Tag Archives: Exclusivity

When Government Externalizes Internalities

02 Sunday Feb 2020

Posted by in Government Failure

≈ Leave a comment

Tags

, , , , , , , , , , , , , , , ,

The headline describes a kind of government failure. In an ideal private transaction, costs and benefits are fully internalized by the buyer and seller. Both reap private gains, or surplus, from mutually beneficial transactions. On the other hand, there are cases in which external costs are inflicted on otherwise unrelated third parties, as when production emits pollutants. Or, there might be external benefits that inure to third parties, as when a homeowner pays to beautify their property and the whole neighborhood gains. These “externalities” are commonly citied as rationale for government interference in private markets. A good government, it is said, would seek to “internalize the externalities”, in one way or another, to prevent too much trade in a good imposing external costs, or too little trade where there are external benefits. Imposing taxes, granting subsidies, intervening with price controls, quotas, or various regulations are all ways in which corrective action might be attempted by public authorities.

The problem is that government often chooses badly, both misidentifying externalities, poorly estimating their magnitude, or in choosing how best to address them. When mistakes of this nature occur, the internal gains from trade are not just compromised or even destroyed. They are often externalized — revoked and redistributed to non-participants. The formerly private and internal gains may be extracted in the form of taxes, ultimately flowing to unconnected third parties. They are externalized internalizes, if I may coin a phrase. In other cases, in order to subsidize favored industries, individuals might be taxed on their income. Yet the favored industry is likely  unconnected or external to the taxed individual’s source of income. While the gains that might accrue in the favored industry are internalized there, their source is an externalized internality.

Putting the troubling issue of takings or confiscation aside, these mistaken interventions distort relative prices and production decisions, with false signals propagating into other markets — which again are external effects. This, in turn, distorts the allocation of resources across various uses. These cases are clear-cut examples of externalized internalities.

I will confine this discussion to economic matters. By “internalities“, I mean all things within the economic realm that are private and/or reserved to the individual by natural rights. That includes private property and the individual’s freedom to trade and contract with others.

Wrongly taxing presumed “bads” or wrongly subsidizing presumed “goods” are absolute cases of externalizing internalities. And taxing a “bad” excessively (at more than its true social cost) or subsidizing a “good” excessively (at more than its true social benefit) are cases of externalizing internalities. The political temptation to subsidize might be the greater danger, as it is all too easy for public officials and politicians to identify and sell “deserving” causes, especially if they intimate that others will pay.

For example, subsidized education, which primarily benefits private individuals, is billed to the taxpaying public. It over-allocates resources to education, including students with greater value as human resources in other pursuits. Subsidized energy pays the seller of a power source more than its value to buyers, courtesy of taxpayers, and over allocates resources to those energy sources relative to non-subsidized energy and other goods.

Even if an industry is taxed in exact accordance with its true social cost, there is still the question of how the proceeds of the tax are to be distributed. Ideally, unless the social costs are borne equally by all, the distribution should bear some proportionality to the damages borne by individuals, yet that is seldom considered outside of certain kinds of litigation. The true victims will almost certainly be shorted. Benefits will accrue to many who are free of any burden inflicted by the undesired activity. The corrective action thus fails to properly address the externality, and it bestows an incidental external benefit on wholly unconnected parties.

Likewise, subsidies paid to an industry in exact accordance with its true social benefits require taxes that may burden individuals who do not stand to benefit from the subsidized activity in any way. That is true unless the industry in question produces a pure public good. Indeed, if the taxed individuals had a choice in the matter, they would often use the funds for something they value more highly. Thus, suboptimal distribution of the tax proceeds for funding a less-than-pure “social good” involves the extraction of an internality.

Other forms of government action have similar externalization of internal costs or benefits. With the imposition of a wage floor, or minimum wage, the least-skilled workers are likely to lose their jobs. Consumers are likely to pay higher prices as well. The job losers become more dependent on public aid, which must be funded via taxes on others. The wage floor will also degrade working conditions for those lucky enough to keep their jobs. All of these effects of market intervention demonstrate the public piercing of internal gains from private, voluntary trade. Some of what is excised gets spilt, and some gets siphoned off to external parties. Thus internalities are externalized.

Regulation of private industry often results in regulatory capture, whereby regulators impose rules with compliance costs too high for small competitors and potential entrants to afford. This obviously strengthens the market power of larger incumbents, who may in turn increase prices or skimp on quality. Taxpayers pay the regulators, consumers pay the inflated prices, smaller firms shut down, and resources are under-allocated to the product or service in question. These distortions spill into other markets as well. All these effects are part of the despoilment of internal gains from trade. To the extent that trades are prevented at competitive prices, the external winners are those who capture trades at higher prices, along with the regulators themselves and anyone else standing to benefit from graft as part of the arrangement. And again, the wrongful gains to the winners can be described as externalized internalities.

