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Against Monopoly

defending the right to innovate

Monopoly corrupts. Absolute monopoly corrupts absolutely.





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Life, liberty and the pursuit of patents

Via Matt Yglesias, the following poster was what greeted delegates to the Republican convention at the Minneapolis airport this week:


Comments

I'm no longer sure in what way the group called AT&T is different from a so-called "government agency". I bet only a handful of people on the globe know the full extent of the relationship between this "company" and the thieves masquerading as "the state".

How are patents compatible with liberty, by the way?

Alex:

Your question: How are patents compatible with liberty, by the way?

I guess you may as well ask, how is home ownership compatible with liberty? How is ownership of a piece of land compatible with liberty? How are laws against nudity compatible with liberty? To the extent that liberty is being able to do what you want so long as it does not harm someone else or interfere with someone else's right to do what they want, then none of this is compatible with that extreme form of liberty.

However, remember that patents are a bargain that government makes with a company. In exchange for revealing the secrets of how to make something, a company is able to restrict someone from making, using or selling their mechanism for a limited period of time.

What you need to remember is that before patents existed, it was fairly easy to keep some processes and techniques from being copied. Thus, certain industries were invented and then remained stagnant for decades or even centuries. Governments recognized that such monopolies on technology (oh my goodness, you mean there were monopolies on technology before patents existed, and those monopolies were considered a bigger problem than patents? - YES!) were not in the best interest of society, so patents were developed as a way to expose technology to a broader audience faster, so that the technology could be developed versus stagnate.

So, patents are a compromise between liberties. If a company is able to slow the dissemination of technology by keeping it secret, which in some industries is relatively easy to do, then that secrecy is anti-liberty. The people in this web site seem to me to be anti-intellectual property, so for them the answer is clear, patents, trademarks and copyrights are anti-liberty. However, as with any system, there are always pros and cons.

I think that in an ideal world, people would respect another person's property and would not steal it, and thus intellectual property would be unnecessary. However, if certain people had their way (switching to copyrights), exactly one copy of a movie would be sold, and the rest would be free. You can imagine how quickly the movie industry would be eliminated, along with the recording industry and virtually all forms of print. Live performances would return as the primary form of entertainment. It would likely be one of the biggest economic upheavals of the last 50 years. Of course, there are actors, recording artists, the tens of thousands of people in the film industry, retailers, etc. that rely on copyrights who would be out of work virtually immediately. While it would be interesting from an academic point of view, I do not look for that to happen any time soon. Also, another poster was entirely correct that blockbuster movies such as "Batman Begins" and "Titanic" would never be produced again - they would never pay for themselves.

Liberty is frequently a two-edged sword. Absolute liberty provides disincentives to do certain things, and makes secrecy an important tool and weapon. Abolishing intellectual property will just make us protect information in different and probably better ways that will once again slow the dissemination of knowledge and slow the progress of technology, though those on this web site do not believe that will happen. I think companies are very creative, and security technology would explode with the elimination of intellectual property - novel new techniques to prevent the copying of digital information would pass through generations within two or three years, and I think we would finally figure out how to make copying of digital information difficult or impossible; the only reason we have yet to do so is that it is cheaper to let things go as they have been.

What you need to remember is that before patents existed, it was fairly easy to keep some processes and techniques from being copied. Thus, certain industries were invented and then remained stagnant for decades or even centuries. Governments recognized that such monopolies on technology (oh my goodness, you mean there were monopolies on technology before patents existed, and those monopolies were considered a bigger problem than patents? - YES!) were not in the best interest of society, so patents were developed as a way to expose technology to a broader audience faster, so that the technology could be developed versus stagnate.

To quote what my old monetary theory prof wrote on a paper of mine, sophistry. Patents originated as monopoly grants by the State to suppliers of certain things, mainly commodities such as salt. There is no such thing as a private monopoly of a technology or anything else on the free market, as Rothbard pointed out in Man, Economy, and State. All monopolies emanate from grants by the State to privileged monopolists. They were not created to combat monopolies--on the contrary, they were the quintessential form of monopolies. Patents impede innovation, as a perusal of economic history demonstrates. You persist in thinking we need Big Daddy Government to do what competition and the free market does naturally, namely promote innovation. Patents are an abrigment of liberty, not a "compromise between liberties," whatever that is. Trade secrecy is consistent with liberty, contrary to your claim that it isn't. If I have a secret, since when does my keeping it secret violate anyone's rights? What, praytell, is being violated. If Smith hits Jones with a baseball bat other than in self-defense, everyone would recognize it as a crime. But if Smith knows a secret Jones doesn't, how is he violating Jones' rights or liberty? Since when does Jones have a right to force Smith to reveal it to him? Does he have a right to hit him with a bat if he doesn't reveal the secret? If not, why not?

Be careful Bill. 'Trade Secrecy' tends to be misconstrued as sanction for a corporation (or their big brother, the state) to hit their employees (and ex-employees) with a bat if they dare reveal any secrets they were made privy to during their employment.

Privacy (and trade secrecy for corporations) is fine if it is a protection against unauthorised intrusion or violation (IP theft), but not if it is a means of controlling dissemination by authorised recipients. I may tell you a secret, but I cannot require you to surrender your right to further communicate it - and you couldn't even if you were willing to.

There's nothing wrong with a firm requiring non-disclosure of trade secrets and certain information as a condition of employment. Ex-employees is another matter though.
Bill:

In the context of facts, I am not sure how sophistry exists. In fact, some companies have done an outstanding job of maintaining a monopoly on technology in a free market. History has numerous examples going back to the beginning of recorded time. Even today there are monopolies that exist not because of patents or governments, but because certain companies are in possession of information that no other company has, and as long as the employees of those companies continue to maintain their silence (for which ample financial incentives are provided), those companies will keep their secrets. Rothbard can say what he wants, but history has proven and continues to prove that secrecy is the best way to protect some information, and that is still a chosen methodology. I continue to maintain that technology is disseminated to the world at large faster because patents exist. However, I admit that my assertion is a theory based on pre-patent scenarios. Conversely, your assertion that patents do not enhance dissemination of technology is equally a theory; I have yet to see the proof that elimination of patents would improve free trade. I am certainly waiting for a proof that involves no sophistry.

