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Capitol Comment

    Capitol Comment 296 - Public Choice, Copyright, and Napster

    06/14/2001

    Economic theory begins with a simple assumption: “Individuals are motivated by utility-maximizing considerations and that, when an opportunity for mutual gains exists, ‘trade’ will take place.”1 These private transactions between producers and consumers serve as the foundation for a market economy and free society.

    At times, decisions are made through the political process to prevent the exchange of certain goods or services. In a market-based economy, state action in restraint of trade is usually defended in the context of ethics, morality, or externalities not borne by those involved in the exchange. Laws that outlaw the sale of drugs,2 the sale of cars failing to meet certain fuel-efficiency standards,3 gambling,4 the sale of fireworks,5 and the sale of one’s body,6 are all examples.

    Other laws permit the exchange of certain goods and services, but only within legally defined guidelines. Included among this sort are antitrust laws, which have been used to outlaw the exchange of products at prices deemed “too low,” and “anti-bootlegging” statutes that prevent the direct interstate shipment of alcoholic beverages.7

    However, in many instances, restrictions on market exchange are merely the result of political activities undertaken by incumbent firms seeking to protect market share and limit competition.8 While such “rent seeking” behavior is often cloaked in the guise of the public interest, economic self-interest is clearly evident once the outcomes of rent-seeking activities are analyzed.

    One example is the Copyright Act, which outlaws the unlicensed reproduction of expressive works and technology capable of circumventing encryption or digital-rights systems used to prevent unlicensed use.9 While the need to protect intellectual property was recognized in the Constitution, statutory protections go well beyond those envisioned by the Founding Fathers. Indeed, the statutes controlling copyright have sparked vigorous political fights, with copyright holders effectively extending their monopolies for longer and longer periods of time.

    The justification for copyright’s restriction on trade is predicated on the notion that the unlicensed downstream reproduction of books, sound recordings, maps, and computer programs would prevent creators from making enough money to justify creative pursuits.10

    In modern economic terms, copyright law confers a monopoly power to the copyright holder for a time requisite to recover the sunk costs invested to produce the work. In addition, copyright acts to mitigate the opportunity and transaction costs inherent to expressive works because of their nonsalvageable character. Copyright provides a government structure to which the exchange of expressive works is assigned.11

    Initially the term of copyright was 14 years, but now averages over 100.12 In many ways, the increase in the length of copyright’s term is attributable to the widely held belief that copyright’s original justification has been lost altogether. Many commentators and copyright advocates consider copyright to be an analogue of normative property and believe it should be treated as such.

    Yet, from a public choice perspective, this contention is little more than sophistry: The fact remains that copyright prevents private parties from using their own resources and ingenuity to reproduce and sell recordings, books, etc. to willing consumers—long after the original creator has been compensated for the risk and investment in the work. Thus, copyright remains, first and foremost, a restraint on trade that could not be maintained absent the coercive force of law supplied by a willing political body.

    The advent and widespread use of the Internet and peer-to-peer packet-switched networks requires policy makers to re-examine the merits of copyright’s coercive restriction on trade. Today, books, maps, and sound and video recordings can all be converted into digital format and transferred between computers at the speed of light. In addition, IBM will soon unveil “pixie dust” technology, which is capable of storing 100 gigabits of data – enough memory for over 200 hours of compressed digital video – per square inch of disk area.13

    The Digital Millennium Copyright Act (DMCA) attempts to address this issue by placing restrictions on the trade of technological devices and software code able to decrypt digital copyright protections. If enforced as envisioned by its supporters, the DMCA could erode 1st Amendment protections, impair the right to contract, and greatly restrict the “progress of science,” which itself was one of the constitutional aims of copyright.

    No matter how revolutionary, technology can never erase the sunk costs required to produce expressive works. But it is important to recognize that the billions invested to produce sound and video recordings are a function of the monopolistic protection afforded by copyright. Any business or industry subgroup would see its level of capital spending increase dramatically were it afforded a monopoly grant.

    In a market economy, state action to restrict trade should require irrefutable empirical evidence to demonstrate that society would have to bear an even greater burden without it. In the context of the digital transfer of copyrighted works, it is clear that copyright owners have not provided sufficient evidence to justify the annihilation of innovative delivery platforms like Napster.

    Yet, as long as copyright owners have the law on their side, economic considerations will be of no consequence. As copyright owners understand well, “almost any conceivable collective action will provide more benefits to some citizens than to others.”14 The statutory expansion of copyright is an unwelcome reminder of the primacy of the state in affairs better left to individuals seeking mutually beneficial gains in a free market.

    1Buchanan, James and Tullock, Gordon. The Calculus of Consent. http://www.econlib.org/library/Buchanan/ buchCv3Contents.html. Chapter 18: 3.18.5
    2See the Mission statement of the Drug Enforcement Agency at at http://www.usdoj.gov/dea/agency/mission.htm
    3The Energy Policy and Conservation Act of 1975 set CAFÉ standards for automobile manufacturers.
    4See, for instance, 18 U.S.C. @ 1084 (1994), which prohibits interstate wagers.
    5 For example, see Section 270.00 of the New York State Penal Code. “Unlawfully dealing with fireworks and dangerous fireworks.”
    6 For example, see Section 240.37 of the New York State Penal Code. “Loitering for the purpose of engaging in a prostitution offense.”
    7 “Predatory Pricing” doctrine. See, most recently, Brooke Group Ltd. v. Brown & Williamson Tobacco Corp.,509 U.S. 209, 222 (1993). See also, Webb-Kenyon Act (27 U.S.C. 122) prohibits the importation of licensed beverages into states in violation of state law. See also H.R. 2031, incorporated into Public Law No: 106-386 in the 106th Congress to grant state Attorneys General greater authority to prosecute direct shippers.
    8 See Tollison, Robert D. (1982) "Rent-Seeking: A Survey." Kyklos. 35: 4.
    9 The Constitutional basis for Copyright is found in Article I Section 8. See also, “The Digital Millennium Copyright Act. 17 U.S.C.A> 1201-05 (West Supp. 1999) providing civil and criminal penalties for a variety of acts that might interfere with the effectiveness of copyright management systems).
    10 Few, if any, interpretations of the copyright clause reach a different conclusion.
    11 Williamson, Oliver E. The Economic Institutions of Capitalism. New York: The Free Press. 1985. p. 54.
    12Escape from Copyright: Market Success vs. Statutory Failure in the Protection of Expressive Works," 69 U. Cin. L. Rev. __, __ (2001) (forthcoming)
    13Nairn, Geoffrey. “’Pixie dust’ casts a spell.” The Financial Times. June 6, 2001. p. XI.
    14Buchanan and Tullock, Chapter 19: 3.19.18.