Intellectual Property and Deflation of the Knowledge Economy

[Update: This accidentally became a series of posts on a theme.


Does Intellectual Property Law Foster Innovation? Where I question the efficacy of patent and copyright in a socially networked world.


Intellectual Property and the Deflation of the Knowledge Economy - (this post) Where I toy with the idea that the Knowledge Economy may not turn out to be much of an economy, especially when it comes to Intellectual Property


The Economic Reset Button - Where Jeff Jarvis asks Eric Schmidt whether or not this is a fundamental shift in the economic base


Innovative Deflation - Where I ask, "Is the knowledge economy ripe for growth, or is it the means by which traditional economies are shrunk?" ]

Friday night I was discussing the future of intellectual property law with some friends. My argument, in a nutshell:

Every business model relying on intellectual property law (patent and copyright) is heading for massive deflation in our lifetimes. We've seen it with the music industry and newspapers already. The software industry is starting to feel it with the maturity of open source software, and the migration of applications to the cloud. Television, movies, and books are next. I've come to question the ability of copyright and patent law to foster innovation, but leaving that aside, the willingness of people to collaborate and share, and the tools provided for it on the internet, may render these laws obsolete.

Jeff Jarvis seems to be toying with some of the same ideas when he posted When Innovation Yields Efficiency last week. In it, he writes:

But as I thought through the major innovations of the last decade, many of them have not led to economic growth; they haven’t added money to the economy but left it in the economy. Thus measuring innovation’s impact in the revenue, growth, productivity, and market cap of large companies may not be valid. Instead, we are seeing innovation take money out of their pockets, leaving it with their customers.

The problem, if you can call it that, is that many of the customers are also employees that have had their jobs fall victim to efficiency. Jarvis refers to this as "efficiency" or "shrinkage", and he's right on both counts. But the better term for it is "deflation". Journalists, auto workers, record industry players, retail sales clerks, and marketing staff are forced to go looking for work in shrinking markets. These businesses are either suffering from old business models based on increasingly artificial scarcity (newspapers, music, marketing, software development), or are able to do more work with the fewer resources due to the newly created efficiency (retailers). In short, businesses relying on artificial scarcity created by intellectual property law, are businesses most susceptible to deflation.

Why is deflation a better descriptor? Because as businesses whose product is reliant on intellectual property shrink due to Internet-based efficiencies, consumers are reaping the rewards of these efficiencies. Fewer people are employed by this sector, but fewer consumers are having to pay for products previously only produced by this sector.

The knowledge based economy doesn't follow the laws of supply and demand. (Well, sort of.) First, Intellectual property are largely non-rival goods, meaning that I can "consume" news, or music, or software, and it doesn't get used up. Until recently, restrictions on production in the delivery medium (newsprint and CD's) and/or licensing restrictions on consumption have kept the law of supply and demand in place for intellectual property.

The Internet first struck a blow to the restriction on production, because the copying and transmission of IP became nearly free. Now, with the maturation of open source software, social networks, and collaborative platforms, we're moving away from licensing restrictions on consumption: social networks and news aggregators bring us news, blogs bring us opinion pieces, musicians like Nine Inch Nails and Jonathan Coulton are beginning to release their music for free. Musicians don't need the backing of recording studios any longer: They'r recording in home studios, fans spread their music via social media, and fewer people are getting new music from the radio.

Effectively, the restrictions that held supply in check for IP are slowly falling away. As effective supply rises, price plummets. Don't believe me? You probably spend less money now on music than you did 15 years ago, and your collection is larger and more varied than ever. You probably spend less time watching TV news, and less money on newspapers than you did 10 years ago, and are better informed.
I won't go so far as to say that the knowledge economy is going to be no economy at all, but it is a shrinking one in terms of money, both in terms of cost to the consumer, and in terms of the jobs produced in it.

Kevin Kelly of Wired magazine called this "The New Socialism". He's aware of the stigma attached to the word, but he justifies well:

When masses of people who own the means of production work toward a common goal and share their products in common, when they contribute labor without wages and enjoy the fruits free of charge, it's not unreasonable to call that socialism.

He's right. I've always been a capitalist to the core. I have frequently defended this belief by saying that Capitalism is society's best method for the allocation of scarce resources. And I believe that now more than ever. But what happens to markets like intellectual property when "scarcity" no longer exists?

Cyberdefense and Civil Liberties

Jim Harper over at Cato is still keeping an eye on the Fed's grab for cybersecurity authority.

That’s correct. “Cyber” is not a problem that affects our sovereignty or the integrity of our national boundaries. Thus, it’s not a problem for the defense or intelligence establishments to handle.

The benefits of the online world vastly outstrip the risks - sorry Senator Rockefeller. With those benefits come a variety of problems akin to graffiti, house fires, street closures, petit theft, and organized crime. Those are not best handled by centralized bureaucracies, but by the decentralized systems we use to secure the real world: property rights, contract and tort liability, private enterprise, and innovation.

I've blogged about this before, here and here, but it's worth keeping tabs on.

Does Intellectual Property Law Foster Innovation?

[Update: This accidentally became a series of posts on a theme.


