Broken Windows and Copyrights

by on November 20, 2006 · 30 comments

Reader X. Trapnel appears to have a newly created blog, and he has a provocative and well-argued post arguing that copyright and patent are examples of Bastiat’s broken window fallacy. I made a much more limited version of this argument back in May, where I pointed out that it was a mistake to measure the worth of peer-produced projects like Wikipedia by the revenues they generate. But X. Trapnel goes much further and argues that the entire argument for patent and copyright law are examples of the fallacy:

Just as in the Bastiat story, you have the helpful onlooker who says “But everyone must live, and what would become of innovation if every innovator could have his insight copied by the first free-rider who came along?” Just as in the Bastiat story, this is wrong. What is seen is the way in which the protected firm uses his IPR to generate monopoly profits, some of which are then plowed back into R&D, generating a pleasant stream of innovation. What is not seen is what would happen in the absence of this protection: the innovator would have to keep innovating in order to maintain his market, leveraging his expertise into further productive developments, while newcomers would be able to experiment on their own with the knowledge produced by the first. Money that once went to monopoly rents would go instead to other, more productive things–including further innovation.

The neo-Schumpeterian retort is that this is hopelessly naive: innovation requires large capital investment and the reasonable hope of monopoly rents to recoup it. But this is mere question-begging, and its plausibility lies, again, with the distinction between What Is Seen and What Is Not Seen: when we give innovators monopoly privileges of this sort, we thereby tilt the playing field dramatically towards heavily capitalized firms by jacking up the costs of the inputs (eg., prior innovations, a skilled legal team, insurance against lawsuits) to production. As a result, What Is Seen is capital-intensive innovation; What Is Not Seen is the less capital-intensive innovation that the legal regime has stamped out.

As I’ll explain below the fold, I think this argument has a certain plausibility (especially for patent law), but ultimately I don’t find it persuasive.


To evaluate the argument, it’s important to identify the “what is not seen.” With the broadest and most intrusive parts of the patent system, this is easy. With software patents, for example, what is seen is the billions of dollars that companies holding such patents earn. What is not seen is what the companies and consumers who had to pay those royalties would have done with the money had it been left in their pockets. Also not seen are the new innovations that were stifled because companies couldn’t navigate the relevant patent thicket, and the millions of dollars that went to keep the patent bar in Mercedes. The NTP-RIM case was one hell of a broken window.

It’s not as obvious, however, where the “what is not seen” is to be found with copyright law. Trapnel mentions the derivative works right in copyright law, but it doesn’t seem to me that being unable to use another author’s characters is a particularly serious burden. (although I’m sympathetic to the argument that the derivative works right is currently too sweeping)

However, it’s not obvious to me that the core of copyright–the exclusive right to distribute copies of your creative work–is an example of the broken window. What makes software patents a broken window is that it imposes costs on unwitting third parties, in this case other programmers who happen to stumble upon the same “invention.” But the proverbial thousand monkeys aside, no one accidentally stumbles across another person’s novel. The only actions that are restricted by the core of copyright are actions that would not have been possible at all had the author not first produced the work being copied.

Trapnel’s response seems to be that because a significant number of authors would continue producing works even without the monopoly of copyright, the need to pay for works that they would otherwise have obtained for free is a broken window. I have two problems with this response. First, it hinges on an empirical claim that I find dubious: that approximately the same quantity and quality of copyrighted works would be produced in the absence of copyright. I find this claim plausible for a few categories of content, notably popular music. But I find it implausible for a number of other categories, such as accounting textbooks, movies, and video games.

But that’s an empirical question which I think we’re unlikely to ever be able to answer conclusively. The more fundamental objection is that it’s not obvious to me that there’s a broken window at all here. Keep in mind that the harm of the broken window lies in the fact that a window was broken, not merely that the shopkeeper had to give money to the glazier. If we could magically transfer six francs from the shopkeeper’s pocket to the glazier’s pocket without breaking anything in the process, that would not be an example of the broken window fallacy. Likewise, to the extent that copyright simply transfers money from the pockets of consumers to the pockets of authors (or their publishers), this isn’t a broken window at all; it’s just a wealth transfer. And one that, frankly, most people including myself feel is morally justified.

