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Economics of Intellectual Property: Copyright

January 27, 2012

From the perspective of economic growth, the battle for copyright is much lower stakes than the battle over patents. Patents affect the speed of technological innovation and seriously impact the rate of economic growth. Copyrights do however, seriously impact the quality and variety of artistic and cultural products which people have access to, so have a profound impact on the quality of our lives.

The Law
“The Congress shall have Power … To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries;” –U.S. Constitution

Copyright law, like patent law was established in the U.S. Constitution. The current core law which governs copyright is the Copyright Act of 1976, a current version of which can be found here. To be copyrightable, a work must be original, a work of authorship and fixed in a tangible medium*. Titles and other short expressions are excluded from copyright protection, as are useful articles (covered by patents), and ideas. Owning a copyright grants the author the ability to reproduce the copyrighted work, prepare derivative works based upon the work, distribute copies of the work to the public, and perform or display the copyrighted work publicly.

Historic Duration of Copyrights
Source: Wikipedia

The duration of copyright is effectively infinite. Whenever a work is in danger of drifting into the public domain, copyright holding corporations and the great-great-grandchildren of authors gather before Congress and claim that unless copyrights are extended for another decade or two, content creation will decrease significantly. Not only is that absurd, but I believe current practice violates the spirit of the “for limited Times” clause in the Constitution.

Fair Use
There is an important exception to violations of copyright: fair use. There are four criteria used to determine if a use of a copyrighted material is fair:
1. “The purpose and character of the use, including whether such use is of commercial nature or is for nonprofit educational purposes” Nonprofit, journalism, or educational use is more likely to be fair use.

2. “The nature of the copyrighted work” Facts and ideas are not covered by copyright, nor are useful designs, so if someone copies a non-copyrightable part of a copyrighted work, it is more likely to be fair use.

3. “The amount and substantiality of the portion used in relation to the copyrighted work as a whole” The smaller the percentage of the work which was excerpted, the more likely it would be fair use. If the particularly high quality or essential part of the work is used, that is weighted as being worth more.

4. “The effect of the use upon the potential market for, or value of, the copyrighted work” If there are no damages to the copyright holder from the use, it is more likely to be fair use.

Economic Justification for Copyright
The basic logic of copyrights is the same as that of patents: without a legal monopoly on the production of similar goods, content producers will produce less and thus everyone will be worse off. Likewise, the arguments against copyright are similar as well: copyrights reduce rather than increase cultural innovation and monopolies are poor ways to reward innovation. Copyrights, however, the imitation costs are much closer to 0.

Copyrights are much harder to exclude than patents, so copyrighted work is a public good. With patents, imitation costs are often substantial, as the product must be reverse engineered and there is still often a physical good which must be created to profit from it. Readers are likely familiar with the “Tragedy of the Commons“, where people overuse a rival good. The reverse problem, the Tragedy of the Anti-commons occurs when a good is non-rival and people who value it don’t use it. Since the marginal cost is much closer to 0, the efficient quantity of music is basically infinite, and a high price generates a lot more deadweight loss than a patent would.

An Example of Music Industry Propaganda

IP Industries
Just as various industries have varying needs for patents, so too do they need varying copyright protection. Without any IP protection, it seems likely to me that very costly forms of content, such as Hollywood movies, would be produced at a much lower rate. However, that does not mean that copyrights need to be eternal. The vast majority of profits from a movie, book or even music are made in the first few years of publication. Shortening copy protection to 5 or 10 years would reduce profitability of IP industries by perhaps only 10-20%. Pre-recorded music might not need to be protected at all, as most musicians make most of their money doing live performances and selling merchandise anyway. With the ubiquity of amateur photography, photographs would probably not diminish in quantity if copy protection were limited to a year (to protect professional journalistic photography of current events).

