SOPA, Incentives and Efficiency

Paul H. Rubin —  22 January 2012

The fight over SOPA is about the ownership of intellectual property.  Rights to intellectual property have two effects.  The benefits of intellectual property are the incentives for creation.  The costs are that after some work is created any price above marginal cost (which is often zero for digital property) will discourage valuable use.

Every piece of intellectual property than now exists was created with the incentives that were in place when it was created.  No change in intellectual property rights can have any effect on existing works.  Therefore, any change in property rights should be entirely prospective.  That is, any change in property rights should effect only works copyrighted after the passage of the legislation.

Of course, there are huge rents associated with the ownership of existing rights, and fights over these rents will  continue.  But we should recognize that these fights are over rents — payments which have no incentive effects.  If our goal is efficiency, we should stop wasting resources on these fights and start from now.

 

Paul H. Rubin

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PAUL H. RUBIN is Samuel Candler Dobbs Professor of Economics at Emory University in Atlanta and formerly editor in chief of Managerial and Decision Economics. He blogs at Truth on the Market. He was President of the Southern Economic Association in 2013. He is a Fellow of the Public Choice Society and is associated with the Technology Policy Institute, the American Enterprise Institute, and the Independent Institute. Dr. Rubin has been a Senior Economist at President Reagan's Council of Economic Advisers, Chief Economist at the U.S. Consumer Product Safety Commission, Director of Advertising Economics at the Federal Trade Commission, and vice-president of Glassman-Oliver Economic Consultants, Inc., a litigation consulting firm in Washington. He has taught economics at the University of Georgia, City University of New York, VPI, and George Washington University Law School. Dr. Rubin has written or edited eleven books, and published over two hundred and fifty articles and chapters on economics, law, regulation, and evolution in journals including the American Economic Review, Journal of Political Economy, Quarterly Journal of Economics, Journal of Legal Studies, and the Journal of Law and Economics, and he frequently contributes to the Wall Street Journal and other leading newspapers. His work has been cited in the professional literature over 8000 times. Books include Managing Business Transactions, Free Press, 1990, Tort Reform by Contract, AEI, 1993, Privacy and the Commercial Use of Personal Information, Kluwer, 2001, (with Thomas Lenard), Darwinian Politics: The Evolutionary Origin of Freedom, Rutgers University Press, 2002, and Economics, Law and Individual Rights, Routledge, 2008 (edited, with Hugo Mialon). He has consulted widely on litigation related matters and has been an adviser to the Congressional Budget Office on tort reform. He has addressed numerous business, professional, policy, government and academic audiences. Dr. Rubin received his B.A. from the University of Cincinnati in 1963 and his Ph.D. from Purdue University in 1970.

5 responses to SOPA, Incentives and Efficiency

  1. 

    Since you asked me to reply, I will do so quickly. In my post I try to distinguish between costs and benefits of intellectual property. As you point out, the benefits are that works are created; I do not deny that. I merely point out that there are costs as well. This is standard analysis. Your final point, about transactions costs if different pieces of property have different rights associated with them, is valid and something certainly worth considering if my proposal should be taken seriously.

  2. 
    Thomas D Sydnor II 23 January 2012 at 9:15 pm

    Professor Rubin,

    I would ask you to clarify what point you intended to communicate, in the hope that what you thought you were saying will turn out to be less infantile than what you actually seem to have said.

    You say, “The fight over SOPA is about the ownership of intellectual property.” Wrong: I have read all versions of all proposed rogue-websites bills repeatedly. So far as I can tell, none would have affected the ownership of any trademark, copyright, or any trade good or digital file embodying either of these rights. Consequently, I presume that your reference to “the ownership of intellectual property,” was just intellectually sloppy: You must have meant to say “The fight over SOPA is about the how we enforce intellectual property rights.” I will explain why that distinction matters near the end of this comment.

    Next, you say, “The costs [of copyrights] are that after some work is created any price above marginal cost (which is often zero for digital property) will discourage valuable use.” Copyrights are intended to encourage the private production of expressive works by encouraging commercial investment in the production and promotion of works likely to appeal to private audiences. But I would be the first to concede that copyrights would seem horribly inefficient were we to indulge the essentially masturbatory fantasy of comparing their real-world efficacy to the glories of an imagined Neverland in which we somehow manage to encourage commercial investment in the production of expressive works even though the maximum possible return on any such investment would be negative–as it would be if those who make the risky, long term investments of human and financial capital required to create new expressive works were required to sell them at the near-zero marginal cost of making more copies of those few works that turn out to be popular..