Now of course, the copyright monopoly isn’t simply a wealth transfer. It imposes deadweight losses along several dimensions. First, there’s the fact that in setting a nonzero price for copyrighted works, some consumers are inefficiently excluded from having access to the copyrighted work. Secondly, there are the transaction costs involved in paying for access to content. Perhaps most importantly, there are the costs associated with rent-seeking on the part of the publishing industry. We have life-plus-seventy copyright terms and excessive laws like the DMCA because the entertainment industry spends millions of dollars on lobbyists every year.

But it’s not obvious that these “broken window” costs are particularly large compared to the size of the industries we’re considering here. The movie, music, and book industries collectively generate tens of billions of dollars in revenue every year. If even a small part of that output is content that would otherwise not have been produced, it could easily outweigh the deadweight costs I outlined above.

Finally, it’s worth mentioning that this is a highly contextual question. The extent to which copyright law is like broken windows is highly dependent on the details of technology and the law. For example, fair use is designed to minimize deadweight costs by eliminating both transaction costs (excerpts and parodies) and to allow relaxed access to those who likely wouldn’t be able to pay full price (copying for academic purposes).

It seems likely that the deadweight costs have increased as the distribution of content has become more efficient and decentralized. Copyright law worked “with the grain” of 20th century publication technologies that involved shipping books, records, VHS tapes, etc around the country. People were opening their wallets for those products anyway, so copyright didn’t really add much in the way of added costs. But as content distribution technologies have matured, the costs of the copyright system have clearly started to rise.

Finally, unlike the patent system, people can opt out of the copyright system. The free software movement is a community of programmers who have decided that they’re better served by mutually pledging not to charge one another for content. Increasingly, we’re seeing musicians doing the same thing: they make their music available on MySpace or MP3 blogs in the hopes that they will become famous, even if they can’t become rich.

So although there clearly are some deadweight costs to the copyright system, it’s not at all obvious to me that they’re significant. Markets have developed a number of ways to minimize these deadweight costs in cases where the copyright system is not helpful. And because it seems to me that there are still important industries in which copyright is helpful, I doubt I’ll be in favor of abandoning the system any time soon.

  • http://booksdofurnisharoom.blogspot.com X. Trapnel

    Thanks for the generous response and critique. I’ll say more later, but I’ll just admit right now that my main problem with copyright, by far, is the derivative works right. Take that one away, and I’ll be happy to be an ignored extremist grumbling in the corner. =)

  • http://booksdofurnisharoom.blogspot.com X. Trapnel

    Thanks for the generous response and critique. I’ll say more later, but I’ll just admit right now that my main problem with copyright, by far, is the derivative works right. Take that one away, and I’ll be happy to be an ignored extremist grumbling in the corner. =)

  • http://weblog.ipcentral.info/ Noel Le

    Interesting blog XT:)

    So tell me Tim Lee and XT, what do you folks think of the US venture capital system. Is it a waste of money. Should all the capital flowing from VCs be diverted elsewhere besides commercial firms. How should profitable companies (who often act as VCs themselves) (re)use their revenue.

    Also, XT, did you catch my point about the iPod and DRM. Although it plays MP3 files, the iPod is successful because it excludes non-Apple DRM. This probably marks the difference in success between the iPod and your usual MP3 player. W/o that kind of exclusivity enabled by DRM and the DMCA, seriously, why would Apple invest in creating the iPod and its peripheral products.

  • http://weblog.ipcentral.info/ Noel Le

    Interesting blog XT:)

    So tell me Tim Lee and XT, what do you folks think of the US venture capital system. Is it a waste of money. Should all the capital flowing from VCs be diverted elsewhere besides commercial firms. How should profitable companies (who often act as VCs themselves) (re)use their revenue.