There are many other examples of government failure that fit the description of externalized internalities. In fact, extracting internalities is the very essence of taxation, though we readily accept its use for expenditures on goods that are of a truly public nature, which by definition confer benefits that are non-exclusive. The classic case, of course, is national defense. The differences in the cases of government failure cited above, however, are that the internalities extracted via taxation or other forms of intervention are externalized for private gain by other parties, no matter how widely distributed and diffuse. This is an extremely pernicious kind of government failure, as it ultimately leads to a cannibalization of private activity via our role as public actors. Beware politicians bearing gifts, and beware them just as much when they demonize private trade.

New Socialists Fail Socialism 101

02 Sunday Sep 2018

Posted by in Big Government, Socialism

≈ Leave a comment

Tags

, , , , , , , , , , , , , , , ,

Not many self-styled socialists can actually provide a proper definition of socialism these days. That includes the celebrated Alexandria Ocasio-Cortez, the New York congressional candidate who has proven herself to be an incredible stumble-bum in numerous media appearances since her primary victory over incumbent democrat Joe Crowley. Maine Wire‘s Matthew Gagnon calls her “belligerently ignorant” as she tweets what she believes to be examples of democratic socialism. Gagnon dissects some of her flakey assertions. The sad truth is that Ocasio-Cortez is fairly typical of her generation, despite her dual college majors in economics and political science.

Gagnon notes that socialism is public ownership of the means of production. But socialism is somehow regarded as a “soft” version of communism: less authoritarian, perhaps. That premise deserves closer examination. There is only one way that the public sector can take possession of private property: by force. A new, authoritarian regime might simply commandeer property, nationalize it, and revoke prior ownership claims at the point of a gun or a club. The government would ultimately impose new rules under which management of formerly private enterprises must operate, and it would engage in centralized decision-making and planning to a large extent. This is essentially communism. Some personal freedoms might be preserved, but they are likely to be severely curtailed; dissidence is not likely to be tolerated.

There is another mechanism by which society can declare public ownership of productive resources that is nominally less authoritarian: democracy. Citizens or their elected representatives simply vote for the state to acquire particular resources and enterprises, in whole or in part. Enabling legislation might authorize administrative agencies to determine how the former private owners of these enterprises are to be compensated. To one extent or another, this involves takings of private property and rights, and it boils down to a very real tyranny of the majority: we will vote to take possession of your business; we will vote to create a bureau that will determine its worth and your compensation; we will vote that henceforth you may not operate this business on your own behalf, but only in the service of the people; and we will vote on what rights you possess. This is the ugly tyranny of democratic socialism, and it still requires force.

Self-proclaimed socialists are fond of proclaiming that we already have socialism in many sectors of the economy. They cite public parks, roads, bridges, K-12 education, and other goods and services sometimes provided by the public sector. There is a key distinction, however, that separates many of these examples from actual socialism: whether a good is actually a “public good”, meaning that its benefits are non-exclusive, as opposed to a private good that yields exclusive benefits. A more precise definition of socialism, in my view, is public ownership of the means of producing private goods.

The typical example of a public good is national defense: the benefits I receive do not reduce the benefits you receive, so those benefits are non-exclusive. I have little personal incentive to pay for national defense if anyone else is willing to pay for it, as I’ll receive the benefits anyway. But who will pay if everyone tries to free-ride on others? That’s why the provision of public goods is an appropriate function of government, and it is not generally what is meant by socialism. Gagnon is correct that government involvement in an activity is not the same as socialism, and he correctly ridicules some examples of governmental activities (and non-governmental activities like cooperatives) that Ocasio-Cortez believes to be socialism.

In contrast to public goods, private goods are exclusive in their benefits. The development of a private market can be counted upon to fulfill demands for such goods because private individuals are willing to pay. However, when government grants itself an advantaged position as a provider in such a market, such as a monopoly franchise, we can safely describe it as socialism. Many goods are not purely private, having some degree of non-exclusivity in their benefits. This is commonly asserted to be the case for K-12 education, but the matter is not as clear-cut as the public education establishment would have you believe. The bulk of the benefits to education accrue privately. Therefore, it is fair to describe public K-12 education in the U.S. as socialism. And it is largely a disaster.

