Intellectual Property and Incentives

The standard theory behind support for creating a legal monopoly for certain ideas, processes, and inventions is that absent such promise of monopoly there would be far less innovation.

It has a surface level logic to it.  People respond to incentives.  Legal monopoly means more money for the one who has it.  People tend to like the money incentive.  Therefore, more people will innovate because they have the incentive to capture greater rewards by securing a monopoly on the production or sale of their invention.

The weird thing is it doesn’t play out like this in the real world.  Something is missing.

Inventions typically spring from technicians and masters at a craft.  These are the types who are driven by a passion for what they do.  They want to solve problems, discover things, build things, and create things.  So they do.  If they seek a legal monopoly on their invention this happens after the fact.  It is hard to imagine many innovators saying, “Oh wow!  Think of possibility of solving this chemistry problem and discovering an entirely new way to do X!  Wait…get a lawyer in the lab before I go any further.  I refuse to make any discoveries without proof that I’ll be protected from competition once I do.”

And innovation doesn’t look like that.  You can see this by observing areas without the ability to get legal monopolies on their inventions.  Fashion, food, and football are a few of my favorites.  You can copy, borrow, and imitate fashion designs, recipes, and defensive schemes with abandon.  Many people do.  Yet each of these fields is as dynamic as any industry, constantly evolving and introducing new things.  Apparently the innovative offensive coordinator, cook, and designer don’t require the promise of monopoly to entice them to innovate.

People do respond to incentives.  This is a fact of life and one that need not be overturned to overturn the belief that IP laws are required for innovation.  Any good economist will tell you that incentives are many, and value is subjective.  The innovators are certainly responsive to money incentives, but 1) legal monopoly is not the only or best way to earn money for inventions and, 2) money isn’t the only incentive driving invention.

As for number one, consider how many people are typically working on a similar innovation simultaneously.  With the current IP regime, only one can get the monopoly.  If we want to take incentives seriously, what kind of incentive does this create for all the others?  Furthermore, the one most likely to get the monopoly is the one with all the lawyers and accountants and resources and willingness to take others to court, not the one with the greatest contribution to the discovery.  This would seem to drive upstart innovators away from the task for fear of being sued by the big guys as much or more than it would drive them to innovate for the possible promise of securing a patent.

As for number two, while the promise of monopoly may be the dominant incentive for lawyers and R&D departments, it’s not the dominant incentive for inventors.  They innovate first, driven by a passion for the task, the desire to solve a problem, create their dream, help a colleague, or improve their own daily life with some small innovation.  Yes, they want and seek money for the invention once successful, but the absence of a promise of monopoly does not stop them from creating.

Understanding incentives is crucial to really understanding how the world works and how to change it.  But an elementary look at incentives that examines only dollars and cents and only their intended, not actual, beneficiaries will not get you very far.

For more on the problems with intellectual property laws, check out “Against Intellectual Monopoly“.  It’s excellent.

If You Don’t Like Profit, Advocate Free Markets

I don’t find anything at all distasteful about profit.  Profit seeking behavior is as natural and inescapable in humans as breathing, and deserves no moral censure.  When placed in an open and voluntary institutional setting profit is an indicator of value created for others.  Still, a great many people find profit disturbing and wish to curb it.  If that is you, you have no practical choice but the full-fledged support of free-markets.

Competition exerts a relentless downward pressure on profit.  Open markets invite competition and power positions in the market are never secure.  It is for this reason that those in the temporary position of high profit-earners are most likely to be the ones lobbying for new rules and regulations.  They don’t want to compete, they want to monopolize.

The only true monopoly is government monopoly.  All other applications of the term are illusory and not to be feared.  Peter Thiel has famously advocated for monopoly, but he uses the word to represent a business that creates a product so unique it is all but impossible to be replicated by competitors for a long period of time.  That is not the same as the textbook description of monopoly with all of its attendant dangers.  The only true and dangerous form is government monopoly.  It eliminates not only present competition, but potential competition.