Does Intellectual Property Law Foster Innovation? (this post)Where I question the efficacy of patent and copyright in a socially networked world.


Intellectual Property and the Deflation of the Knowledge Economy - Where I toy with the idea that the Knowledge Economy may not turn out to be much of an economy, especially when it comes to Intellectual Property


The Economic Reset Button - Where Jeff Jarvis asks Eric Schmidt whether or not this is a fundamental shift in the economic base


Innovative Deflation - Where I ask, "Is the knowledge economy ripe for growth, or is it the means by which traditional economies are shrunk?" ]

Patent and copyright were established in this country under the assumption that the limited-term monopoly rights for creators foster innovation. The promise of exclusive reward to a creator for some set period of time provides incentive to pursue the overhead costs of research, invention, and innovation. But can we take that mechanism as a given? Does IP law really spur innovation? It may not be as clear as we think in the socially networked age.

Thomas Jefferson once asked this very question in a letter to Isaac McPherson:

It would be curious then, if an idea, the fugitive fermentation of an individual brain, could, of natural right, be claimed in exclusive and stable property. 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, which an individual may exclusively possess as long as he keeps it to himself; but the moment it is divulged, it forces itself into the possession of every one, and the receiver cannot dispossess himself of it. Its peculiar character, too, is that no one possesses the less, because every other possesses the whole of it. He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me. That ideas should freely spread from one to another over the globe, for the moral and mutual instruction of man, and improvement of his condition, seems to have been peculiarly and benevolently designed by nature, when she made them, like fire, expansible over all space, without lessening their density in any point, and like the air in which we breathe, move, and have our physical being, incapable of confinement or exclusive appropriation. Inventions then cannot, in nature, be a subject of property. 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. Accordingly, it is a fact, as far as I am informed, that England was, until we copied her, the only country on earth which ever, by a general law, gave a legal right to the exclusive use of an idea. In some other countries it is sometimes done, in a great case, and by a special and personal act, but, generally speaking, other nations have thought that these monopolies produce more embarrassment than advantage to society; and it may be observed that the nations which refuse monopolies of invention, are as fruitful as England in new and useful devices.

In their book Against Intellectual Monopoly, Michele Boldrin and David K. Levine lay down a pretty thorough argument that the granting of patent to James Watt for an innovation he made with the Newcomen steam engine delayed further innovation (and the onset of the Industrial Revolution) by 20 years:

Once Watt’s patents were secured and production started, a substantial portion of his energy was devoted to fending off rival inventors. In 1782, Watt secured an additional patent, made “necessary in consequence of ... having been so unfairly
anticipated, by [Matthew] Wasborough in the crank motion.” More dramatically, in the 1790s, when the superior Hornblower engine was put into production, Boulton and Watt went after him with the full force of the legal system.

During the period of Watt’s patents the U.K. added about 750 horsepower of steam engines per year. In the thirty years following Watt’s patents, additional horsepower was added at a rate of more than 4,000 per year. Moreover, the fuel efficiency of steam engines changed little during the period of Watt’s patent;
while between 1810 and 1835 it is estimated to have increased by a factor of five.

After the expiration of Watt’s patents, not only was there an explosion in the production and efficiency of engines, but steam power came into its own as the driving force of the industrial revolution. Over a thirty year period steam engines were modified and improved as crucial innovations such as the steam train, the
steamboat and the steam jenny came into wide usage. The key innovation was the high-pressure steam engine – development of which had been blocked by Watt’s strategic use of his patent.

These things may call us to question the efficacy of intellectual property law, but the advent of the Internet may make this point moot regardless. Legally protected intellectual property are now having to compete with free, collaborative, openly created intellectual property. And it's damned hard to compete with free. Intellectual property is essentially being rendered a commodity.

New efficiencies arise that threaten these business models, but the efficiency is passed to the consumer. Instead of listening to radio to hear new artists, they are being recommended by our friends, and streamed to us on facebook, youtube, and from the artists own websites. Instead of buying whole CD's for the 2 or 3 songs we like, we now purchase music a la carte, for less than $1 a track. These are new efficiencies in the music business... efficiencies the RIAA would rather not have had to deal with. They enjoyed the economic bubble that supported their business model just the way it was, thank you very much. It is only in the face of music sharing on the Internet that they were forced to change, to the benefit of consumers. They could no longer command consumption at the levels capable of sustaining their economic bubble. Thus, there is massive deflation in the music industry in terms of money, yet all of our music collections are larger and more varied than they've ever been, and we've paid less for more.

This is the future for all businesses that rely on intellectual property. More variety, more innovation, greater availability, and less money involved.

P.J. O'Rourke

The opening incantation of P.J. O'Rourke's new book,
Driving Like Crazy: Thirty Years of Vehicular Hell-Bending:

The feminists grabbed our women,
The liberals banned our guns,
The health cops snuffed our cigarettes,
The bailout has our funds,
The laws of Breathalyzing
Put an end to our roadside bars,
Circle the Fords and Chevys, boys,
THEY'RE COMING TO TAKE OUR CARS.

Now THAT, my friends, is poetry.