Is a social safety net rightly described as socialism? Gagnon thinks not and, strictly speaking, the welfare state does not require public ownership of the means of production, only a means of redistribution. It requires funding, so private resources will be extracted via taxes, and the same is true of public goods. Taxes do not make it “socialism”. Let’s stipulate for the moment that there is a true safety net supporting only those unable to support themselves, either on a temporary or a permanent basis. This may yield non-exclusive benefits to the extent that such a “lifeline” reduces crime, begging, and our personal discomfort with the possibility that other individuals might starve. However, on an ex ante basis, some of these benefits represent a form of risk reduction that, in principle, could be arranged privately. To the extent that we vote to provide these potentially private benefits, those parts of the safety net can be construed as democratic socialism. In practice, our “safety net” covers a large number of able-bodied individuals. Unfortunately, it does a poor job of encouraging self-sufficiency. Like most public benefit programs, it is expansive, poorly designed, and has pernicious effects on the private economy that act to the long-term detriment of its intended beneficiaries.

Leftists fancy that socialism is “compassionate” and righteous, despite its predictably harsh outcomes. The misleading conceit that universal alms-giving by the state is always empowering to individual recipients, and potential voters, is an extremely corrosive element of democratic socialism. William Voegeli, Senior Editor of The Claremont Review of Books, writing in Imprimis makes “The Case Against Liberal Compassion“. (I dislike his misuse of the word “liberal” — too many conservatives are willing to cede that label to the Left.) Voegeli notes the “never enough” mentality of welfare statists, who refuse to acknowledge that the expansive growth of the welfare state over the past five decades has failed to reduce rates of poverty. The programs are rife with fraud, waste and bad incentives. If leftists are truly compassionate, Voegeli insists, they ought to take more interest in fixing problems that leave less for the truly needy and create dependencies rather than simply increasing the flow of funding.

Many well-meaning individuals are careless about affiliating with socialist causes because they do not understand what it actually means, and they often lack any historical and theoretical perspective on the implications of socialism. The flirtation is dangerous, and we can only attempt to educate and reason with them. Some will grow into greater wisdom. Some, like Bernie Sanders, will never come around. While we educate, let’s keep their hands away from the reins of power.

Open Borders and Club Goods

13 Saturday Jan 2018

Posted by in Immigration, Liberty

≈ 1 Comment

Tags

, , , , , , , , , , , , , , , , , , ,

The question of open borders divides libertarians as much as any. The arguments for open borders made by the likes of Bryan Caplan, Alex Tabarrok, Don Boudreaux and Sheldon Richman are in many ways quite appealing. Fewer borders means greater opportunities for gainful trade among individuals. For the U.S., the economic gains from in-migration have been unquestionable. From a pure libertarian perspective, governments should never interfere with the non-violent actions of free individuals, including freedom of movement. These great economists contend, in effect, that there is no real moral distinction between government actions that confine individuals within borders and those that keep people out, though our conciences are less burdened by the latter because the world abroad seems so large.

There is a gnawing contradiction in this viewpoint, however. It relates to the appropriate scope of “ownership”. At the link above, Caplan says:

“The only principled libertarian objection to this is that the citizens of each country are its rightful owners, so they’re entitled to regulate migration as they see fit. … But if you believe this, there is no principled libertarian objection to any act of government. Fortunately, the belief that citizens are countries’ rightful owners is crazy. The social contract is an utter myth. Contracts require unanimous consent, and no country has ever had unanimous consent.“

The Character of a Good

I contest Caplan’s assertion that any one act of government is like all others. Yes, there is always a danger of a majoritarian tyranny in any democracy. But there is also the question of sovereignty, for which borders of some kind are necessary. If policies governing those borders are established legislatively, they should be subject to checks and balances: executive consent as well as judicial review of disputes.

I also contest Caplan’s statement that ownership implies unanimous consent. In fact, there are many forms of property over which decisions do not imply unanimous consent of joint owners. One such form is the subject of what follows, and I believe that form of “ownership” is applicable to one’s citizenship or residency status.

To keep things simple, I’ll frame this discussion only in terms of citizenship. I therefore abstract from issues like green cards, visiting worker programs, and the presence of resident aliens in general. For a nation, the essence of barriers to immigration can be addressed by considering the simpler case of citizens versus non-resident non-citizens. For purposes of this discussion, if you are allowed to arrive on a nation’s shores, you will be a citizen.

If a country’s citizenship can be considered a good worth acquiring, what is its real character? It is privately possessed and not tradable, but not all goods are tradable. An important taxonomy of goods in the public finance literature is based on two dimensions: exclusivity and rivalrousness. The former is the degree to which other parties can be excluded from enjoyment or use of the good or resource.

Most goods have at least some degree of exclusivity: you can be denied admission to a concert, the use of an appliance or furniture, and even parks and port facilities. Pure public goods like national defense and the air we breath are completely non-exclusive, however. Broadcast television is non-exclusive as well, as long as you have the equipment to watch it.