Unlike competition, monopoly exerts no downward pressure on profit.  Indeed, its sole purpose is to suppress competition so that profit can balloon, without any corresponding increase in value creation.  In this sense, the critique that, “There is too much profit in X industry”, or, “The profit motive corrupts Y good or service”, is correct.  In a truly monopolized industry, the profit motive is terrible.  Again, not because of the motive itself, which is ever-present in all humans, but because of the institutional setting which prevents all of the incentives to curb and corral profit motive towards value creation and away from plunder.

In monopolized industries the profit motive is very destructive.  Do not be fooled by tax designations or accounting terminology.  Governments and “non-profits” are also profit driven.  It is here where profit is the most dangerous and often deadly.  The justice and law enforcement industry is all-but entirely monopolized by the state.  Because it faces no real competition there is no downward pressure on profits.  It is therefore one of the most profit-driven enterprise imaginable, only it needn’t create value to profit.

An ever growing number of laws and regulations ensure that more and more people are guilty of crimes.  This is a highly profitable state of affairs for the justice system.  Law enforcement routinely harass and abuse and give out tickets for violations of no practical importance.  They find or plant illegal substances for the sole purpose of seizing assets of the accused.  Prosecutors, medical examiners, judges and law enforcement regularly lie, exaggerate, and falsely convict.  The profit motive is what drives them.  They have a monopoly on the administration of justice, so they invent whatever means they can of increasing the profitability of the enterprise.  The greater the number of crimes, the greater the receipts.  Indeed, the origin of government monopolized police and courts attest to the revenue-enhancing motive at their core.

We cannot wish away the profit motive, or hope to elect or appoint people who magically do not possess it. (How would they win an election or appointment without it?)  We can, however, realize the danger of granting monopoly status to any profit-seeking enterprise, including governments.  If it is profit that is driving the corruption and abuse among police, courts, and other sectors, the surest way to suppress the ability to generate more profit is to open it up to competition.

How to Keep the Young and Poor from Succeeding

Let’s face it. I’m not that young anymore. I’m also not poor anymore, and I live a comfortable middle-class American life. Most older, better-off middle-classers like me got where we are through the dynamic market process. The trouble is, now that we’re doing pretty well, that same dynamic process is a threat. I don’t want some young whippersnapper or poor immigrant to outwork me. What if they succeed faster than I do? What if they create more value than I can, and so outcompete me for a job?

Take heart, well-heeled middle-agers. I have a plan. My scheme for keeping younger and poorer people from succeeding—and possibly making us have to work harder to stay on top—is two-pronged: We’ve got to affect both supply and demand.

We need to restrict the supply of economic opportunities. We need to make those opportunities more costly and thus out of the reach of many young and poor. We also need to suppress the demand for jobs and entrepreneurial ventures. We need to make it more beneficial to stay out of the market than to participate in it.

Let’s get to some specifics.

Restrict the supply of opportunities

The biggest advantages young and poor people have over us are very low opportunity costs and a low-cost lifestyle. This means they don’t have to give up much to work a job, and they don’t need to earn much to cover their expenses. Because of these major advantages, they can work for very low wages, and thus become attractive for employers to hire and train. At low wages, they’ll always find work, and worse yet, they’ll be constantly learning and improving—adding to their stock of human capital.

The obvious solution is to make it illegal to work for low wages. Working for free is absolutely out of the question. If young and poor people could simply offer to work for little or no pay, they’d soon be gaining valuable skills and competing with us for jobs! Let’s cut that first rung off the ladder, lest they climb over us some day.

Young and inexperienced workers don’t have a lot of expertise. They make mistakes. Of course, if they’re allowed to participate in the trial-and-error process of the market, the incentives will soon drive them to develop expertise and be reliable suppliers of goods and services. That would be a travesty for us. We need to keep them unskilled and unreliable. The solution is to create a labyrinthine web of licenses and regulations that make it illegal for anyone but experts to sell goods or offer services. Since we’ve already banned working for low wages or apprenticing for free, it will be almost impossible for these novices to learn from a seasoned expert until they gain the necessary skill. We can make it even harder by adding lots of fees and costly training sessions to obtain licenses.