    For example, suppose a learned professor of economics were to pretend that Santa and his elves were real, and that Santa would just give us for free at Christmas whatever quantities we might want of any and all socially valuable resources (like new expressive works) that might otherwise be costly and risky for humans to produce. A professor comparing this Santa-based system of production against any real-world market economy could then honestly claim that—as compared to Santa—the “deadweight loss” associated with any form of capitalist production (like one predicated on copyrights or any other private exclusive rights) would be equal to the total of all above-zero prices that capitalist consumers paid to capitalist, human producers of expressive works or other socially valuable resource that are risky and costly for non-elven humans to create. Indeed, that is the “deadweight loss” of a market economy—if you compare it to a Santa-based system of production. Yet you seem to be making a disturbingly similar comparison when you say, “The costs [of copyrights] are that after some work is created any price above marginal cost (which is often zero for digital property) will discourage valuable use.”

    And in case I have failed to make my point, Professor Rubin, let me note that your learned observation would be just as valid (or invalid) if applied to the market production of socially valuable resources other than copyrighted works. For example, the CPUs sold by Intel and AMD are kinda like copyrighted expressive works in that 99.99% of the costs and risks associated with producing them are incurred in the creation of the first good copy—after that, the marginal cost of producing more copies of those CPUs—while not zero—are pretty negligible. Yet I would hope that we could agree that it would be silly to argue that the “deadweight loss” of CPUs produced by Intel thus equals [(the average total cost that consumers willingly paid for a given Intel CPU) * (the number of such CPUs purchased)] – (the negligible marginal cost of producing all of the copies of that CPU other than the first one).
    So please tell me why the seemingly similar argument that you appear to be making as to copyrighted works is somehow less absurd.

    No doubt you intended to make some different and less infantile point about expressive works, But if so, then I fear that it has evaded me. No doubt the fault was mine, but do be so kind as to enlighten me as to what point you actually intended to make
    .
    Finally, you claim that “any change in property rights should effect [sic] only works copyrighted after the passage of the legislation.” I hate to be the bearer of bad news, but this is the year 2012, and you are still regurgitating the quid pro quo argument about copyrights that was unanimously rejected by every U.S. Supreme Court Justice a decade ago in the 2002 case Eldred v. Ashcroft. Let’s recall why this shopworn argument was unanimously rejected so long ago.

    For three reasons, it was rejected because it is the sort of laughably impractical nonsense that appeals only to nutty professors. First, it is inconsistent with the way that we treat private exclusive rights in almost all other areas of law. Second, like our usual practices, it deters arbitrage—it ensures that no one has any real incentive to rush or delay publication of a work just because they think that copyrights may expand or contract in the future. Third, your proposed quid pro quo rule is utterly impractical. It would convert tradable copyrights into snowflakes—each one different, each one forever crystalizing the unique (and potentially non-optimal) combination of rights, remedies, and limitations that just happened to exist at the moment of a given work’s creation. It is possible to imagine more effective ways to deter trade in expressive works, but only barely.

    For example, online service providers would be truly screwed in the snow-flakey world you envision. Oh, sure, they could be eligible for the safe-harbor liability limitations enacted in 1998 and codified in Section 512 of the Copyright Act—but only as to works created AFTER 1998 (when the DMCA was enacted). But works created during or before 1997 would not be subject to the then-nonexistent Section 512 liability limitations. The same would go for works create before 1984—their owners would not be subject to the still-mysterious “capacity-for-substantial-noninfringing-use” defense first created in the 5-4 majority opinion in the Supreme Court’s 1984 Sony decision.
    These and many other equally flakey results are all avoided if we follow our usual practices regarding legally enforceable exclusive rights granted to private producers of any sort of socially valuable resource: All such rights are presumptively granted subject to the understanding that while they cannot be taken without compensation, the precise balance of rights, remedies and limitations granted is subject to such legislative changes as may be deemed to be more socially optimal, and thus enacted, while those private rights endure.

    –Tom Sydnor

  3. 

    If I know that the rents which the government provides as an incentive to create IP are often taken away after the creation of that IP, that reduces the expected value of rents ex ante and thus the incentive for new IP creation.

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