Rivalrousness is the degree to which the use or enjoyment of a good precludes another’s use or enjoyment. My friend can’t eat the steak if I eat the steak. That’s rivalrous. But my friend and I can both enjoy the concert. That’s non-rivalrous. A private good is both exclusionary and rivalrous. A public good is neither.

Citizenship as a Good

Citizenship can be viewed as a bundle of attributes much as any good, but it is an extremely complex bundle: it includes the individual rights enshrined in a nation’s constitution (if any), the personal and economic opportunities available by virtue of access to in-country markets and resources, the culture(s), and any personal risk reduction provided collectively, i.e., a safety net via public support. How, then, would one classify citizenship, or its component attributes, in terms of exclusivity and rivalrousness?

First, the entire citizenship bundle has a high degree of exclusivity. A nation can decide on closed borders, or partially open borders, if it chooses to do so, just as a theme park limits its gate. That is the political decision at hand. The degree of exclusivity of individual components of the bundle matters little if the bundle itself is highly exclusive.

At a high level, citizenship itself is non-rivalrous. My citizenship does not preclude citizenship for anyone else. Therefore, at the level of the bundle, citizenship is exclusive but non-rivalrous, so it has the character of what economists call a “club good“. Citizens are already part of the club; to that extent they are joint “owners”. Like many clubs, decisions about new membership need not be unanimous.

Classification of citizenship attributes as goods is trickier. The exclusivity of citizenship makes the non-rivalrous public goods available to citizens into club goods. Once admitted, for example, you are free to engage in speech, practice a religion of your choice, own a weapon, and receive due process and habeas corpus without interfering with any other citizen’s ability to exercise the same rights. You get national defense and a judicial system. You have equality of opportunity to the extent that your pursuit of economic gain does not interfere directly with anyone else’s opportunities. On the other hand, the freedom of assembly is rivalrous to at least some extent, as we learned last year from events in Charlottesville, VA. In fact, there may be congestion limits to some of the other freedoms mentioned above. 

Access to a nation’s markets permits mutually beneficial trade to take place. An individual’s participation usually does not rule out participation by others, so it is essentially non-rivalrous. (In some markets the entry of new sellers may be limited and exclusionary.) Of course, a nation’s resources are scarce; exploiting them for gain or enjoyment necessarily prevents others from using the same resources. From the point of view of existing citizens, these resources are non-exclusive and rivalrous, and are therefore classified as “common resources”, subject to congestion effects, but they are still exclusive to those citizens. The key here is not whether there are gains from trade, but that there is some rivalrousness embedded in this citizenship attribute.

In addition to the basic rights mentioned earlier, the entire legal structure, regulatory apparatus, and the political process are complex attributes of citizenship. These bear on the limits of legal conduct: Can you buy or sell liquor on Sundays? Do businesses require licensure? Is abortion legal? And on and on. In a democracy, the ability to participate in the political process is non-rivalrous: it does not prevent others from participating. However, the range of possible outcomes of the process can also be viewed as an attribute, and these outcomes, as they are promulgated, are certainly rivalrous. If the “other” side gets extra votes, then the power of my vote is diminished. So the limits of legal conduct are exposed to political rivalry. In the case of open borders, a large number of citizens may not favor existing rules, regulations, and the allocation of public spending.

So the attributes of citizenship are mixed in terms of rivalrousness: Some are rivalrous but many are not. The citizenship bundle, at a more detailed level, is therefore a mix of club goods (exclusive but non-rvalrous) and some goods that are rivalrous. This is important, because under the classical description club goods are public goods provided privately; they are therefore under-provided from the perspective of social welfare and the Pareto criterion that a new citizens can be made better off without making any existing citizen worse off. That might not be the case in the presence of congestion effects.

Should a Club Good Be Unrestricted?

Citizenship has value at the margin to both existing citizens, who should be regarded as established club members, and non-citizens. The foregoing establishes that there are some private (exclusive and rivalrous) attributes attached to citizenship. Sometimes this is due to the impact of congestion on the provision of public goods. Patrick McNutt, in his survey of literature on “Public Goods and Club Goods“, summarizes some basic conditions under which public goods are provided by clubs:

“The public good is not a pure public good, but rather there is an element of congestion as individuals consume the good up to its capacity constraint. What arises then is some exclusion mechanism in order to charge consumers a price for the provision and use of the good. Brown and Jackson (1990, p. 80) had commented that the purpose of a club ‘is to exploit economies of scale, to share the costs of providing an indivisible commodity, to satisfy a taste for association with other individuals who have similar preference orderings’. For Buchanan and Ng the main club characteristic is membership or numbers of consumers and it is this variable that has to be optimised.“

Citizenship (or residency) is generally not price rationed, though there are certainly costs to the immigrant. I make no pretense here as to the determination of an optimal membership from a club or larger social perspective. My point is that rationing membership is a rational choice by club members, or citizens in this case.