There needn’t be just one law making low wages illegal or just one licensing and regulatory regime. We need a wide variety of complex and ever-changing barriers. High taxes on productivity and profit, union dues and demands, work restrictions, rigid job categories, seniority bias, massive credential requirements, health and safety rules to cripple upstarts, consumer protection laws to hamper smaller producers, no access to capital or ability to stay in line with the law without costly lawyers and accountants, etc., etc., ad nauseam.

My recommendations are myriad, but they all boil down to a simple principle: Do anything we can to make economic opportunities more costly and rare. This reserves most of said opportunities for us.

Now for the second prong.

Reward non-participation

We don’t want to seem callous and cold toward those less comfortably situated. Indeed, we harbor no ill will toward the young and poor. We just don’t want them to compete with or catch us.

Since we care—and especially because we want people to believe that we care—we can’t be all “stick.” We need some “carrot,” too. It’s not enough to restrict the supply of opportunities, because some people will break the rules or work around them. We also need to suppress demand by offering some sweet incentives for young workers to stay unproductive and uncompetitive. We need to make non-participation in the market more attractive than participation.

First, I recommend a strict policy of forced education for the first few decades of life. We’ve already discussed making it illegal for the young to work or the poor to work for low wages. But we also need to make it mandatory that they do something else, and something that won’t make them more likely to compete with us now or later. We should create giant institutions where we send them all day to follow rules and do what they’re told without question. We don’t want them becoming innovative, or pursuing passions and interests that they might become experts in and thus supplant us in the market. They must only learn what the bureaucrats who run the system tell them to. (Oh, and the people who run the system should only be those who don’t really know much about competing in the market, because we wouldn’t want them passing on such knowledge.)

We can’t just make school mandatory. Many would still play hooky if it cost too much. We also need to hide the cost by paying for the whole thing through taxes and borrowing. We need to subsidize it so much that alternatives can’t compete. We need to weave a narrative about its glory so that no one wants to opt out.

But 18 years isn’t enough. We need to keep these young, hungry individuals out of our way as long as possible. I say we artificially lower the cost of otherwise very expensive degree programs and advanced studies. We can guarantee low-interest loans, throw a lot of grants and subsidies around, and always, always parrot powerful propaganda about the inestimable value of classroom learning. Let’s make the most attractive option—socially and economically—the one that keeps them from the commercial world as long as possible.

The longer we can make the education process, the better for us. Defer, defer, defer the time at which young people start entering the productive sector. The more loans they take on in the process, the better. Maybe they’ll even get married, get a nice house (we can incentivize the buying of expensive consumer goods via debt as well!), and have kids. All of these things are good because they take away one of the major advantages the young have in the workforce—their low cost of living and hence ability to bid for lower starting wages. We want them saddled with so much debt that they have to earn high wages to get by, and thus have to compete with workers who are a lot more experienced for those higher wage jobs. We need them coming out of college looking for salaries that don’t comport with their skill levels. This increases the odds that older workers like us will win.

We’ll need to address those too old or too poor for school as well. We need basic income guarantees, food stamps, and all manner of welfare to cover the costs of low-income life such that no part-time entry-level job could pay quite as much. Again, we need to make not working worth more than working.

The best part

Here’s the best part: By the time these young and poor find themselves unable to compete, with costly lifestyles and loans to maintain and little skill or experience, they’ll be older. They’ll join our ranks. They’ll lobby for even harsher restrictions on those even less experienced and less well-off than they are. They’ll demand to get the low-skill jobs they’re qualified for, but demand the pay be raised to high-skill wages. They’ll make the list of degrees and credentials they’ve accumulated the new barrier to entry to artificially raise their market value. They’ll help us perpetuate the very policies that caused their plight!

As with the first prong, these are but a few examples. Ideally a massive and shifting bundle of incentives to not enter the market as a producer can be put together: education mandates and subsidies, tax incentives to spend rather than save and to purchase education rather than other goods or business tools, housing and healthcare as long as you don’t work, and rewards for any activity that makes one less likely to try to compete with us in the market.