    Also, XT, did you catch my point about the iPod and DRM. Although it plays MP3 files, the iPod is successful because it excludes non-Apple DRM. This probably marks the difference in success between the iPod and your usual MP3 player. W/o that kind of exclusivity enabled by DRM and the DMCA, seriously, why would Apple invest in creating the iPod and its peripheral products.

  • http://www.techliberation.com/ Tim Lee

    I don’t think venture capital is a waste of money, and I have no clue how that’s related to anything I wrote here.

  • http://www.techliberation.com/ Tim Lee

    I don’t think venture capital is a waste of money, and I have no clue how that’s related to anything I wrote here.

  • http://weblog.ipcentral.info/ Noel Le

    Its related to XT’s blog, where he talks about how capital is not necessary for innovation. One of the tenets of our current IP regime is that copyrights/patents help induce capital investment and appropriation. If capital is not necessary, neither are IPRs.

  • http://weblog.ipcentral.info/ Noel Le

    Its related to XT’s blog, where he talks about how capital is not necessary for innovation. One of the tenets of our current IP regime is that copyrights/patents help induce capital investment and appropriation. If capital is not necessary, neither are IPRs.

  • http://www.techliberation.com/ Tim Lee

    Well, since this post was in defense of copyright law, I don’t understand why you’re directing the question at me.

  • http://www.techliberation.com/ Tim Lee

    Well, since this post was in defense of copyright law, I don’t understand why you’re directing the question at me.

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

    Noel: What is the basis for this statement “the iPod is successful because it excludes non-Apple DRM.”? iPods are bought on the customers perception that they can have a lot of content irrespective of any DRM. Seems to me, the iPod would be even more sucessful if it accepted all formats since it would mean even greater availability to content. Would you buy a Ford on the sole basis that it does not use any parts made by Chevrolet?

  • http://www.blogger.com/profile/14019452 Steve R.

    Noel: What is the basis for this statement “the iPod is successful because it excludes non-Apple DRM.”? iPods are bought on the customers perception that they can have a lot of content irrespective of any DRM. Seems to me, the iPod would be even more sucessful if it accepted all formats since it would mean even greater availability to content. Would you buy a Ford on the sole basis that it does not use any parts made by Chevrolet?

  • http://weblog.ipcentral.info/ Noel Le

    Steve, how would you explain the iPod’s success vs MP3 players then.

  • http://weblog.ipcentral.info/ Noel Le

    Steve, how would you explain the iPod’s success vs MP3 players then.

  • Snorre

    Noel, I think most customers of the ipod either are unaware of the drm, or don’t care because they don’t have any drm’d media. The reason it is successful is more likely because it is seen as cool, hip, and well-designed (apart from the drm issue, obviously). I’d be truthfully surprised if you could drag out as many as one ipod customer that bought it because it disallows said customer to play files from some other provider.

    Also, completely unrelated, would you please start using question marks? witout tehm yuo coulds as wells be writeining lieks dys

  • Snorre

    Noel, I think most customers of the ipod either are unaware of the drm, or don’t care because they don’t have any drm’d media. The reason it is successful is more likely because it is seen as cool, hip, and well-designed (apart from the drm issue, obviously). I’d be truthfully surprised if you could drag out as many as one ipod customer that bought it because it disallows said customer to play files from some other provider.

    Also, completely unrelated, would you please start using question marks? witout tehm yuo coulds as wells be writeining lieks dys

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

    Noel: You are avoiding answering the question. Your statement is illogical since it lacks causality. There is not dispute that the iPod is successful. While it is successful, where is the evidence (proof) that it was successful because it “excludes” non-Apple DRM? The success of the iPod may be due solely to effective marketing and may be a transient fad while having absolutely no correlation to DRM. I could say, if logic does not matter, that the continued existence of MP3 players “proves” that knowledgeable consumers crave DRM free devices.

  • http://www.blogger.com/profile/14019452 Steve R.

    Noel: You are avoiding answering the question. Your statement is illogical since it lacks causality. There is not dispute that the iPod is successful. While it is successful, where is the evidence (proof) that it was successful because it “excludes” non-Apple DRM? The success of the iPod may be due solely to effective marketing and may be a transient fad while having absolutely no correlation to DRM. I could say, if logic does not matter, that the continued existence of MP3 players “proves” that knowledgeable consumers crave DRM free devices.