A little over half of Hollywood’s profits from the box office, and most of the rest comes from sales of copies (either DVDs or Blue Ray). Even without copyright, people will still go to the movie theater. As long as theaters are forced to pay, that revenue stream will be stable. Wages in Hollywood are also very “winner take all”. If revenue streams were cut by 25%, probably the biggest losers would be the 100 or so best actors and directors. While Leonardo Di Caprio might earn less making Titanic, it’s hard to imagine a world where “The Blair Witch Project” wouldn’t be produced.

The profit accruing to the content creator is equal to the price per unit that the author gets times the quantity of copies sold. In the past, royalties on books have been around of 10% of the cover price, meaning an author would earn $2 on a $20 book. At that price, let’s say they sell 10,000 copies. Suppose now the author moves to an ebook format, costing $2 per copy, and the author gets $1 per ebook sold. So long as they now sell 20,000 copies or more, the author will make more under the ebook format. Given a reasonable demand curve, it is highly likely that the author will make more, even if they make much less per copy.

Spontaneous Law
When people interact with one another frequently, they develop patterns of behavior and informal rules to govern the interaction. When problems are solved, efficient solutions are communicated to other members of the group. Shame and disapprobation are heaped on those who violate these informal rules, which is a fairly effective punishment. Ideally, laws would look to the informal rules for guidance and conform to the norms of society. Laws which do not at least resemble prevailing norms will face widespread resistance.

For example, in a society where smoking marijuana is considered morally wrong, people who see others smoking will report to the police. If it is not considered wrong, it’s “not my problem”. The vast majority of Americans violate copyrights in their daily lives. Very few of them seem striken with guilt. The American government simply does not have the resources or the inclination to arrest and imprison 90%+ of the population. Coercive control relies on static centralization. Microsoft can’t get the government to arrest people who pirate home copies of their software, but they can effectively go after big corporations who do so. The more resources are spent on enforcement, the more hurt formal, centralized businesses will be and the more people will move to the informal sector and spend effort on avoiding punishment rather than economic production.

The legislative system has two choices:

1. Continue with the charade that violating copyright is damaging enough to society to warrant criminal prosecution and sporadically and capriciously punish those who they can catch. This option makes the legal system look like the bad guys, and undermines respect for the law.

2. Reform copyright to fit more coherently with the emergent law which matches people moral intuition and think of ways to preserve income streams to content creators.

Clearly, I prefer the second option. I think that copyright enforcement should be limited to no more than 10 years, which I think would still provide content creators with more than half of the revenue they currently earn. The gains will be the poor and middle classes, and the losers will be those who are already highly benefited by the legal and social structures of our society. I believe that laws which cannot be enforced and run counter to moral norms should not be on the books, as they undermine respect for the law. Trying to enforce copyrights on goods which flow freely on the internet is a Sisyphusian task. Personally, I pay for IP which is priced fairly and not covered in inconvenient DRM, and I think most of my pirate friends do as well. I love Steam, as it is convenient and reasonably priced.

I don’t think content will vanish, but rather will likely become even more creative with the internet. Everything is a remix. People never produce content purely from their imaginations. Great authors steal. Great movie makers steal. To pretend like one person wholly owns their output is absurd. That output is the product of the individual, but also all the culture which influenced it. If people took a deep breath and admitted that, perhaps they would not be so swift to strike down all who they, in turn, influenced.

* Not really. After Congress passed the “Uruguay Round Agreements Act” in 1994, fixation became pretty much optional.

Further Reading
Julian Sanchez on Piracy. More here.
Rajeev Ramachandran on SOPA
Will Wilkinson on IP as theft (not the piracy)
Music quality since Napster (punchline: it hasn’t fallen)
The Economy of Ideas – An article by John Barlow, co-founder of the EFF. Very Hayekian.
Similar uncopied works can be illegal
Clay Shirky on SOPA
Entertainment industry revenue is increasing
Patronage as a method for funding the arts.
Steve Blank on SOPA
Lawrence Lessig, Free Culture
Copyright Math – estimates on damages because of piracy (humorous)

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