Monopolies in the 17th and 21st Centuries

by on July 4, 2006 · 6 comments

Pondering last month’s discussion of innovation and interoperability, it struck me that there are close parallels between that argument and the 19th-century debate over free trade. To explore this insight further, I sought the advice of my friend and budding trade scholar Dingel, who recommended that I read Against the Tide: An Intellectual History of Free Trade. I thought this passage, on page 46 of the hardcover edition, was provocative:

The term “free trade” apparently originated at the end of the sixteenth century in parliamentary debates over foreign trade monopolies. In England, royal grants giving select merchants the exclusive privilege to engage in trade with a particluar region of the world dated back to the thirteenth century. Although well established in the vocabulary of those writing on economic issues by the dawn of the seventeenth century, the term free trade initially carried a different meaning than what we now attach to it. “A free trade” was a commercial activity in which entry was unrestricted, where the liberty of the merchant to participate in trade was unhindered by exclusionary guild regulations or government grants of monopoly rights and privileges. Calls for “a free trade”–or more preceisely, “freedom to trade”–arose in an antimonoopoly movement that opposed such government restraints on either domestic or foreign commerce…

Monopoly trading companies provoked such ill feeling that those defending them either denied that they were really monopolies or justified the exlucsive grants on other grounds. Misselden, for example, agreed that such grants reduced the liberty of subjects to engage in any trade they wished, but argued that the resulting security against competitors would increase traffic aboev what it otherwise would have been, and therefore concluded that “the utility that hereby arose to the commonwealth, did far exceed that restraint of the public liberty. A common defense of foreign trade monopolies was that long-distance trade required expenditures on certain public goods, such as navigational guides or defense establishments to protect person and property abroad, and government entry restrictions were required to prevent free riders from undermining the financing of such goods. An exclusive company, for example, could raise the requisite capital to pay for these required expenditures or use their trading profits to ensure the safety of cargo, whereas interlopers who did not contribute to the fund might reduce profits and could ultimately subvert the basis for all such trade.

The parallels to contemporary intellectual property debates are obvious. We often hear the argument for expanded intellectual property made in terms of creating incentives for the creation of quasi-public goods. Professor Picker, for example, implicitly portrays those who create and use unauthorized XBox software as free riders in a manner analogous to a competing shipper who benefits from a British East India company’s lighthouse In each case, one company expends capital creating infrastructure that subsequently makes it easier for competitors to enter the field, supposedly risking the financial viability of the whole effort.


I should admit, however, that this analogy does have problems. Most obviously, The British East India Company didn’t create India, whereas Microsoft did create the XBox. That weakens the philosophical argument from liberty, because there would have been no XBox to hack if Microsoft hadn’t entered the market. It also means that companies wanting to compete with Microsoft can build their own game consoles, whereas would-be competitors to the BEAC may not have been able to secure a royal charter to another part of the world.

Perhaps a closer parallel is to the granting of overly broad or obvious patents. When a company is granted a patent monopoly on one-click shopping, wireless email, or online movie rentals, it seems to me the effect is very much like a 17th-century trade monopoly. NTP didn’t create the concept of wireless email any more than the BEIC created India–NTP concedes that RIM developed its technology independently.

Some people, of course, stretch this analogy to encompass all intellectual property. That strikes me as misguided. The primary problem with 17th Century trade monopolies was that it prevented others from engaging in trade they would have been free to engage in even if the monopolist had never entered the market. That’s true overly broad patents, and it’s at least a little bit true of technological platforms (the number of technological platforms is likely to be small, so proprietary platforms may crowd out open ones). But it’s not really true of most copyrighted works: Dan Brown’s publication of The DaVinci Code in no way interferes with my ability to publish a novel of my own.

  • Steve R.

    Fascinating discussion. My feeling are along the lines posted by Xcott and iTunes on Randy Picker webpage. In a capitalistic system, if you do not effectively price your product, too bad.

    To explain further; once the product is “sold”, the manufacturer should have no further financial interest in how the product is actually used. Unfortunately, we are moving in the direction of asserting that products are no longer sold but are actually licensed to be only used under certain conditions unilaterally imposed by the manufacturer. This is wrong.

    By way of absurd example, most people today use word processing programs to write. The logic of allowing Microsoft to prohibit modifications to the Xbox could be used by the word processing manufacturer to assert that they are entitled to a royalty for every word generated by a user based on yea olde unilateral license agreement.

  • http://www2.blogger.com/profile/14380731108416527657 Steve R.

    Fascinating discussion. My feeling are along the lines posted by Xcott and iTunes on Randy Picker webpage. In a capitalistic system, if you do not effectively price your product, too bad.

    To explain further; once the product is “sold”, the manufacturer should have no further financial interest in how the product is actually used. Unfortunately, we are moving in the direction of asserting that products are no longer sold but are actually licensed to be only used under certain conditions unilaterally imposed by the manufacturer. This is wrong.

    By way of absurd example, most people today use word processing programs to write. The logic of allowing Microsoft to prohibit modifications to the Xbox could be used by the word processing manufacturer to assert that they are entitled to a royalty for every word generated by a user based on yea olde unilateral license agreement.

  • http://www.knowyourbroker.blogspot.com/ jai

    Folks this is indeed a great debate! I would like to add to this: Imagine the scenario where the Online trading community in stocks is exposed, vulnerable to security hazards. Add to that there is not even any ownership or cover against hacking of accounts as the platform owners wash their hands of all legal angles and implication. Is this also not a form of imperialism? The brokerage imperialism? Do feed back!

  • http://www.knowyourbroker.blogspot.com/ jai

    Folks this is indeed a great debate! I would like to add to this: Imagine the scenario where the Online trading community in stocks is exposed, vulnerable to security hazards. Add to that there is not even any ownership or cover against hacking of accounts as the platform owners wash their hands of all legal angles and implication. Is this also not a form of imperialism? The brokerage imperialism? Do feed back!

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