Updated: Volokh's Defense of Intellectual

Updated: Volokh's Defense of Intellectual Property

Incentives and the Case for Intellectual Property Eugene Volokh has a very clear, well-argued defense of intellectual property over at the Conspiracy. Volokh's argumentative strategy focuses on the similarities between the case for property rights in tangible property and the case for property rights in intellectual property--putting incentives to invest at center stage. Volokh's exposition is marvelous, and this portion of his argument is very persuasive.
Rival versus Nonrival Consumption But there is a difference between property in resources (land, chattels) and intellectual property. That difference, as Volokh explains with great lucidity, concerns rivalrousness. Consumption of tangible resources is rivalrous--my using a plot of land interferes with your consumption of the land. Consumption of intellectual property is nonrivalrous--my making a copy of an MP3 file does not significantly interfere with your ability to make a copy.
The Well, Take One Volokh then provides a wonderful example that illustrates how consumption of resources can be nonrivalrous (in a sense):
Imagine that there are a few hundred farmers living out in relatively well-irrigated countryside. Each farmer can dig a well, which will amply serve the farmer and many nearby farmers; that's just the property of a well -- even a small well provides lots of water, much more than one farmer would need. Moreover, the water table is huge, and the farmers aren't going to exhaust it. But, it turns out, the well takes a lot of money to dig (the money goes for renting equipment and paying laborers).

Say that you create a well on your property, and start charging your neighbors, who don't have such wells, for access to it. Many of your neighbors are willing to pay; your well is closer and more convenient than other competitor wells. But some others just come and take the water for free. "This water is nonrivalrous," they say. "If I take the water, I'm not going to interfere with your or your customers' right to use it, nor will I really interfere with any work you do on your land on the way to the well."

You'd be upset, but that's not my concern. My concern is that if this starts happening, and other neighbors see that they can take water without paying, other farmers won't drill as many wells: They'll know that if they do spend the money to dig the well, they probably won't be able to recover this investment. Maybe they'll find some less effective and more expensive ways of getting payment (for instance, they may invest more money into putting up very high-tech fences -- technological self-help rather than reliance on law), but this will still mean many fewer wells built, and much more expensive water.

Even for the nonrivalrous good, destroying the right to exclude has taken away much of the incentive to invest. It hasn't taken away all the incentive; even destroying all property wouldn't take away all the incentive to invest effort. But it has taken away a lot, likely enough to make society on balance considerably worse off.


Club Goods
Economists use a bit of jargon to refer to this situation. The well, an economist would say, is a club good. You can think of a club good as an intermediate case between a pure public good and a pure private good. Pure public goods have two characteristics. Consumption is (1) nonrival and (2) nonexcludable. By nonexcludable, economists mean that if the good is made available, no one can be excluded from consumption. Clean air might be an example. With a club good, is possible to exclude, but consumption is only partially rivalrous, e.g., rivalrousness only kicks in when a threshold is exceeded. An example is a film shown in a theater, where it is possible for the good to be priced (exclusion can be practiced) and for a number of people to share the good without diminishing each other's consumption of it. The optimal size of a club is that which maximizes the group's joint utility. If too many people try to crowd into a theater, the quality of the experience is impaired. The pricing strategy for a club good is usually a membership fee. Once you pay the fee the good is free for all members of the club, but others are excluded.

The Well, Take Two
So let's go back to Volokh's example of the farmer in the dell with the high capacity well. (Let's assume that this well is located right on the edge of the farmer's property, so that neighbors can draw from it without having to enter on the farmers land, interfering with other uses.) The well is a club good. If too few neighbors use the well, there is a net loss of welfare (because neighbors are forced to use other, more expensive, sources of water). The classic solution to this problem is to create a club. If you join, you can draw as much water from the well as you want. If you don't join, then you are excluded. If the price is too high, the well will be underutilized. If the price is too low, the well will be overutilized--either it goes dry or long queues diminish the utility of the well for all. (In Volokh's example, it might be the case that the well would never be overutilized because of costs not included in the price of club membership. For example, even if membership in the club was free, it might be the case that transportation costs would naturally limit the number of users so that the carrying capacity of the well was not exceeded.)

Intellectual Property Is Not a Club Good
And this is where I take issue with Volokh's argument. Intellectual property is not a club good. Take MP3 files. When a new song is released, the CD is ripped and MP3 files are made available via P2P systems. The CD is a physical resource--it is traditional tangible property. The internet connections of the many users of P2P networks are also tangible resources--they are also property. But the "intellectual property," the information that constitutes the MP3 file, is not a pure private good, because consumption is nonrivalrous. (Consumption of the CD is rivalrous. Consumption of the internet connection is rivalrous. But these are not the intellectual property.) Here comes the crucial move. Moreover, the intellectual property is not a club good. Why not? Because there is no optimal size of the club. Unlike wells and movie theaters, there is no net social welfare gain that derives from limiting the number of consumers through pricing. If too many people crowd into a theater or too many people attempt to use a well, there is a net loss of social welfare. If everyone who wants to do so listens to a song, there is a net gain of social welfare.

And What Are the Implications?
Volokh's core argument was that intellectual property rights create incentives to produce intellectual property. That argument is unaffected by the club-goods argument I've just made. But in addition to his core argument, Volokh made another move. His move was prompted by the fact that consumption of intellectual property is nonrivalrous and hence that the case for intellectual property is different than the case for property in tangible resources. His move was to point to cases in which consumption of tangible resources is, in a sense, nonrivalrous. He made this move by using examples like movie theaters and water wells. But these examples are examples of club goods. Intellectual property is not a club good. Of course, the incentive-for-investment argument still holds, for pure-private goods, for club goods, and for intellectual property. But Volokh's argument does not succeed insofar as he attempts to show that the case for property in tangible resources that are club goods is really the same as the case for intellectual property.

Read Eugene Volokh's very fine post!
And for Volokh's reply, go here and for my further thoughts scroll up or click here.