By Gordon Hull
As I suggested last time, the current neoliberal expansion of IP hinges on the acceptance of monopolies, and the relation between deadweight loss (as advanced by Arrow) and incentives theory (as advanced by Demsetz) is accordingly essential to understanding it. Here I want to expand on that point, and then say something about contemporary theory.
The debate is one that Demsetz’s side is winning. When term limits came before the Supreme Court in Eldred v. Reno, a set of seventeen economists – including such neoclassical luminaries as Arrow, James Buchanan, Ronald Coase, and Milton Friedman – submitted an amicus curiae brief to the Supreme Court opposing the 1998 Copyright Term Extension Act (CTEA). These economists made arguments precisely in terms of incentives and deadweight loss: a further increase in term length is highly unlikely to make a meaningful difference to incentives to create works, while likely to burden the public with reduced access, and other creators with greater licensing fees. They conclude:
“Comparing the main economic benefits and costs of the CTEA, it is difficult to understand term extension for both existing and new works as an efficiency-enhancing measure. Term extension in existing works provides no additional incentive to create new works and imposes several kinds of additional costs. Term extension for new works induces new costs and benefits that are too small in present-value terms to have much economic effect. As a policy to promote consumer welfare, the CTEA fares even worse, given the large transfer of resources from consumers to copyright holders” (p. 14).
The Supreme Court upheld the extension anyway, on the highly formalistic ground that any non-infinite term meets the Constitutional requirement of “limited.” In so doing, it buried the substantive complaints about deadweight loss under a notion of formal equality (this is the same notion of formal equality that neoliberals routinely use to ignore substantive power differences between putatively equal market actors), with the effect of green-lighting Demsetzian theories about innovation.
It is worth mentioning that this is not a new debate: opposition to IP was traditionally in terms of balancing incentives against the evils of monopolies, and monopolies were taken to be a very important risk to minimize, especially through term limits. For example, when John Locke wrote in opposition to the renewal of the English licensing law, it was in terms of the evils of monopoly (the non-renewal of this law is what led eventually to the first Copyright statute, which was a market-friendly alternative, in part due to the brevity of the IP grant). When Thomas Jefferson wrote to McPherson that “if nature has made any one thing less susceptible than all others of exclusive property, it is the action of the thinking power called an idea,” he is arguing that ideas are not subject to natural rights. He adds immediately that “society may give an exclusive right to the profits arising from them, as an encouragement to men to pursue ideas which may produce utility, but this may or may not be done, according to the will and convenience of the society, without claim or complaint from anybody.” His correspondence with Madison on the IP clause is about term limits. In opposing copyright term extension in England in 1841, Lord Macaulay famously said:
“We must betake ourselves to copyright, be the inconveniences of copyright what they may. Those inconveniences, in truth, are neither few nor small. Copyright is monopoly, and produces all the effects which the general voice of mankind attributes to monopoly …. That monopoly makes things dear is certainly a theory, as all the great truths which have been established by the experience of all ages and nations, and which are taken for granted in all reasonings, may be said to be theories. It is a theory in the same sense in which it is a theory that day and night follow each other, that lead is heavier than water, that bread nourishes, that arsenic poisons, that alcohol intoxicates. If, as my honorable and learned friend seems to think, the whole world is in the wrong on this point, if the real effect of monopoly is to make articles good and cheap, why does he stop short in his career of change? Why does he limit the operation of so salutary a principle to sixty years? Why does he consent to anything short of a perpetuity? …. I believe. Sir, that I may safely take it for granted that the effect of monopoly generally is to make articles scarce, to make them dear, and to make them bad. And I may with equal safety challenge my honorable friend to find out any distinction between copyright and other privileges of the same kind; any reason why a monopoly of books should produce an effect directly the reverse of that which was produced by the East India Company’s monopoly of tea, or by Lord Essex’s monopoly of sweet wines. Thus, then, stands the case. It is good that authors should be remunerated; and the least exceptionable way of remunerating them is by a monopoly. Yet monopoly is an evil. For the sake of the good we must submit to the evil; but the evil ought not to last a day longer than is necessary for the purpose of securing the good.”
In other words, decreasing resistance to monopoly is critical to understanding the growth of IP.
This returns us to contemporary theory. We aren’t going to understand neoliberalism unless we take seriously the willingness to embrace monopoly on efficiency grounds. And doing that is going to require reading more law and economics than is typically the case in discussions of neoliberalism. Davies’ account is unusual in that he sees not only the importance of law and economics, but of Coase as part of the background to that. Coase is often cited for his treatment of externalities, but the interesting work here is on the nature of the firm. Basically, Coase realized that sometimes hierarchical institutions are more efficient than pure markets; this efficiency gain explains the existence of large firms on the market. As I have argued before, the exact distribution of costs and efficiencies make the distribution between firms and markets very complex, but it’s clear that part of why neoliberals can tolerate monopolies derives from the realization that hierarchical structures can be more efficient than markets. Against that background, it’s not at all surprising to see the law and economics endorsement of efficient monopoly. Here is Posner:
“To the extent that efficiency is the goal of antitrust enforcement, there is no justification for carrying enforcement into areas where competition is less efficient than monopoly because the costs of monopoly pricing are outweighed by the economies of centralizing production in one or a very few firms” (qt. in Davies, 94).
The parallel to the Arrow-Demsetz debate should be clear. In short: Foucault was writing before a lot of the application of the anti-trust revision became clear, but it’s essential today. It’s not just the creeping tolerance for monopolies that we’ve seen in the slow erosion of anti-trust enforcement; it’s also evident in other things, such as the repeal of net neutrality. I think the current attempt to repeal net neutrality is based on a series of deceptions, but the theory behind the repeal essentially rejects what would otherwise be the expected creation of a marketplace in favor of treating the ISPs as the most efficient way to deliver content to consumers. It’s a debate at two levels, of course – one in which there is a fundamental vision of the Internet as a semi-public space that enables markets to function and one in which it’s a fully privatized vehicle for content provided by large corporations. But that latter view can’t get off the ground without a tolerance for monopolies behind the hostility to regulation. The FTC’s case against net neutrality includes the complaint that common carrier rules date to the 1930s. That’s true, and it’s because those rules were framed by the more classically liberal concern to prevent monopolies from distorting markets. What Pai doesn’t tell you is that the complaint he’s making dates to the 1930s, too.
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