You also state that "Patents originated as monopoly grants by the State to suppliers of certain things, mainly commodities such as salt." I would like to see your proof of that assertion. According to Charles Anthon, "A Classical Dictionary: Containing An Account Of The Principal Proper Names Mentioned in Ancient Authors, And Intended To Elucidate All The Important Points Connected With The Geography, History, Biography, Mythology, And Fine Arts Of The Greeks And Romans Together With An Account Of Coins, Weights, And Measures, With Tabular Values Of The Same," Harper & Brothers, 1841, patents were granted by the Greek city of Sybaris to "encourage new refinements in luxury." The profits of these new refinements were provided to the inventor for one year after granting. Let me check here. Was the inventor a supplier of salt or other commodities? Apparently not. I have a fact. What is yours?

Then you say that "All monopolies emanate from grants by the State to privileged monopolists." Excuse me? Where is your fact here? The Coca Cola Company has a monopoly on Coke, not because it was granted by the state, but because Coke has managed to keep the formula secret for decades. I look forward to your counter fact here.

Next you state that "All monopolies emanate from grants by the State to privileged monopolists." I guess that depends on your definition of "privileged monopolists." The USPTO is oriented to help small inventors, many of whom are poor and do not have the resources to hire an agent or lawyer, to obtain patents. I guess if that is your definition of "privileged monopolists," then you and I have a different definition of "privileged."

Then you assert that "Patents impede innovation, as a perusal of economic history demonstrates." Really? I would love to see your proof of your statement. I have offered examples several times of how technology was impeded from entering the public domain several times in a variety of posts. Some impediments were state oriented. Others were the result of company's efforts. Regardless, many of these efforts were quite successful. Patents provided inventive to companies to stop keeping technology secret. Now, where is your factual counter information?

Next you say "You persist in thinking we need Big Daddy Government to do what competition and the free market does naturally, namely promote innovation." *Sigh* As I stated previously, we have seen situations where certain companies or governments were able to put a stranglehold on competition and the free market by constraining the dissemination of technology. Free market and competition can always be thwarted with the proper technology and resources. If you do not believe that, then I guess you have little knowledge about Microsoft.

Then you go on to assert that "Patents are an abrigment [sic] of liberty, not a 'compromise between liberties.'" I keep asking you to prove that patents are an abridgement of freedom, and thus far I have seen nothing from you, only sophistry and theory.

As for a "compromise between liberties," authors with far more knowledge and capability than I have discoursed on this subject with greater clarity than I ever could. However, I will take a stab at it.

There are people who believe that knowledge should be accessible to all for the greater good. However, it is relatively easy to protect some knowledge, and even knowledge that is more difficult to protect can be protected for a while. Thus, some people believe that keeping knowledge from moving into the public domain limits the natural right of people to know what is to be known. On the other hand, some people also believe that in addition to having access to all knowledge, there should be no limit on what people do with that knowledge. The question that is faced then is how to gain the best of both? How do we get "secret" information into the public domain as fast as possible so that it is available for anyone to use? With patents, virtually every government of every country has granted a limited right for an inventor to restrict make, use or sale of his invention for a limited period of time, in exchange for the inventor telling the world about his technology. Of course, some people want to have their cake and eat it too, but that is counter to reality.

Incidentally, the entire purpose of the USPTO is dissemination of technology (who woulda thunk?). They do not defend patents, they do not comment on the commercial value of patents, they have nothing to do with the actual scope of a patent, which is decided in the market place and in the courts.

Moving on, you say "You persist in thinking we need Big Daddy Government to do what competition and the free market does naturally, namely promote innovation." Oh my, you put words in my mouth. If I said this, then I take it back. We do not need "Big Daddy Government," whatever that means, to promote innovation. However, I disagree that competition and free market "promote innovation." Competition by its very nature is anti-innovation, and prefers the status quo. It is cheaper to make what you already make than to make something new. The longer you can keep making the same thing, the more money you make (look at the product life cycle curve and note that at maturity and decline companies are doing everything possible to extend the life of the; those efforts frequently have little to do with innovation). Everyone making a certain product keeps hoping that the next guy will keep making the same thing as long as possible so that the profits will keep rolling in.

As for the so-called "free market," I would love to see a "free market," but you and I both know that the artificial constraints place on "free markets," of which copyrights, patents and trademarks are but a small part, make "free markets" virtually impossible.

Lastly, your comment about my comment on trade secrets. You said "Trade secrecy is consistent with liberty, contrary to your claim that it isn't." Ah, but that is your comment regarding liberty. Some people believe that any information that is not personal information should be placed in the public domain. Thus, any technological secret is a violation of the liberty we all have as a right. I do not believe this. Apparently you do not. However, some people do. So, if you have a right to your beliefs, they have a right to theirs. I will not belabor the point. Suffice it to say that there are a spectrum of beliefs, and yours is not the most extreme.

I agree Bill.
@Lonnie E. Holder, you said...

"If a company is able to slow the dissemination of technology by keeping it secret, which in some industries is relatively easy to do, then that secrecy is anti-liberty."

That seems like nonsense to me.

A person has their Liberty if no other person is using coercion against them.

(And note, because some people's definition of "coercion" varies... I'm speaking of physical coercion here.)

It sounds like you may be using the word "liberty" as a metaphor. While I wouldn't be so bold as to speak for others in this thread, I (personally) don't care about metaphorical liberty... I care about actual liberty.

-- Charles Iliya Krempeaux
http://changelog.ca/

Charles:

You have my point exactly. My comment was part of a position statement and not my personal belief. I do not believe that patents, trademarks, copyrights and trade secrets are anti-liberty (or anti-freedom, as some describe it). However, it appears to me that other people on this site do believe they are.