Okay, I Like My Club

Tribal affiliations, and ultimately nation states, were a natural outgrowth of early competition for resources, especially when identifying threats from outsiders was a constant preoccupation. Territorialism was a byproduct, and with the establishment of agriculture, the peoples of these early societies probably identified strongly with their homelands.

Modern nation-states have evolved from those early patterns, and nations continue to differ in terms of language, culture, and governance. Successful nations are undoubtedly more liberal (in the classical sense) and open to trade and cross-border movement. Maybe one day all nations will be united under the principles of libertarianism… don’t count on it! For now, to one degree or another, a nation’s inhabitants have an interest in minimizing economic and political risks and retaining access to resources within their borders. I don’t believe that desire is irrational or immoral. If the inhabitants of a nation have a moral obligation to share their rights, wealth, and political process with all comers, then they must accept the possibility that their rights will be compromised, and possibly even complete upheaval. They suffer a loss of sovereignty and a loss in the expected value of their citizenship.

There is obviously no limiting principle to the open borders policy, as Tyler Cowen says. Existing citizens would be obligated to accommodate all those who land upon their shores, granting them the full rights and opportunities accorded to all other residents. Perhaps there would be economic gains in the short or long run, as most libertarians would predict. But perhaps there would be some losses along the way. Perhaps there would be political stability after a large influx of new residents, but perhaps not. And ultimately, perhaps changes in the political climate would feed back to the detriment of economic performance. One simply cannot say, a priori, how things would go. There are risks to the existing citizenry, and if they are obliged to accept those risks, those might well include having to feed, clothe and house new residents. There should be no absolute obligation to accept those risks. If the debate is about individual liberty, then surely imposing those risks via open borders would  abrogate the rights of existing citizens.

Addendum: A Note on the Goods Taxonomy

Given the two dimensions of goods discussed above, exclusivity and rivalrousness, goods are classified as follows:

  • Private goods: exclusive and rivalrous;
  • Public goods: non-exclusive and non-rivalrous;
  • Club goods: exclusive but non-rivalrous: e.g., a concert;
  • Common resources: non-exclusive but rivalrous: the air we breath; an aquifer;

Another category is sometimes defined: contestable goods, which have the character of public goods or even club goods when under light use, and are common resources when under heavy use. There is a difference between an empty park and a crowded park; or an empty road and a crowded road.

See ThoughtCo. for a good exposition on the taxonomy.

Who Brought the Melting Pot To the Pow Wow?

11 Wednesday May 2016

Posted by in Censorship, Free Speech

≈ 1 Comment

Tags

, , , , , , , , , , , , , , , , , , , , , , , , , ,

Chris Rock

I ran into a Chinese colleague in a break room at work and mentioned that I’d seen her engaged in a “pow wow” with a senior staffer, and she asked, “Pow wow?” I tried to explain the Native American origins of the term for a gathering or meeting, and I think she liked that, but I joked that my use of the term might represent “cultural appropriation” (CA). A second colleague who’d entered the kitchen glanced at me with a raised eyebrow. Knowing them well, I’m not sure either of them knew what I meant. As it happens, describing the pow wow as a celebration is more accurate, so my use of the term to describe a meeting was too narrow. In fact, in modern usage by Native Americans, it is a celebration of culture, but meetings take place at these events as well.

CA occurs when aspects of one culture are used in some way by others. It is criticized for trivializing the traditions or symbols of the source culture or because it robs it’s members of intellectual property (IP) rights. I can think of examples of cultural trivialization, such as the “Ugg-a-Wugg” song from the musical Peter Pan. Such complaints strike me as hyper-sensitive, but perhaps the umbrage taken by Native Americans to this song is understandable. Nevertheless, I stand more strongly behind the right of free expression. This song, which is rarely performed today out of respect for Native Americans, was part of a larger Neverland fantasy that has great appeal. And after all, the Indians were good guys in the story!

Works such as Peter Pan and Huckleberry Finn are historical and reflect the times in which they were created. As such, some argue that they should be left in their original form. And I agree, in general. However, in the case of a musical that is performed publicly again and again by various professional and amateur groups, I am sympathetic to the notion that potentially offensive elements can be excised if the changes do not do great damage to the story. If it is not in the public domain, the owners of the story’s rights have the final say.

The IP argument is flawed to the extent that IP arguments are always flawed: ideas are non-rivalrous and non-exclusive. Moreover, even IP rights recognized under U.S. law are limited to individual “property”; they do not extend to the traditions and symbols of various cultures that coexist in society.

