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Is Intellectual Property the Key to Success?

Mises Daily: Thursday, July 05, 2007 by

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One of the greatest tragedies of intellectual property law is how it generates intellectual confusion among successful businesspeople. Many are under the impression, even when it is not true, that they owe their wealth to copyrights, trademarks, and patents and not necessarily to their business savvy.

For this reason, they defend intellectual property as if it were the very lifeblood of their business operations. They fail to give primary credit where it is due: to their own ingenuity, willingness to take a risk, and their market-based activities generally. This is often an empirically incorrect judgment on their part, and it carries with it the tragedy of crediting the state for the accomplishments that are actually due to their own entrepreneurial activities.

Certainly there is no shortage of narratives ready to back up this misimpression. Countless business histories of the US observe how profits come in the wake of patents and thereby assume a causal relationship. Under this assumption, the history of American enterprise is less a story of heroic risk and reward and more a story of the decisions of patent clerks and copyright attorneys.

As a result, many people think that the reason the United States grew so quickly in the 19th century was due to its intellectual property protection, and assume that protecting ideas is no different from protecting real property (which, in fact, it is completely different).

A clue to the copyright fallacy should be obvious from wandering through a typical bookstore chain. You will see racks and racks of classic books, presented with beautiful covers, fancy bindings, and in a variety of sizes and shapes. The texts therein are "public domain," which isn't a legal category as such: it only means the absence of copyright protection.

But they sell. They sell well. And no, the authors are not misidentified on them. The Bronte sisters are still the authors of Jane Eyre and Wuthering Heights. Victor Hugo still wrote Les Miserables. Mark Twain wrote Tom Sawyer. The much-predicted disaster of an anti-IP world is nowhere in evidence: there are still profits, gains from trade, and credit is given where credit is due.

Why is this? Quite simply, the bookstore has gone to the trouble of bringing the book to market. It paid the producer for the book and made an entrepreneurial decision to take a risk that people will buy it. Sure, anyone could have done it, but the fact is that not everyone has: the company made the good available in a manner that suits consumer tastes. In other words, with enterprise comes success. It is no more or less simple than that. IP has nothing to do with it.

So it would be in a completely free market, which is to say, a world without IP. But sometimes businessmen themselves get confused.

Let's consider the case of an ice-cream entrepreneur with a hypothetical brand name Georgia Cream. The company enjoys some degree of success and then decides to trademark its brand name, meaning that it now enjoys the monopoly on the use of the name Georgia Cream. And let's say that the company creates a flavor called Peach Pizzazz, which is a great success, so it copyrights the recipe such that no one can publish it without the company's permission. It then realizes that the special quality of its ice cream is due to its mixing technique, so it applies for and achieves a patent on that.

So this company now has three monopolies all sewn up. Is that enough to ensure success? Of course not. It must do good business, meaning that it must economize, innovate, distribute, and advertise. The company does all these things and then goes from success to success.

If you suggest to the founder and CEO that we should get rid of intellectual property law, you will elicit a sense of panic. "That would completely destroy my business!" How so? "Anyone could just come along and claim to be Georgia Cream, steal our recipe for Peach Pizzazz, duplicate our mixing technique, and then we'd be sunk."

Do you see what is happening here? A small change that would threaten the very life of the business is indirectly being credited, by implication, for being the very life of the business. If that were true, then it would not be business prowess that made this company, but government privilege, and that is emphatically not true in this case. The repeal of intellectual property legislation would do nothing to remove from the business its capacity to create, innovate, advertise, market, and distribute.

The repeal of IP might create for it an additional cost of doing business, namely efforts to ensure that consumers are aware of the difference between the genuine product and impersonators. This is a cost of business that every enterprise has to bear. Patents and trademarks have done nothing to keep Gucci and Prada and Rolex impersonators at bay. But neither have the impersonators killed the main business. If anything, they might have helped, since imitation is the best form of flattery.

In any case, the costs associated with keeping an eye on imitators exists whether IP is legally protected or not. To be sure, some businesses owe their existing profits to patents, which they then use to beat their competitors over the head. But there are costs involved in this process as well, such as millions in legal fees.

Big companies spend millions building up warchests of patents that they use to fight off or forestall lawsuits from other companies, then agree to back down and cross-license to each other after spending millions on attorneys. And no surprise, just as with minimum wage or pro-union legislation, the IP laws don't really hurt the larger companies but rather the smaller businesses, who can't afford million-dollar patent suit defenses.

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"What you are not permitted to do in a free market is use violence in the attempt to create an artificial scarcity."

The Internet age has taught that it is ultimately impossible to enforce IP. It is akin to the attempt to ban alcohol or tobacco. It can't work. It only succeeds in creating criminality where none really need exist. By granting exclusive rights to the first firm to jump through the hoops, it ends up harming rather than promoting competition.

But some may object that protecting IP is no different from protecting regular property. That is not so. Real property is scarce. The subjects of IP are not scarce, as Stephan Kinsella explains. Images, ideas, sounds, arrangements of letters on a page: these can be reproduced infinitely. For that reason, they can't be considered to be owned.

Merchants are free to attempt to create artificial scarcity, and that is what happens when a company keeps it codes private or photographers put watermarks on their images online. Proprietary and "open-source" products can live and prosper side-by-side, as we learn from any drug store that offers both branded and generic goods inches apart on the shelves.

But what you are not permitted to do in a free market is use violence in the attempt to create an artificial scarcity, which is all that IP legislation really does. Benjamin Tucker said in the 19th century that if you want your invention to yourself, the only way is to keep it off the market. That remains true today.

So consider a world without trademark, copyright, or patents. It would still be a world with innovation — perhaps far more of it. And yes, there would still be profits due to those who are entrepreneurial. Perhaps there would be a bit less profit for litigators and IP lawyers — but is this a bad thing?

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Jeffrey Tucker is editor of Mises.org. Send him mail. See his archive. Comment on the blog.

See Stephan Kinsella's "Against Intellectual Property," Journal of Libertarian Studies (Vol. 15 Num. 2), available in PDF.