I agree somewhat that a person has their liberty if "if no other person is using coercion against them." However, "coercion" is a slippery word. What is your definition of "coercion." Is following traffic rules coercion? What about rules against loud noises? If someone willingly enters an agreement that says they will keep information confidential during and after employment, and there was no coercion used (fundamentally the only coercion is that they take the job - though most if not all manufacturinmg and design companies require their employees to sign confidentiality agreements - if you believe that is coercion, it is time to find another career).

I too care about real liberty Charles. Real liberty begins with my job. I have my job because of intellectual property. I would not have my job if intellectual property did not exist. I would probably end up working at McDonalds - if they even existed.

After that, liberty is being able to do what I want to do, so long as I do not interfere with the rights of others. Stealing someone's book or song is a violation of that person's liberty. However, some people think it is okay to steal a song, movie or book. I have no idea how someone can think that this interference with the rights of an author or movie maker is okay; I am still trying to figure out how such criminal theft can be acceptable.

Lonnie, just to see quite where on the spectrum of liberty you position yourself, if I purchase a CD and make a copy of a track for my iPod, would you class that as 'stealing a song'?
Crosbie:

Simple answer: How can copies for your personal use be illegal? You purchased the CD, you are making a copy for your own personal, non-commercial use.

So commercial distribution of musics is illegal without permission qualify as stealing?

Strange.

In response to Lonnie's reply:

Thanks for the thoughtful post. I wanted to ask about a few things:

"If a company is able to slow the dissemination of technology by keeping it secret, which in some industries is relatively easy to do, then that secrecy is anti-liberty."

It seems to me like liberty and secrecy are being mixed up here. The concept of liberty lies strictly in the ability to freely choose what to do, not on whether the outcome is determined to be better or worse for people at large. If the company in question chose to keep their knowledge a secret, then the pro-liberty thing to do would be to let them sit on that secret.

However, remember that patents are a bargain that government makes with a company.
How did "governments" acquire the legitimate ability to start making these types of bargains? (If your answer is "The Constitution", then I ask: by what moral basis did the "framers" institute a legal code that pertains to all future generations? ... can't a man only speak for himself?) Also, by what moral provision does the state pay for their end of this "bargain" with everybody else's freedom to create things? (even if the ideas are not necessarily original)

I think that in an ideal world, people would respect another person's property and would not steal it, and thus intellectual property would be unnecessary

"Piracy is Not Theft - A Handy Guide"

"I think companies are very creative, and security technology would explode with the elimination of intellectual property - novel new techniques to prevent the copying of digital information would pass through generations within two or three years, and I think we would finally figure out how to make copying of digital information difficult or impossible.

If we're talking about any audio or video that is watchable on a home computer system, there will always be the possibility of exploiting "the analog hole". In essence, if it's out there... it can and will be copied directly. If it reaches a person's eyes or ears, there is a way to duplicate it!

(From a later post...) I keep asking you to prove that patents are an abridgement of freedom, and thus far I have seen nothing from you, only sophistry and theory.
Proofs are always theoretical. If examples were relied upon, it would be more like an anecdote than a proof. This is why "pros and cons" can never be used to base a reasoned argument on. What's funny is that, in this particular case, a proof isn't even really needed. Patents are an abridgment of freedom by definition. The only thing that makes a patent a patent is the gun sitting next to the fresh ink on the "bargain" between the company and the state. Clearly, when someone walks Product X into the patent office, their aim is to reduce the freedom of everyone else in society from also making Product X. If that reduction of freedom weren't on the table, the inventor would have clearly not even bothered with the patent process.

If you want to further argue that he would have just thrown up his hands in the air and not bothered with the invention in the first place, fine. Maybe yes, maybe no. However, one must at least admit that the patent process involves a major, inescapable decrease in freedom for everybody but a select few with political connections and enough money to actually afford the attention of the IP bureaucrats.

In fact, some companies have done an outstanding job of maintaining a monopoly on technology in a free market. History has numerous examples going back to the beginning of recorded time. Even today there are monopolies that exist not because of patents or governments, but because certain companies are in possession of information that no other company has, and as long as the employees of those companies continue to maintain their silence (for which ample financial incentives are provided), those companies will keep their secrets.

Can you name one?

As for the origin of patents, I mean in the modern sense, as per the Wikipedia article, inadequate as it is on the history of patents. Intellectual monoplies existed in Greece and Rome, but they didn't amount to much. One was granted to a group of chefs for culinary delights. Some patent. Adam D. Moore points out in his book Intellectual Property and Information Control that some of these monopolies were franchises and favors and that there was no actual law governing IP in Rome. I doubt Greek law had much to say about patents either. So the law of IP didn't really start until the 15th century. Moore dates the "first lasting patent institution of intellectual property protection" to the Venetian Republic of 1474. Most of the early patents in England were in fact for the production of commodities. This was also true in the U.S. to some extent.

Then you say that "All monopolies emanate from grants by the State to privileged monopolists." Excuse me? Where is your fact here? The Coca Cola Company has a monopoly on Coke, not because it was granted by the state, but because Coke has managed to keep the formula secret for decades. I look forward to your counter fact here.

Coca-Cola has a monopoly on Coke the way Tiger Woods has a monopoly on Tiger Woods' services. True but economically irrelevant. Just as Tiger has to compete against dozens of other golfers, Coke has to compete against Pepsi, Jolt and who knows how many other brands. The relevant economic market here is soft drinks, which is much bigger than Coca-Cola. And traditional soft drinks have to compete in restaurants and super market shelves against not just other colas, but energy drinks (Hansen Natural), bottled water, beer, etc. Competition rightly understood is bigger and more dynamic that you allow. Coca-Cola recognized this when it bought a bottled water company. As the Autrians have long pointed out, arbitrarily narrowing the scope of something the way you did in the case of Coke rules out competition by definition. But competition is dynamic; firms of all sorts compete for consumer demand. Try telling Coke's marketing managers that--game over--and they don't have to compete in the Cola wars any more, and they'll laugh you out of the conference room. Btw, Rothbard is very good on this point in his chapter on monopoly in Man, Economy, and State.