Another area emphasized by critics of CA has to do with historical grievances against a dominant culture, often without regard to current circumstances. Apparently, such grievances place the minority culture off-limits. Under this view, cultural exchange is fundamentally bad, which is fundamentally absurd. It has the faint ring of “separate but equal” — paradoxical given the avowed desire among critics of CA for an end to racial and social division.

While European colonialists certainly exploited the native inhabitants in many lands, today’s liberal order in the West is attractive to members of different cultures around the globe.They adopt similar institutions and practices at home, and some of them bring their cultures to us. We all gain in the exchange.

Strong condemnation of CA has been all the rage on college campuses over the past few years (see several of the links here). It reflects a hyper-sensitivity about the normal mixing of cultures. Cultural exchange tends to elevate appealing aspects of all cultures into the larger society. Should we really condemn any of the following harmless activities?

  • Yoga classes at the Jewish Community Center?
  • Cinco de Mayo celebrations by non-Mexicans?
  • Caucasians celebrating the Chinese New Year or Moon Festival?
  • St. Patrick’s Day celebrations by non-Irish, non-Catholics?
  • Flower Drum Song or The King and I?
  • Caucasians playing Delta Blues?
  • African American Mardi Gras Indians?
  • Caucasians watching Bollywood movies?
  • The Grateful Dead at the Pyramids?
  • Caucasians cooking “ethnic” foods?

I grant that respect dictates avoiding use of another group’s sacred symbols. Beyond that, it is difficult to conceive of any objections to activities like those above. They are all forms of cultural cross-pollination, even if they seem to trivialize in some cases. This sometimes  involves cultural interpretation by “others” that might not be accurate, but that is always the case when cultures mix. People incorporate or adapt features of other cultures that they enjoy, which is hardly a sin.

Curious about pow wow, I found the following qualification in the Wikipedia entry for pow-wow:

“…the term has also been used by non-Natives to describe any gathering of Native Americans, or to refer to any type of meeting among non-Natives (such as military personnel). However, such use may be viewed as cultural appropriation, and disrespectful to Native peoples.“

Well, well, well! Pow wow is used in conversational english to lend an air of informality or lightness to certain proceedings. It may simultaneously convey a serious diplomatic purpose and an opportunity to resove differences. Sometimes, non-Natives might even use the term to sound clever, like using the French term soirée rather than “party”. Or perhaps they are amused by the image of corporate managers seated akimbo around a camp fire, passing a peace pipe. Or any pipe. Trivial? Maybe, but if that possibility outrages Native Americans, it strikes me as an over-reaction. After all, the joke is partly on “the suits”, and there isn’t much the Indians can do about it under the law.

I have always been fascinated by American Indian history and culture. I do not use the term pow-wow in disrespect. I use it because it’s colorful and I like it. The cross-pollination of language and culture is borne out of the utility of a particular word or practice. It can hardly be bad that a few shards of Native American language and culture are incorporated into broader American society.

My sister has a beautiful scarf bearing the profile of an American Indian in full head dress. She has always had an interest in the art and culture of the American southwest, which has benefitted from the heavy influence of Indians who are native to that region. So it was unsurprising to me that she would be drawn to the beauty of the scarf. It is a work of art and she does not wear it out of disrespect for American Indians.

Certain acts of CA are thought to intersect with racism, however. How about the Washington Redskins football team name? The team logo and merchandise use Native American symbols. The same goes for the Atlanta Braves and other teams. However, the term Redskin almost certainly has overtly racist origins as a description of an enemy thought to be savage, much as “Nips” was a derogative used by Allied soldiers in World War II as a term for the Japanese.  Defenders of the team claim that “Redskin” is not meant to trivialize or denigrate Native Americans, but instead to recognize their honor and ferocity in battle. The team owner and many fans insist that the tradition of the team name should continue in tribute to American Indians. Nevertheless, the name is understandably objectionable to Native Americans today as a crude description of their genealogy. My friend John Crawford tells me of a proposal to change the team logo to a red-skinned potato, but apparently the idea was rejected by the U.S. Patent Office.

In all of these matters, free speech outweighs all other considerations. While cultural appropriation is sometimes regarded with hostility, that does not give the aggrieved special rights to prevent it. The same is true of racism, however regrettable it is. Even so-called hate speech is protected under the U.S. Constitution, short of “fighting words”. Critics of cultural appropriation can seek to educate, influence, boycott and to shame those believed to have run afoul of their standards. In most cases, however, I think the best advice is to chill out.

 

Is The Patent a Perversion?

