Carol has lost a USD and Dave has gained one. However, if Carol equates a small amount of social capital to one USD and Dave equates a larger amount, then there has been a net gain. You seem to discern the problem as you converted to both time and energy, but this is ultimately no solution since Carol may value an hour (of leisure, say) more highly than Dave, whereas Dave values a kilowatt more highly than Carol. Under such conditions you get different answers depending upon what measure you use. This distinction is quite important to your argument because you then go on to argue that pirated software can be beneficial to social gain. This conclusion is squarely in the realm of normative economics, whereas surpluses are tools of positive economics. Admittedly, the term "total surplus" is not completely free from this difficulty.

You quite rightly mentioned third party costs like the effluent from burning coal, but there also third party benefits such as the benefit Alice gets from Bob's keeping his lawn neat and tidy.

My own opinion is that intellectual property rights should be long enough to foster invention and artistry, but no longer. I think a term of one year would be about right for software and songs, while three years would be about right for a new type of jack or vehicle. I confess, however, that I have seen no studies on the subject, and expect that the optimum time would depend upon the rate of invention in the particular culture where the intellectual property rights were created.


Old problem, no new solution (5.00 / 1) (#70)
by svampa on Thu Jan 10, 2002 at 05:48:02 PM EST

You can skip all the formulas and willing to pay blur concept. The whole article is sumariced in:

If everybody may use the software for free. How hell the developers get rewarded to go on?

Yeah, that's the one million dollars question

A simpler copyright submission solution? (none / 0) (#72)
by tekue on Fri Jan 11, 2002 at 10:30:59 AM EST

It might be too simple to work, but try this: what if instead of figuring out what should one send to the LOC when registering stuff for copyright, it should be a simple rule like "What you send in is copyrighted, everything else is not."?

For example, if you send the binary file, but not the source code, that means, that the binary file is copyrighted, while source code is not. In my opinion it's a reasonable solution and it would not require software companies to keep all the old source code and libs, music creators would not have to struggle to create the sheets with their music (which, keep in mind, is sometimes not possible to do without creating your own format of music sheets, which in turn renders the sheets very hard to understand or even not understandable at all, to everyone except the author), everyone would just copyright what they want.

Mind that copyrighting someting is not required to make profits of it. For example, Coca-Cola never copyrighted their formula for a drink, yet they are still quite much in business. They just keep the formula secret.

Humanity has advanced, when it has advanced, not because it has been sober, responsible, and cautious, but because it has been playful, rebellious, and immature. --Tom Robbins
A solution to the problem of network effects? (none / 0) (#73)
by dash2 on Sun Jan 13, 2002 at 02:57:39 PM EST

Very interesting and readable introduction to the economics. Has anyone worked through the economics of using free software as a solution to the problem of network effects (e.g. the situation where everyone buys Windows because everyone else has Windows, and they need to read Word documents)? Some analysis of this would probably provide the strongest argument for open IP licensing.
If I speak with the tongues of men and of angels, but have not love, I am become sounding brass, or a clanging cymbal.
Economics of Intellectual Property | 74 comments (67 topical, 7 editorial, 0 hidden)
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