However, I disagree that competition and free market "promote innovation." Competition by its very nature is anti-innovation, and prefers the status quo. It is cheaper to make what you already make than to make something new. The longer you can keep making the same thing, the more money you make (look at the product life cycle curve and note that at maturity and decline companies are doing everything possible to extend the life of the; those efforts frequently have little to do with innovation). Everyone making a certain product keeps hoping that the next guy will keep making the same thing as long as possible so that the profits will keep rolling in.

On the contrary, innovation can only be pro-competition and emanate from the market. Competition is anti-status quo. Do you think the creation of the internet and the rise of Amazon and other online retailers allowed the old, staid bricks and mortar booksellers, etc. to rest on their laurels? I mean the ones that didn't go bankrupt.

Wow, I wake up this morning to two excellent posts, which I will have to deal with separately.

Alex:

Re secrecy vs. liberty: I agree. Some of the comments I was responding to seemed to imply that companies that kept things from the public were violating the rights of the public as a matter of liberty. That notion seems like pure nonsense to me, for the very reason you pointed out. However, there are a spectrum of beliefs, and some people equate secrecy with a host of negative concepts.

Re "governments" acquiring legitimate ability to start making these types of bargains: I would never say the consitution because patents pre-date the contitution by decades, if not millenia. From a purely philosophical viewpoint, you are correct that a person can only speak for himself. However, because standards of conduct vary, society has deemed it necessary to establish a code of conduct applicable to all people, regardless of the specific beliefs of an indidividual. Bottom line: you have to live within the framework of a society's rules, like them or not, or be deemed a criminal. Of course, you can always try to change the laws, though that can be very difficult.

Your question is a much broader question than just about intellectual property, as you noted. The moral basis or legitimacy of the writers of our constitution gained their right because each of the original 13 states ratified the constitution as being the framework that held the 13 states together. I know you can go more finite and ask whether all members of each state agreed (they did not, of course), and whether a majority has the right to impose on the minority (a question that continues to be debated), or whether the largest minority has to right to impose on smaller minorities (again, I am unable to address this question because I do not know the answer - and our society and laws have debated and continue to debate the answer). For better or worse, the governments that we elect have said that we will follow the laws they have established or pay the consequences. Of course, if enough people object to a law, it is always possible to get the law overturned.

You also asked the question "By what moral provision does the state pay for their end of this "bargain" with everybody else's freedom to create things?

I am not sure I understand the question. If I create the first pencil, and patent it, how does that abridge someone else's right to create paper? If your question is, how can I prevent someone else from creating another pencil, then my question is: Did they create the pencil on their own, or steal (or pirate) the idea? If the idea was truly independent, well, congratulations to them, but the framework of laws in the society into which they were born grants to the first inventor of a mechanism who patents that mechanism the right to limit the make, use or sale of that mechanism for 20 years from the date of filing of the invention.

I must point out, however, that the vast majority of inventions are practiced only after someone else sees the invention, either in a patent or as a product. Are there cases where independent inventors came up with the same invention at approximately the same time? Yes. How do I sort that out? I do not. I would be terrible at it.

Incidentally, most governments of the world (with a few exceptions, the United States being one), use the "first to file" system, rather than the first to invent. I think the U.S. will eventually go to a "first to file" system. Now, imagine this: Someone invents a device, who shows it to a friend. The first friend describes the device to a second friend, who quickly realizes that he could "invent" (hahaha) the same device and then runs to the patent office and files for a patent. The original inventor files the next day. Under first to file, the guy who filed first, who probably never had an original idea in his life, gets the patent, and the original inventor is left out in the cold.

Re "piracy is not theft": You say potato, I say po-tah-to. You have someone's creative output that you did not obtain by means that a particular society has deemed acceptable - regardless of whether you agree with society. Many people would call that stealing. You can call it corn flakes for all I care. The end result is the same.

Re analog copying: Ah, the challenges or security! Yes, you are correct. The video or audio may be substantially degraded, but it can be done. You did get me thinking about analog copying. I think there are ways to defeat some kinds of analog copying by messing with sync rates and doing some other things. However, regardless of the technique you use to prevent copying, there will always be a way around it. That does not prevent companies from continually trying to keep people from copying - and they will. Indeed, whatever option is cheapest to prevent stealing (or piracy), they will use.

Re patents and freedom: Yes, I agree with your statements that patents involve a reduction in freedom for everyone else. BUT, how real is that reduction?

Scenario:

Society is muddling along with snail mail carried by coaches. Everyone is free to use coach carried mail, limited only by their ability to pay for paper, a writing implement and stamps.

One day, a person invents the telegraph, and patents it. The first telegraph is installed between city A and city B. Communication between city A and city B is more reliable and faster, though the cost is substantially higher than snail mail. Everyone else is prohibited from installing telegraphs for a period of 20 years.

Question: Has freedom been increased, decreased, or remained the same?

(1) No one else can produce a telegraph, so freedom has been decreased. WHAT? Until the inventor made the telegraph, no one else could have used it or copied it. So how could freedom be decreased? Indeed, all previously existing freedoms have remained the same, it is just the new development that is affected, and since it is new, you are taking nothing away that did not previously exist.

(2) The telegraph presents a new option for communication, which improves the ability to communicate, assuming you can pay for that ability. So, the new invention gives society a new choice, and choice - even if you have to pay for it and as long as it is open to all who can pay for it - expands freedoms, so freedom is increased.

(3) Since the telegraph is just another form of communication, and since all it changes is speed, and since most people are unable to afford the telegraph, society is neither enhanced or degraded by the new invention, so freedom is unchanged.