  • http://weblog.ipcentral.info/ Noel Le

    Steve, its a bit complicated, but if you’re a man who needs causation, you know that its often hard to pin down in the technology industry.

    iTunes has a couple more deals with the Studios than other music services. Those studios signed with Apple b/c of DRM agreements. iTunes, while not a big profit maker for Apple, induces folks to get the iPod.

    Granted that most songs on the average iPod are not bought from iTunes, the fact that iTunes offers many labels/tracks not available many places elsewhere, which can only be played on the iPod, is enough of a case for DRM.

    I should have clarified this, but when you talk about DRM and Apple, its probably important to mention both the iPod and iTunes.

  • http://weblog.ipcentral.info/ Noel Le

    Steve, its a bit complicated, but if you’re a man who needs causation, you know that its often hard to pin down in the technology industry.

    iTunes has a couple more deals with the Studios than other music services. Those studios signed with Apple b/c of DRM agreements. iTunes, while not a big profit maker for Apple, induces folks to get the iPod.

    Granted that most songs on the average iPod are not bought from iTunes, the fact that iTunes offers many labels/tracks not available many places elsewhere, which can only be played on the iPod, is enough of a case for DRM.

    I should have clarified this, but when you talk about DRM and Apple, its probably important to mention both the iPod and iTunes.

  • http://booksdofurnisharoom.blogspot.com X. Trapnel

    Noel, please stop talking nonsense about the iPod’s success. You have yet to address what seems the single most important stylized fact for this discussion about the iTunes Music Store: they have only sold enough songs to account for Almost no-one is buying an iPod with the intent to fill it with iTunes’ DRM music.

    Perhaps you are getting confused by the very real fact that iTunes integration is a big selling point for the iPod. But this has nothing to do with DRM, and everything to do with the fact that iTunes is a very well-designed MP3 playing music program. People like iPods because they are gorgeous, hip, and user-friendly; people like iTunes because it is a great piece of software; people like them both even more because they are designed to work well together. I repeat: none of this has anything to do with DRM. I use both an iPod and iTunes all the time, and my position on DRM is pretty obvious by now. I use both iTunes and my iPod to play DRM-free MP3s. Which is why your comment about “iPod vs MP3 players”–as if the iPod weren’t an MP3 player itself!–is so bizarre.

    Now: if the time comes when many consumers will have built up a significant library of DRM’d iTunes tracked, then this will, in fact, result in a lock-in effect that will help the iPod withstand rivals. But we’re not there yet, not at all.

  • http://booksdofurnisharoom.blogspot.com X. Trapnel

    Noel, please stop talking nonsense about the iPod’s success. You have yet to address what seems the single most important stylized fact for this discussion about the iTunes Music Store: they have only sold enough songs to account for Almost no-one is buying an iPod with the intent to fill it with iTunes’ DRM music.

    Perhaps you are getting confused by the very real fact that iTunes integration is a big selling point for the iPod. But this has nothing to do with DRM, and everything to do with the fact that iTunes is a very well-designed MP3 playing music program. People like iPods because they are gorgeous, hip, and user-friendly; people like iTunes because it is a great piece of software; people like them both even more because they are designed to work well together. I repeat: none of this has anything to do with DRM. I use both an iPod and iTunes all the time, and my position on DRM is pretty obvious by now. I use both iTunes and my iPod to play DRM-free MP3s. Which is why your comment about “iPod vs MP3 players”–as if the iPod weren’t an MP3 player itself!–is so bizarre.

    Now: if the time comes when many consumers will have built up a significant library of DRM’d iTunes tracked, then this will, in fact, result in a lock-in effect that will help the iPod withstand rivals. But we’re not there yet, not at all.

