Thread by @PerBylund

#Intellectualproperty--patents, copyrights, and other government-granted and -enforced monopoly privileges--gets a lot of knee-jerk support. While people invent plenty of arguments in favor, they are, unfortunately, often based in economic misunderstanding. Let's talk about #IP.

First, arguments in favor tend to rely on a cost-based theory of value. But something is not of value because it was expensive to make, but is expensive to make because it is expected to be of great value: it is the expected value that justifies taking on the (production) cost.

It's a flawed argument to ask "who would take on the great cost" to come up with new inventions if they can't get paid. Nobody has a right to get paid based on their cost or effort. You don't earn a high grade because of your effort, but put in the effort to earn a high grade.

The world contradicts the assumption in the argument: we strive to achieve value and can, because we expect/imagine/hope the result will be of value, justify taking on costs to get there. But not higher cost than we believe the outcome is worth it. This is important to remember.

Second, ideas have no value. We must make the important distinction between invention (the idea) and innovation (the realization/implementation of it, including bringing something to market). No idea matters much unless it is made useful somehow. Just the idea is but a thought.

It's commonly presumed that entrepreneurship is about having a grand idea. It's not. It's all implementation. Experienced entrepreneurs and investors know this. A mediocre idea with great implementation can change the world; a great idea with mediocre implementation is worthless.

Third, it's not as easy as "more is better." There is such a thing as over-investment in research, invention, and innovation, which means too much resources are invested in these activities compared to, for example, satisfying wants in the present. There is always a tradeoff.

In a world where everything existed in abundance, then investing endless amounts into space exploration would be no problem because there is no downside. But if it would happen at the cost of, say, feeding people, providing shelter for the homeless, or curing cancer...?

The issue is fundamentally an economic one: the economizing of resources to produce the means for want satisfaction. This is why the expected benefit must be compared to other benefits (opportunity cost). In other words, more invention comes at the expense of something else.

It's also often asserted that IP is necessary because without it there would be no invention (or at any rate "less" or "too little" of it). Yes, indeed, without subsidies (which IP amounts to) there would be less. The real question is: of what? And further: is that a bad thing?

Let's look at specific distortions, which IP contributes to (and use patents as example). As the patent holder gets the exclusive right to the idea, investments shift from innovations to inventions. So the firm is better off patenting a lot and early using a shotgun approach.

It's not only about having the idea, but if your securing a patent for it means others cannot use it, you also protect yourself from (potential) competition. Patents become a way of holding others down, at the expense of consumers who might never see products based on the ideas.

Ceteris paribus, patents lead to more inventions and, relatively speaking, fewer innovations. Are ideas not good? Sure, but not if they are produced at the expense of actual goods and services. Ideas in themselves have very little (if any) value unless they are made usable.

Everything isn't patentable, which means a lot of ideas fall outside of such protection. The incentive is therefore to do research specifically on those things that are patentable. So, we get more of what patents protect and less of what they do not protect.

To say that we get "more" is tongue in cheek. Firms invest enormous amounts into legal services because of patents. Those resources could be used in innovation instead. Add to this the waste of anti-competitor patenting. Distortions abound and consumers pay the price.

It's also claimed that patents help the little guy. That's a fiction. Large firms invest huge amounts into getting/protecting patents. Patent trolls make money this way; other firms use it strategically to squash competition. The little guy can't afford playing this game.

Many other things can be said too, but if we clear the discussion of the misunderstandings and then discuss the distortions caused by this type of system, we'll have a much better discussion. And, I think, a different consensus.