Re giving up: There have been inventors who have become bitter over patent disputes. Some gave up, others moved on. Tesla became quite bitter in his patent disputes with Edison. History proved Tesla right, and Edison finally agreed that Tesla was right, but in the meantime we spent years developing DC because Edison was the recognized expert and Tesla was a relative nobody at the time. Tesla did keep on inventing, but I think the disputes with Edison kept him from realizing his full potential.

Re patent process: "Political connections"? How does a political connection help you get a patent? The process is very specific and goes through the USPTO. Political connections have nothing to do with a patent.

"Afford the attention of IP bureaucrats": An inventor can file his own patent. I am not sure of the precise cost, but filing and issue fees would be under $1,500 for an individual inventor, comparable to the cost of cable tv and internet for a year. Hiring a patent agent or patent attorney costs more, but an inventor should be able to find an agent or attorney to prepare an application for a few thousand dollars. Again, not cheap, but not exorbitant.

Bill:

Excellent post.

Re keeping things secret:

Coke has maintained their formula a secret for decades.

KFC's recipe for fried chicken (the famous 11 herbs and spices). Various formulas for chocolate have been maintained secret by various companies, including Hershey's, Nestle and Swiss companies, for decades or more.

English textile producers held the secrets of the power loom and the spinning frame for decades before other countries were able to figure out how to do the same thing.

It has been oft-reported that the code of much of Microsoft's software remains unavailable, thus sparking the open source debate.

Then there are the thousands of trade secrets of smaller scope held by the average company. While the scope of these secrets may be small, others are large.

How many examples do you want?

Excellent point on Coca-Cola and Tiger Woods. I agree absolutely, unequivocally. When someone comes up with a new invention, that new invention competes with all previous inventions, even if a government grants the inventor the ability to limit make, use or sale of the invention. So, what is the real monopoly here? When someone invents an iPod, the monopoly on iPods is only for iPods, and not all the other devices that existed prior to the iPod and those that will exist after the iPod. Unless someone invents a device without competition, a rare event indeed, everyone has competition. True monopolies are rare indeed.

Re innovation & competition: One of the things I recall quite well from my classes on economics is the risk/reward scenarios that companies face. The rewards for continuing to exploit a successful product in decline are high. The risks for trying the new, untested product are high. Most companies always prefer the tried and true over the risky and new, because the chance of success is low. Some companies even have various ratios, 100 new products for 1 new succes, etc.

The true innovators are those, like Amazon and eBay, who start without the limitations of an existing company. The risks for Amazon and eBay were high, the payback period was long, but now both companies are considered quite successful. Congratulations to them. If innovation was pro-competition, and companies like Waldenbooks were so competitive, why did they not do what Amazon did? Because the risks were high and they already had a working concept. Also, as you noted, how many other innovative dot com companies were similarly successful? Thousands of highly innovative companies went belly up.

Perhaps I should have said that established companies historically prefer the low risk of the way they have always done things versus the high risk of trying something new. A few established companies have innovation as a core company value, but most do not, and would prefer the way things always were. Some innovations have even been suppressed or worked against by established companies to minimize competition.

Lonnie,

I realize Coke, KFC, etc. have trade secrets, but you cliamed, incorrectly, that their secrets give them monopolies. A trade secret doesn't give anyone a monopoly on anything. Coke doesn't have a monopoly on soft drinks or even the cola segment of that market, nor does KFC have a monopoly on either the fast food market or the chicken subset of it.

You said that some technology companies can have monopolies by secrecy alone, but didn't give an example. At least some trade secrets are vulnerable to being discovered by others, and in theory any trade secret could be discovered by someone other than the original inventor. By claiming that Apple has a monopoly on the iPod, you didn't really get my point about Tiger Woods, etc. Apple doesn't have a monopoly on what the iPod does, i.e., storing and playing music on a small portable hardware device, and that is what matters.

A trade secret can give a company a competitive advantage, but can't give it what only the government can--a monopoly in the form of a legal barrier against competition from would-be competitors. For example, if the government had granted Coke a monopoly on soft drinks, and barred Pepsi from marketing Pepsi-Cola, that would have been a monopoly based not on a trade secret, but on an anti-competitive law.

Of course, established companies tend to be less innovative than many smaller start ups, but you have to be careful about what you might have been taught in economics. Based on my experience, most of what I learned in my eocnomics classes was at least somewhat flawed. Every firm has to innovate at least a little bit, perhaps in only a humdrum way by inventing a new name, logo, etc. That is an innovation of sorts, even if not earth shattering in import. My larger point stands that competition and the free market promote innovation. Did communist countries have more innovative economies than capitalist ones? Innovation can only happen on the market. Governments are criminal organizations and can only innovate in new ways of theft and mass murder.

Bill:

I love your last post! I plan on using some of your words (quoted, of course) with respect to those individuals who somehow think that a music artist who creates a song has a monopoly. Silliness, as you confirmed, but there are those who think that. I mixed you up with that crowd.

In any case, you are absolutely correct regarding those examples.

As for technology companies with monopolies, of a sort, I did provide examples, but they may not have been sufficiently explicit. Let me try again:

(1) English textile companies: England held the monopoly on the production of textiles for decades by keeping their technology secret. Indeed, the theft of that knowledge and the history behind how mass production of textiles moved to the new world is a fascinating story.

(2) Microsoft has never revealed the code for Excel. Lotus 1-2-3 has done a fair job of imitating some of Excel's features, but the code for Excel remains a closely guarded secret that has outlived any patent that Microsoft could have obtained. Now, I know you will say that Microsoft does not have a monopoly on spreadsheets, but they may as well with their market share, estimated to be up to 90% of the total market.