  • http://booksdofurnisharoom.blogspot.com X. Trapnel

    Whoa, weird HTML mess-up there. My first paragraph should have read: “they have only sold enough songs to account for less than 25 songs per iPod. Almost no-one is buying an iPod … “

  • http://booksdofurnisharoom.blogspot.com X. Trapnel

    Whoa, weird HTML mess-up there. My first paragraph should have read: “they have only sold enough songs to account for less than 25 songs per iPod. Almost no-one is buying an iPod … ”

  • http://weblog.ipcentral.info/ Noel Le

    XT, the iPod is in a way an MP3 player, my distinction above was meant to call out the difference between the iPod and MP3 competitors: Apple’s DRM.

    It really doesn’t matter the small percentage of songs from iTunes played on the iPod. Its more important that iTunes gives near exclusive offerings that other services don’t. And you know that iTunes will only play on the iPod (at least currently). This ads enough value to the iPod so that MP3 music owners will buy it rather than other players.

    We agree that Apple is really tapping 2 markets: the market for its iTunes store, and the market for MP3 songs. The first, which deals with DRM:), makes the second more valuable. By buying an iPod, MP3 users get a player that will also give them access to exclusive offerings.

  • http://weblog.ipcentral.info/ Noel Le

    XT, the iPod is in a way an MP3 player, my distinction above was meant to call out the difference between the iPod and MP3 competitors: Apple’s DRM.

    It really doesn’t matter the small percentage of songs from iTunes played on the iPod. Its more important that iTunes gives near exclusive offerings that other services don’t. And you know that iTunes will only play on the iPod (at least currently). This ads enough value to the iPod so that MP3 music owners will buy it rather than other players.

    We agree that Apple is really tapping 2 markets: the market for its iTunes store, and the market for MP3 songs. The first, which deals with DRM:), makes the second more valuable. By buying an iPod, MP3 users get a player that will also give them access to exclusive offerings.

  • http://blog.6thdensity.net Jeremy

    Its related to XT’s blog, where he talks about how capital is not necessary for innovation.

    Capital is not necessary for innovation. You can have innovation without capital (just look at Charles Babbage, who designed an extremely complex mechanical computer on paper) but obviously capital does not, of itself, dream up the iPod killer or the next Harry Potter book. Rather, it requires human ingenuity and creativity.

    The point of Trapnel’s argument was not that capital isn’t helpful or useful to innovation, but that the State intervenes in the economy to artificially favor corporate capital against, say, independent artists or inventors in the ongoing race for innovation (at least, that’s how I understood it). The justification for the monopoly of IP is that it is an unequivocal good to grant this privilege, and Trapnel simply introduced some doubt into that thesis.

  • http://blog.6thdensity.net Jeremy

    Its related to XT’s blog, where he talks about how capital is not necessary for innovation.

    Capital is not necessary for innovation. You can have innovation without capital (just look at Charles Babbage, who designed an extremely complex mechanical computer on paper) but obviously capital does not, of itself, dream up the iPod killer or the next Harry Potter book. Rather, it requires human ingenuity and creativity.

    The point of Trapnel’s argument was not that capital isn’t helpful or useful to innovation, but that the State intervenes in the economy to artificially favor corporate capital against, say, independent artists or inventors in the ongoing race for innovation (at least, that’s how I understood it). The justification for the monopoly of IP is that it is an unequivocal good to grant this privilege, and Trapnel simply introduced some doubt into that thesis.

  • eric

    “Its more important that iTunes gives near exclusive offerings that other services don’t. And you know that iTunes will only play on the iPod (at least currently). This ads enough value to the iPod so that MP3 music owners will buy it rather than other players.”

    I think we would need some actual data to establish this. How many iPod owners are buying “near exclusive offerings?” Of this number, how many consider it an important factor in their purchase?

    Color me skeptical.

  • eric

    “Its more important that iTunes gives near exclusive offerings that other services don’t. And you know that iTunes will only play on the iPod (at least currently). This ads enough value to the iPod so that MP3 music owners will buy it rather than other players.”

    I think we would need some actual data to establish this. How many iPod owners are buying “near exclusive offerings?” Of this number, how many consider it an important factor in their purchase?

    Color me skeptical.

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