28 Tuesday Apr 2015

Posted by in Property Rights

≈ 2 Comments

Tags

, , , , , , , , , , , , , , , , ,

money-tree-patent-cartoon

No one likes a monopoly except the monopolist, and a monopoly granted by patent is generally no exception. Patents are intended to be temporary, but they are often extended, at high cost to customers, beyond what many consider necessary as an incentive for innovation. There is also doubt about the validity of many “innovations” on which patents are issued. Alex Tabarrok once posted this cute illustration on the excesses of patent law. He has also discussed the existence of “patent thickets”, situations in which “a new product can require the use of hundreds or even thousands of previous patents, giving each patent owner veto-power over innovation“, or at least a way to skim some of the profits. Such thickets serve as a detriment to innovation, contribute to excessive litigation, and ultimately defeat the purpose of rewarding an innovator. Patent “trolls”, who threaten litigation over patent issues but may not own any patents themselves, have become a growing problem. In many ways, intellectual property laws begin to look like a rent-seeker’s playground. James Pethokoukas blogged late last year about a new study by the Congressional Budget Office stating that the U.S. patent system had “weakened the linkage between patenting and innovation“.

There is strong disagreement among libertarians about the validity of intellectual property rights (IP — copyrights, trademarks and patents). My natural sympathies are with the individual who rightfully seeks to benefit from their own creativity and hard work, but whether an innovator should enjoy a state-enforced monopoly on any and all applications of an idea is another matter. If potential competitors, customers and society have an obligation to this individual, some would insist that it is merely an ethical obligation, not one that should be sanctioned by the state.

In what follows, I will mostly refer to generic “ideas”, with the caveat that there are important distinctions between patents, trademarks and copyrights. I do not mean to minimize those distinctions. Rather, my interest lies in the general notion of intellectual property and any fundamental rights that successful “ideation” should confer. I confess that I have a bias in favor of rewarding innovators, but that might be a mere mental remnant of our legacy of IP protection in the U.S.

Suppose that some person, Mr. I, has an idea, and it is the first of its kind. Should Mr. I be granted an exclusive right to the idea and a monopoly on its application? Two qualities of tangible property are thought to be helpful in thinking about this kind of problem: rivalrousness and exclusivity. Rivalrous benefits make sharing difficult and make a thing more suitable as private property. Exclusivity means that others can be restricted from enjoying the benefits. If ideas had these qualities, then possession of an idea would settle the issue of rights without the need for special recognition of IP by government.

Pure public goods like air are non-rivalrous. Ideas themselves are often said to be non-rivalrous, but what is done with them might produce rivalrous benefits. If the benefits of Mr. I’s idea can be enjoyed by one individual without diminishing the benefits to others, then the idea is non-rivalrous.

Exclusivity is a closely-related but separate concept meaning that the benefits can be enjoyed privately, to the exclusion of others. Pure public goods lack both rivalrousness and exclusivity. On the other hand, a painting can be owned and kept in a private home, thus making it exclusive despite the fact that its benefits are largely non-rivalrous; though multiple individuals can enjoy a film simultaneously (non-rivalrous), it can be screened in a private venue charging admission; and while software can be shared, it is possible to achieve a measure of exclusivity by limiting the media (and replicability) through which it is available. However, the idea underlying a productive machine or process may be exclusive only to the extent that it cannot be discovered or reverse-engineered. While a new machine may be purchased from Mr. I and then owned and used exclusively, the idea itself has only limited exclusivity.

To strip the problem down to bare essentials, suppose there are no frictions in the transmission of information and that if Mr. I makes any practical use of his idea, or even mentions it to someone else, then the idea will be immediately known to all others. The idea itself is non-rivalrous and non-exclusive. There could still be gains to marketing applications if there are production costs involved (as that discourages entry), and those gains are rivalrous if the number of potential buyers is limited. To slightly rephrase the original question: Should Mr. I be granted, by the power of the state, an exclusive right and a monopoly on applications of his idea? A brilliant idea may have a rivalrous dimension and its benefits may be exclusive, but any non-exclusivity of the idea itself will diminish its market value. Does that offer sufficient grounds for the existence of IP?

This was essentially Eugene Volokh’s position when he asserted, in 2003, that a non-rivalrous good (water from the water table) has a market value, like any piece of tangible property, as long as it is possible to exclude others from access (to a well). (But that was not Volokh’s main argument in support of IP — see below.) Lawrence Solum at Legal Theory Blog took issue with Volokh’s position on valuation, insisting that it is often impossible to price IP optimally and therefore it is not like tangible property. Here is Volokh’s brief rejoinder, which rests partly on the argument discussed in the next paragraph.