(3) Chocolate provides another fascinating story. Many chocolate companies zealously guarded their secrets for centuries. Some chocolate companies still have processes that no one knows, and their chocolate shows the result of these processes, if you like their chocolates. Probably most well-known in this country is Hershey, but European chocolate companies have had as many if not more secretes. Again, none of these companies have a monopoly, but certain products, like the Hershey Milk Chocolate bar, have maintained approximately the same market shared for decades even with incredible competition, new and old. Nothing like secrecy!

Re governments and legal monopoly: Your statement is correct. However, I contend that my statement is correct as well. If companies did not have patents to protect them, they would be as slow as possible in revealing secrets to the extent they possibly could, slowing the transfer of technology to the world. Having worked for manufacturing companies for the last 26 years, please believe me when I tell you that these companies do actively think about protecting their technology, and the primary reasons patents are selected over other methods of protection are:

(1) It is relatively cheap protection versus other methods. (2) Most companies assume that newer technology will replace their patented technology in approximately 20 years anyway (of course, there are those pharm guys, but they would protect their drugs forever if they could). (3) Eventually most products (ah, but not all, including many of the most commercially important ones), can be reverse engineered with enough time and money invested. Of course, if patents go away, companies will just spend more time and money on making products tougher to reverse engineer, thus making products more expensive (yes, this is true - two companies I worked for deliberately took steps that cost the end user money to make their product more difficult to reverse engineer, possibly buying years of additional product life).

It is all a matter of incentive. Patents are an incentive to reveal. No patents are an incentive to conceal. Take your choice.

Re innovation in general: Oh my, what you said. Let's get the trivial stuff out of the way first.

Yes, much of economics is theory. Is economic theory "flawed"? Well, sort of. The problem with economic theories is that there are limitations in the extent to which a specific theory can be applied. However, some economic theories work quite well in some situations.

I agree with you regarding your comments about "innovation." The "innovation" is pretty wimpy by technical standards (remember New Coke?), but the intent is to refresh or energize a product, extending the product life cycle. Of course, these "innovations" are mostly not protectable by intellectual property, so who cares anyway?

Now, you said something fascinating and magical. You suggested that communist countries had less innovation than capitalist countries, which is quite true and extremely well documented. Now, I give you yet another aspect of that statement. The country with the most powerful intellectual property protections on earth also is home to the most innovation on earth. Wow. If intellectual property is anti-freedom or anti-free market, how is it that the country with the most exercised intellectual property rules on earth also has the greatest free market and the most innovation? That seems contrary to what some people on this site seem to think. Indeed, where are the weakest intellectual property protections, exclusive of communist countries? Well, most African nations have horrible intellectual property protection, minimal innovation, and some of the most limited markets on earth. Wow. Who woulda thunk. Indeed, I wonder if someone has plotted level of innovation against intellectual property protections to see whether there are some general conclusions that can be made? It would be interesting to me.

Now, as a quick aside, before someone suggests an obvious comment about Africa, I will do a preemptive strike. True, many African nations are repressive dictatorships. However, there are many very free markets in the Caribbean and yet innovation struggles. Indeed, there are a number of countries with incredibly free markets, and yet innovation is notoriously low. China has struggled with low levels of innovation and investment, even though their markets have been relatively free. The more China improves intellectual property protection, the more countries invest in China. Indeed, many companies have stated improved intellectual property protection as a reason to invest in China.

Conversely, India, which wants desperately to emulate China, continues to have highly restrictive rules regarding intellectual property (they want all intellectual property - including trade secrets - to be made available to the government, among other things). Many manufacturing and technology companies are reluctant to invest in India.

Anyway, great post!

"(2) Microsoft has never revealed the code for Excel. Lotus 1-2-3 has done a fair job of imitating some of Excel's features, but the code for Excel remains a closely guarded secret that has outlived any patent that Microsoft could have obtained. Now, I know you will say that Microsoft does not have a monopoly on spreadsheets, but they may as well with their market share, estimated to be up to 90% of the total market."

Note that it is the government that prevents competitors from producing their own version of excel, not secrecy.

"It is all a matter of incentive. Patents are an incentive to reveal. No patents are an incentive to conceal."

If I can keep a monopoly through secrecy for longer than the duration of a patent, I will still keep it secret, even under the patent system. If I can't keep it secret for that long, I will patent it, getting a monopoly for the duration of the patent instead of the shorter monopoly without a patent system. Even if monopolies (through secrecy) exist without the patent system, the patent system only makes the situation worse.

Kid:

Re "Note that it is government that prevents competitors from producing their own version of excel, not secrecy," I would like to see a source for that information. I seem to recall when Lotus 1-2-3 went through a significant update a few years ago that reviewers were favorably impressed with the new version because of how like Excel it was. Your statement would seem to be counter to reviewer's comments regarding Lotus 1-2-3.

Kid:

Re secrecy versus patents:

Companies are not stupid, and they are somewhat lazy. Most companies know that keeping something secret is always a challenge, so a patent is relatively cheap insurance. However, take away the cheap insurance, and companies will go back to the old days and the old ways and do a much better job at protecting their secrets.

The patent system does not make the situation worse, it merely changes the dynamics. In some cases, yes, the patent system might delay the entry of an invention longer than merely secrecy, but the situation can also be reversed. I suspect that the majority of companies would do their best to maximize secrecy without the existence of patents.

Incidentally, what do you mean by "monopoly" with respect to patents?

Re: the British textile industry, the fly shuttle and spinning jenny were both patented in Britain in the 18th century. I don't know that much about the European textile industry, but it's hard to believe that trade secrecy would have prevented other entrepreneurs from reverse engineering a machine (as opposed to a food product). Christine MacLeod doesn't mention trade secrecy at all in her discussion of the textile industry in Inventing the Industrial Revolution.

Re: Excel (which I hate the way David Byrne hated powerpoint), Google has a free version with its open office suite. Also, who uses Excel when a piece of paper with lines (and a calculator if necessary) will suffice? And a 90% market share is not a monopoly, regardless of what the bozos in the DOJ think.