These policies will subtly turn the attention of nearly everyone away from value creation, innovation, and serving customers—all of which might threaten our dormancy. It will turn everyone’s attention and energy to fighting over the details of these policies and programs, to who gets which slice of the artificially limited pie and at whose expense. Some of us can really take advantage by running for political office and dividing up the warring interests we’ve created by promising them more restrictions and subsidies.

Above all, with both prongs of this strategy, we need a narrative that calls these policies noble, compassionate, and wise. We need them to be perceived as humanitarian aid to the young and poor, not as ways to keep them from succeeding. We need to make these programs universal values in themselves—regardless of the outcomes they produce. Who could oppose better wages? Who could oppose more education? Who could oppose more loans for homes or college? Who could oppose work rules and consumer safety regulations? Middle-aged, middle-class people certainly won’t, if we know what’s good for us.

We cannot abide an America in which plucky newcomers outperform us at every turn. Join me in securing our future.

Originally published in The Freeman.

Monopoly Is Everywhere; Monopoly Is Impossible

Concern over the power of “monopoly” is often given as justification for government intervention in the economy. It shouldn’t be. There is no logically consistent definition of monopoly that warrants interference in market. Furthermore, government efforts to disperse market power tend rather to concentrate it, particularly among those best at playing politics, rather than helping consumers.

What is this monopoly thing that is so feared?

Monopoly is often described as two-pronged: complete control over a unique resource, and the ability to be a “price maker”. (“Price maker” means to set the price you want to sell at rather than responding to market conditions and being a “price taker”). Once you define monopoly, you realize what a meaningless concept it is. One of the two prongs is inevitable; the other is impossible.

If monopoly means control over a unique resource that no competitors can sell, everything is a monopoly. Every single product is unique. I have a complete monopoly on the product “public appearances by Isaac Morehouse”. No one else can offer it. What kind of power does this give me?

Sadly, I cannot charge whatever I want for public appearances simply because I have a monopoly. I’ve tried, and so far no one has been willing to pay $50,000 for this unique good over which I have sole control. (Email me if you’re interested.) In other words, I (and everyone and everything else) satisfy the first prong of the definition of monopoly, but that doesn’t help me with the second prong. I’m not a price maker.

In fact, no one is a price maker. OK, I suppose anyone can make any price they want to, but in order to actually sell something – no matter how valuable – they’re constrained. Think of a product that you need badly and can’t really live modern life without. How about gasoline. Why doesn’t Exxon start charging $20, $100, $1 million per gallon at the pump? What would happen?

Life would change pretty dramatically for some people, maybe just at the margin for others, but almost no one would pay that price. Even if all the oil in the world were controlled by one company (a scenario almost impossible to imagine absent government intervention), they still would not be a price maker.

Even complete control over a resource that people really need does not a price maker make. The firm faces substitute goods as a very real form of competition. McDonald’s burgers are not competing only against Wendy’s burgers. They are competing against Subway’s subs, mom’s PB&J, or going without lunch altogether. Firms are held in check not just by substitute goods, but by potential competition. If gas is too costly, new or old technologies become more profitable. Bicycles and solar cars both take a chunk of consumers.

So the first prong of monopoly, control over a unique resource, is everywhere. The other prong, the ability to be a price-maker, is impossible. In reality, firms and consumers are constantly moving up and down to varying degrees on being price takers and makers. There is no complete maker or taker. The market is a process of discovery, and if we want the best outcomes, we need to worry about keeping the process free and unencumbered, rather than the particular distribution of resources among firms at any given snapshot in time.

Efforts to fight the myth of monopoly and make the market look more like make-believe “perfect competition” make things worse. They often result in the one kind of monopoly that is dangerous; the one maintained by force. Forced monopoly, or forced price floors or ceilings, or the breakup of firms or the prevention of mergers, or any other intervention creates artificial markets. They shift entrepreneurial activity away from innovation to serve consumers and towards efforts to ensure regulation benefits me and harms my competitors.

We’re all monopolists, yet none of us are price makers. Stop worrying about it.