Matt Yglesias reminds us that “an awful lot of capital [income] today is actually rent”. It’s a point he’s been making for a while, but it’s unfortunately treated as a bygone conclusion rather than an engineered reality. Here’s he is:
Land is just scarce because it’s scarce, and as returns to Manhattan land ownership increase the size of the island doesn’t expand. Intellectual property is deliberate government-created scarcity out of concern that were it not possible for Bill Gates to become so wealthy nobody would write word processing programs (don’t tell these guys).
I’m of a mixed-mind about patents, but before we consider Yglesias’ point, we need to define our terms, specifically “property”. The real classical liberals go for something called the “labor theory of property” which was proposed by John Locke in his Second Treatise on Government which supposes that property comes about by “the exertion of labor upon natural resources”. I’m not of this view, but it offers rich insight into how we consider intellectual property, which I’ll get to.
The competing, and dominant, theory comes from Jeremy Bentham that property is not prior to government:
Property and law are born together, and die together. Before laws were made there was no property; take away laws, and property ceases.
Furthermore, in this view, property is not absolute. My favorite example is a la carte vs. buffets at a given restaurant. In the former, you own the right to eat your meal, but also give it to your friend and take it home. In the latter, the restaurant has only given you the right to eat the food, they reserve the right of all further distribution. Or take your own home. (In Texas) you have the right to shoot trespassers thereupon, but may not inject cocaine within. The law has not ceded you that right.
Now, the idea of “rent” is closely connected with property rights. As long back as the 18th century, David Ricardo noted that rents – loosely “unfair income” – comes from property misallocation:
It was from this difference in costs [between productive and unproductive land] that rent springs. For if the demand is high enough to warrant tilling the soil on the less productive farm, it will certainly be profitable to raise grain on the more productive farm. The greater the difference, the greater the rent.
Therefore, I think Yglesias’ point that intellectual property is “deliberate government engineered scarcity” is a truism at best. Property exists because of government, and to the extent that any property is scarce, it is “government engineered”. You may not like the nuts and bolts of the broken patent system, but the idea itself is not so alien.
Ultimately, I agree that intellectual property earns a fancy rent, but it’s not nearly so simple. I think about “intellectual property” in a very similar way as physical land. That is, when it comes to physical capital, I believe someone truly creates something. When it comes to intellectual property, I think that all the world’s intellectual pursuits already exist, but they only remain to be discovered. And just as the price of land falls as supply increases, so too does that of a broadly defined “intellectual property”. Of course, most of us don’t “buy” this property, but the “IP share” per good, if you will, falls.
However, this isn’t always the case. Just like some land is fertile or valuable, some intellectual landscapes are more productive and useful. In the intellectual world, until the industrial revolution, we were walking on barren deserts of no value. The first industrial revolution was like finding soil, the second like finding the rich riverbanks on the ancient Nile. The technology revolution was like finding Alaska, Qatar, Norway, and Texas altogether.
In the meantime, we’ve found barren land and cheap soil in such abundance that we ignore formal property in total and revert to a communal ownership thereof. Books on Project Gutenberg and the quadratic formula fall under this purview. But the new intellectual land is so fertile and rich, that Ricardo’s principle of rent is perfectly applicable and because this is owned by so few, rent-derived inequality is of critical importance.
But there is one big difference between land and intellectual property. What are your priors that – by and large – we have discovered all the minerals and inhabitable land in the world? Until intergalactic travel becomes a real possibility, my priors are high. Therefore, incredible land value taxes are a brilliant way of financing redistribution without distortion.
And what then is your prior that we have discovered all the profitable intellectual land god created? Perhaps it is similarly high. Oh how wrong you will be. See the brilliant Lord Kelvin at the turn of the last century:
The future truths of physical science are to be looked for in the sixth place of decimals.
Or Albert Michelson, famous for disproving luminiferous ether:
The more important fundamental laws and facts of physical science have all been discovered, and these are so firmly established that the possibility of their ever being supplanted in consequence of new discoveries is exceedingly remote.
This is a question of philosophy, but more a question of defining one’s terms. If you believe men create intellectual designs, then we can treat such property in similar vain to physical capital. However, if you believe in an infinite (or unobservable) landscape of profit-delivering discoveries, the only way to incentivize explorers is like from an era bygone: gold and silver.
There are two ways to achieve this. Many support crippling the patent system and supporting researchers and entrepreneurs with government tax credits instead. But relative to intellectual property, this suffers from adverse selection arising from asymmetric information. Given a set of researchers and a central funding authority, each researcher has a hidden prior on how good he believes his work will be. He will do his best to prove to the government agency that this prior is high. The government has some test T to check his application, but the test compromises precision for tractability (bureaucrats are limited in time, brains, and money).
On the other hand, a patent is obtained – broadly – after the researcher/entrepreneur discovers the idea for his device. Only those with truly (and not demonstrably) high priors will actually take the capital risk in pursuing this idea. In similar fashion, the kings of yore did not always pay explorers to go on grand voyages, but promised them ownership of wealth thereupon to accommodate for informational asymmetries.
I am no fan of inequality and hence I support socially-owned patents. The government should finance large-scale research projects, and all patents thereof are owned by the American society itself. For this to work in practice, there needs to be a strong and credible independence between patent authorities and the government research apparatus. Private researchers cannot believe that government will prefer itself in competing applications. At the end of each year, the government must auction each patent on an electronic marketplace for five years. This creates a rich source of revenue for social redistribution, but also ensures that intellectual property finds itself in the hands of the firm that will use it most productively. Every five years, the patent will be re-auctioned until the value drops below a certain inflation-indexed value and will fall into communal ownership.
The implicit assumption here is the labor theory of property. If intellectual ideas already exist, property is allocated to he who cultivates it thereof: like the scientist who discovers dry ice, or the programmer who creates Microsoft Office. It strikes me that a libertarian should be most accommodating of this argument.
And, ultimately, rents earned from intellectual property are ultimately spent on natural resources (land, oil, beachfront property, and fancy restaurants in Manhattan). If we tax that, we will be taxing the extractive uses of intellectual capital. That seems like the smarter way.