Re: chocolate, trade secrecy is more relevant here, but don't think that a trade secret gives someone a monopoly. A competitive moat is not the same thing as an absolute state-granted prohibition on competition, either quantitatively or qualitatively.

Re: "IP" and innovation in the U.S. vs. Africa: The U.S. has more innovation despite, not because of, "IP." U.S. innovation is spurred by relatively greater respect for property rights, which are more or less non-existent in much of Africa. Africa is also home to some of the world's most evil kleptocrats.

India has many problems that put off investors, including a long history of socialism, disrespect for property rights, and bad infrastructure.

Bill:

Those various textile related devices may have been patented, but the patents were not open to the public. England had an incredible lock on textile technology until a famous bit of industrial espionage by Bostonian Francis Cabot Lowell, which ended more than 40 years of English monopoly of what was then modern textile technology. You may look at this link for one source:

http://www.historynow.org/12_2006/historian4.html

Re Excel: I personally agree with you that 90% is not a monopoly. However, Microsoft remains in control of the software and while there have been pretenders to the throne, Excel continues to have unique software and a unique market position, even though others could have copied the software a long time ago had it been patented.

Re innovation in spite of IP: Fortunately, we will never be able to test your theory. However, you overlooked China...

I forgot about China. China has a more free market than 30 years ago, but still has a long way to go in its evolution to a capitalist economy. China's is still bedeviled by restrictions in both the real estate and labor markets. "IP" has nothing to do with it; indeed, the markets where China has ignored western "IP" laws have been those where it has enjoyed a lot of growth.
Bill:

And the markets where China has enforced and implemented western "IP" laws have enjoyed even more growth, both for internal consumption and export.

Lonnie,

The export markets where China has had its greatest growth have some intellectual monopolies, but they have grown as fast as they have not because of this, but because of cheap labor. Electronics and computer firms and others have outsourced production to China to lower their costs, which are predominately labor. IM has not buttressed China's growth at all. Indeed, China's record of relatively paltry enforcement of IM is much better from a free market, libertarian perspective than that of most other countries. "Pirates" and knock off artists have made a nice living in China, and bully for them; and bad cess on the monopolists and their legal and intellectual apologists.

A related point I forgot to add re: the relative importance of "IP" protection vs. reduced labor costs is that if the former were the decisive factor in the decision to locate a manufacturing or service facility, then firms that would otherwise produce in China because of lower labor costs would stay in countries (such as the U.S.) where "IP" protection is relatively stronger. The fact that they choose to move to China is because of its more attractive labor market. I trust you don't think that China's enforcement of intellectual monopoly, such as it is, is more rigorous than its enforcement in the U.S. This refutes your point.
Bill:

Yes, criminals and knock-off artists did make quite a good living in China prior to the implementation of intellectual property reforms. However, investment and technology transfer lagged because western companies were understandably reluctant to enter a market where their inventions and creativity would be stolen. As intellectual property has become stronger, the brands for whom intellectual property is most important have expanded investment, giving China cheaper, better quality goods and more choice. China now has quite good enforcement of trademarks, and their announcement that they plan on having courts specialize in patents is encouraging. From the viewpoint of invention and creativity, this news is welcome.

Bill:

I have worked for companies that either moved some manufacturing to China or created joint ventures in China. The early investments involved established technologies for which the IP had either expired and was about to expire. As China's IP protections have improved, these same companies have moved manufacturing that is closer to the cutting edge to China. However, none of these companies have yet moved their cutting edge technology to China. Low labor is enticing, but loss of intellectual property outweighs those benefits.

No less an expert than Bill Gates said that China's "piracy" has been good for Microsoft, because it helped force it to compete in an increasingly open source world. China's somewhat stronger but still relatively weak IP regime (compared to the U.S.) is not a decisive factor in keeping leading edge tech firms away. Leading edge tech workers are harder to replace than those at less than leading edge firms (like the contract manufacturer Flextronics), so they will take longer to move. High edge tech workers in Silicon Valley, etc. don't want to relocate to China.

As for your assertion that strong patents and other IP is good for innovation, you still didn't get the memo to read the books listed at this blog. If monopoly is so great, why shouldn't competition in everything be outlawed?

Bill:

A patent is not a prohibition against competition. Indeed, a patent makes a manufacturing company figure out how to compete in a different way. I have been figuring ways around other people's patents for the last twenty years. Patents just make competitors smarter and stronger.

I have yet to read the noted books, but I will, eventually. But I was on another website similar to this where the author was claiming that ideas were free and patents locked up ideas. Wrong, wrong, wrong. The USPTO has stated, correctly, that ideas are not patentable. Never will be. INVENTIONS are patentable. How can you steal an idea? I do not know. Let's see, I am thinking of putting a fence in my backyard. Wait a moment, that was my idea, you can not put a fence in your back yard. What silliness.

On the other hand, an individual's creativity is something that can be used and exploited, and has value. If someone comes up with a cool invention, then why not give the company that spent a billion dollars on developing the first DVD the opportunity to recoup their development costs so that they can continue to develop ever better inventions?

We live in the most dynamic, competitive era that has ever existed. EVER. The wealth of new products has absolutely exploded, and continues to explode. Even better, the system is functioning quite well. We have the first tier of companies that spends incredible fortunes creating new products. When their patents expire, the second tier takes over, adding new refinements and reducing cost, also patenting their improvements. Then, the third tier comes up, making nearly identical copies at an even lower price. This cycle repeats yearly as patents expire.

Another perspective: All the technology that was publicly revealed in patents that were filed 20 years ago (there are a few exceptions for a variety of reasons), is now available for anyone, anywhere, to exploit to their heart's content. Indeed, laptop computers are cheaper, VCR's cost next to nothing, and even DVD recorders can almost be classified as cheap. Anyone can produce these things without fear BECAUSE THE PATENTS ON THE BASIC TECHNOLOGY HAVE EXPIRED! Wow.