A standard defense for IP is that rewarding invention and creativity enhances incentives for “great works” and technological advance. This was Volokh’s main defense of IP. Many libertarians find this hard to swallow, however. First, they insist that creative action is often driven by non-pecuniary motives. Nevertheless, art and invention are facilitated by funding, so the existence of IP rights may help to secure that support. A second objection is that ideas are frequently not unique; there are many examples of near-simultaneous discoveries. So, as this objection goes, if A hadn’t thought of it, B would have, and the incentive is often unnecessary. That is anything but absolute, however.

A very libertarian argument against property rights for ideas is that defining such a right infringes on the property rights of others. That is, any law restricting the use of an idea by others necessarily prevents them from using their own resources in a particular way. It therefore represents a kind of taking. This post by Stephan Kinsella at the Mises Daily stakes out this position:

“Patents grant rights in ‘inventions’ — useful machines or processes. They are grants by the state that permit the patentee to use the state’s court system to prohibit others from using their own property in certain ways — from reconfiguring their property according to a certain pattern or design described in the patent, or from using their property (including their own bodies) in a certain sequence of steps described in the patent.

In both cases, the state is assigning to A a right to control B’s property: A can tell B not to do certain things with it. Since ownership is the right to control, IP grants to A co-ownership of B’s property.“

Kinsella’s view is that creation, in and of itself, does not imply ownership. It is a transformation of resources, but ultimately the owner of those resources must own the creation. My difficulty with this argument is that an idea, if previously unknown to anyone, has no necessary impact on a prior use of resources owned by others. The ex ante value of those resources is based on their prior use, and that use can be continued. Certainly, if the new idea implies that the prior use is no longer the best use of those resources, then an patent-like restriction on the use of the new idea represents a harm. For example, if the new idea reduces production costs and an established competitor is restricted from using the idea, they will be harmed. Nevertheless, I hesitate to call this a “taking” because there is no restriction on the prior use.

Roderick T. Long makes the same argument as Kinsella in “The Libertarian Case Against Intellectual Property Rights“:

“... information is not a concrete thing an individual can control; it is a universal, existing in other people’s minds and other people’s property, and over these the originator has no legitimate sovereignty. You cannot own information without owning other people.“

Long makes the further claim that ownership of inventions embodying IP is not legitimate because one cannot own a “law of nature”:

“Defenders of patents claim that patent laws protect ownership only of inventions, not of discoveries. (Likewise, defenders of copyright claim that copyright laws protect only implementations of ideas, not the ideas themselves.) But this distinction is an artificial one. Laws of nature come in varying degrees of generality and specificity; if it is a law of nature that copper conducts electricity, it is no less a law of nature that this much copper, arranged in this configuration, with these other materials arranged so, makes a workable battery.“

I find this view preposterous. Nature exists apart from our ability to exploit it. A new piece of knowledge or practical technique is not itself a “law of nature”. It is a discovery about the laws of nature.

Here are Arnold Kling’s thoughts on these and other IP posts, including this short piece from Daniel Drezner, who discusses the importance of credible commitment in protecting rights. A credible commitment does not exist when ex ante assertions of IP protection prove to be malleable ex post, under pressure from critics pointing to the larger gains of rescinding those protections.

I was motivated to write about IP after reading a post by Jeffrey Tucker at the Beautiful Anarchy blog, who wrote about the severe handicaps imposed by government regulation on society. In that post, he briefly disparaged IP. Tucker noted the spooky similarity of the present regulatory environment to Ayn Rand’s novel Anthem. I agree, but there is some irony in this, as Rand herself was a strong supporter of IP rights. Here is what Tucker said about IP:

“Through intellectual property laws, the state literally assigned ownership to ideas that are the source of innovation, thereby restricting them and entangling entrepreneurs in endless litigation and confusion. Products are kept off the market. Firms that would come into existence do not. Profits that would be earned never appear. Intellectual property has institutionalized slow growth and landed the economy in a thicket of absurdity.“

The nation’s founders certainly wished to recognize IP rights, but only within limits. The so-called Copyright Clause in Article I of the U.S. Constitution empowers Congress:

“To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”

So, like it or not, IP is recognized in the Constitution. The libertarian arguments against IP are persuasive in some respects, but I am not wholly convinced of their wisdom in terms of promoting innovation and economic growth. However, I am persuaded that shorter patent duration and severe limits on extensions would reward innovators and offer them incentives without the loss of growth implied by a long-term grant of monopoly. And this sort of modification might encourage more efforts to handle IP contractually, a topic that is discussed in detail (and with skepticism) in the post linked above from Long. There may be benefits as well to defining a higher threshold as to patentable ideas. For example, some say that only discoveries, not mere innovations, should be granted patents. “Mere” innovators could still capture gains via first-mover advantage and their own branding efforts, but not via patents.