On the other hand, if it costs a billion dollars to bring a product to market (which is actually a reasonably typical number for a lot of products), and if payback for the billion dollars is ten years (again typical, particularly on breakthrough products - for which payback can be much longer), and if someone can knock the product off in 1 to 3 years (reverse engineering (aka stealing an invention in the engineering world) is almost always cheaper than the creativity it takes to invent a new product), then the company that spent the billion dollars is out somewhere around 750 million dollars. Without patents free markets will be free all right; free of new products that require a lot of development.

I have yet to hear a persuasive argument for eliminating patents and the protection of creativity. The general gist of the argument against IP is that people want the benefit of someone else's creativity because they are not creative themselves. Pure greed is what I call it. Smells of communism and a welfare state. If creative people are not rewarded for their creativity, they will stop creating and do something more lucrative, like growing vegetables so their families can eat. If you want a world without new products, then get rid of patents. I just hope I am not around if it happens. Actually, it will likely never happen because companies that make products, as opposed to service organizations (such as law firms and dry cleaners - and they are related), will do their very best to make sure they can recover the cost of development while making a profit. Fortunately, manufacturing companies everywhere have a similar mind set and stand behind patents and their value.

A patent certainly does prohibit competing using an invention that is patented. Of course, firms invent around patents all the time, sometimes successfully, sometimes not. Either way, it's generally wasteful compared to the alternative of "going direct" by using the patented invention.

Re: your second point, no one on this blog ever claimed that ideas are patented, and your statement is irrelevant to my point anyway.

If someone comes up with a cool invention, then why not give the company that spent a billion dollars on developing the first DVD the opportunity to recoup their development costs so that they can continue to develop ever better inventions?

Here's where your lack of economic understanding comes through loud and clear. Firms can use their first mover advantage and the sale of complementary services to earn competitive rents in the absence of patents. Read Boldrin and Levine's book on this before you post on this subject again.

I would also recommend Kinsella's book, as well as Tom G. Palmer's two articles, available at his home page (scroll down on the left I think).

Bill:

Re "Going Direct": It may be cheaper going direct, but that is not necessarily in the best interest of mankind. Examples: Edison had a lock on DC electric generation and transmission. Tesla proposed AC as being better and more advantageous. The Wright brothers had a lock on the first practical control technology ever developed for powered aircraft. How fortunate that the work around was better and continues to be the technique used today. Cell phones are a work around to wired phone service. Satellite transmission is a work around to cable networks. The list goes on, and extends into the thousands. I prefer the work arounds. We get a greater variety of products, and a more open and free market. If everyone "went direct," we would have significantly fewer choices, and the lack of choice would decide the winners instead of the market.

Re Ideas: You are right. Now, tell Kinsella that (he claimed that ideas were patented on another web site).

Re lack of understanding: Oh, I agree with that. I fail to understand why a company whose core competency is developing innovative products keeps focusing on developing innovative products rather than getting into something they do poorly, like using their first mover status (to do what, I am unsure from your post) and developing complementary products, even if those products fall outside their desires and capabilities. My poor understanding of economics only understands that some companies are quite good at doing certain things, and poor at doing others. Some companies are excellent at copying the inventions of others. Some companies are excellent at developing (and patenting) complementary products for others' products. Some companies are great at innovative products, and are not good at doing other things.

Some companies are quite good at transforming themselves into something they are not, but most struggle doing that, and frequently fail. Of course, my poor understanding of economics may well have misled me regarding these failures. It is possible that the failure to do things other than create innovative products is just mismanagement rather than core competency. Then again, the Republicans could actually be doing a great job running the country, and I in my ignorance just fail to understand how great things really are. I wish I was less ignorant. I guess I will just have to go to the source of all wisdom in this area, Boldrin and Levine.

Re: Edison, he loved his patents, especially on his record player, but, funny thing, the patent system impeded him in the movie business.

Tesla was a great inventor but a horrible business man. The Wright Brothers' patent impeded Glenn Curtis's bid to improve airplanes.

The bottom line with patents is that they are monopoly grants by the criminal organization known as government, and that they violate the rights and liberties of non-rights holders. They also impede economic progress.

And there are no Republicans here as far as I know.

I will not be reading any more of your comments.

Republicans? I don't think you'll find any republicans if any at all here at this blog.

This blog is practically infested with anarchists!(I don't mean that as a bad thing)

To put a republican(with the exception of Ron Paul?) or a democrat in the same room as an anarcho-capitalist(or even leftist anarchists) means an explosive reaction. As far as ideology is concerned, they don't mix at all.

Wow! One picture is worth a thousand words!
Bill:

You are too funny. Your last comment is the best. You are unable to speak logically about a subject, so you bail. Well, good for you! That is your "natural right."

I am most familiar with the Wright brothers. They impeded Curtis, but in the end, Curtis developed a better system and the Wright brothers, who had a great opportunity to lead the world in flight, ended up being known for one thing and otherwise became irrelevant to the world of aviation.

You keep calling the "government" a "criminal organization." I was a member of the government twice. However, I am unaware of any criminal acts I conducted, and I do not feel as though I am a criminal today. On the other hand, anyone who would call me a criminal because I was a part of the government of the United States would seem to be slandering me, which would appear to be a violation of my natural rights.

Incidentally, I do not recall violating anyone's rights or impeding economic progress, other than being underpaid and underappreciated.

Further, even if your bold statement were true (though you have offered no proof), a criminal organization's activities are not necessarily evil or good, they are just activities until judged by the standards of the members of a society.

I will continue to read your comments because I am neither intimidated by them or by you, and I have an open mind to facts. I am waiting for yours.

I consider myself a _________. I find this room humorous and am interested in the viewpoints here.

I have started reading Michele Boldrin's book, though I am a little frustrated because he keeps saying (though he has a little proviso at the beginning) that ideas are patented. He also asserts that patents are bad for the economy, but I must be well away from his proof.


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