 And in free market principles to save the free market system in a world of conventional confusion There will be time for them to make profits Now's not that time Oh, why everything policemen trees sunshine, and let's not forget the folks who just don't feel like working god bless them Prepare to unshackle your mind an idea whose time has come Cannot be stopped by any army or any government Your professor has arrived Tom woods Beware citizen you are now departing from the world of allowable opinion the tom woods show Welcome everybody it's wednesday august 20 of 2014 We're talking about intellectual property today specifically patents With stefan cancella Stefan is the author of against intellectual property He's the director of the center for the study of innovative freedom C4sif.org is the website And he is the founder and executive editor of libertarian papers Which publishes scholarly articles in the libertarian tradition Stay tuned after my conversation with stefan for a look at what's coming up later this week That you will not want to miss. So of course you are all subscribed on itunes or stitcher Right, which you can easily do at tom woods radio dot com Warm my heart and give yourself a commute sized chunk of liberty education monday through friday Stefan cancella welcome back to the show Thanks, tom glad to be here You in my opinion and in the opinion of many other people really are the go-to person when it comes to intellectual property from a libertarian perspective In this episode, I thought we would try to keep the topic relatively contained even though it's still a big topic By talking about patents in particular I think it might be useful to start off if by having you Recount for us what the traditional account is As to why it's necessary to have government protection of inventions in this way by means of the patent system Absolutely. Yeah, so patents are one type of many types of what's called intellectual property nowadays by Spenders and they use the term intellectual property to kind of sell it to the people But patents were typically their own type of thing Uh, the word patent in uh, I guess latin means open because it was it was granted as a letter patent a letter patent by a monarch or king Giving someone the uh the exclusive right to do something basically it was a monopoly privilege So, um, you'll see letters patent being granted historically Uh to playing card companies or to the first guy to explore north america They would have these exclusive rights. So patents were like an open letter of permission from the government or the state Granting you the exclusive privilege to do something In around 1623, this was being abused so much in england that the parliament passed the statute of monopolies where they limited The power of the government to grant these monopoly patent grants. They limited it to inventions So they they took away the power to grant those of these patents But remained for inventions and then the u.s adopted it at 1789 constitution because of inertia And the theory became more of a um, uh of a utilitarian one that we need to have a policy tool whereby the government Can get some kind of incentive to people to come up with new ideas And so the idea is we'll give you a temporary monopoly and the constitution limit this to temporary times and um presumably this will incentivize People to both come up with new ideas to innovate new inventions and also to disclose their ideas to the public In fact in the patent statute in the u.s The stated goal is to encourage disclosure not to encourage innovation So the so-called patent bargain is this if you disclose to the public The details of your invention Instead of keeping it secret under trade secret law Then we will give you a 17 year monopoly roughly Okay, and then the idea that people used to justify this now is this law and economics toasty and type approach the idea is that um You have a greater incentive to innovate if you know that you can reap the monopoly profits for some period of time after start selling your product Now there is a certain plausibility to that of course. I think that is why the average person who doesn't himself Stand to gain directly from the patent system. He doesn't expect to To develop any kind of invention that will benefit from the patent system Nevertheless accepts it because he says that well i'll get more innovations than i would otherwise Because of course if people get rewarded for doing something they're more likely to do that thing now It turns out though that according to the literature this seemingly obvious conclusion Is not really born out and I think if that's true, then it becomes easier For libertarians of a utilitarian bent to go along with what you're saying because the free market It so happens just tends to be better from a natural rights standpoint from a Utilitarian standpoint from any standpoint you care to imagine And I think some libertarians say but uh, but when it comes to patents I guess we just need them because without them we all know there'd be less innovation But it turns out maybe there wouldn't be less innovation without them after all Yeah, I think that's I think that's true So so I think that people are in favor of patents because they're used to the system They see that the west is productive And they know that we've had the patent system as part of our fabric for 200 years And they sort of assume these things go together and plus they're called By their advocates intellectual property. So there's an association with the word property And there's also this sort of lingering Kind of vague idea the locking idea that you own the fruits of your labor if you work hard in a free market Then you're going to profit you're going to so the idea emerges that you have some kind of right to the fruits of your labor And if you extend that then this contributes to the idea that patents are good But by and large the the prevailing assumption on the part of the average person Is that these patents are necessary? They may be a cost. They may be a pain But they do stimulate additional innovation um But in fact you would think that in the last 200 years the founders uh, well more than 200 years since 1789 When the founders put this provision in the call in the constitution And believe me at the time of the founding they didn't have a lot of empirical studies proving that The patent system was necessary for innovation or that it caused gave rise to more innovation than we otherwise would have For a fairly reasonable say cost to society Um, they didn't have any studies. It was it was a hunch we could say you know the founders thought But it might be a useful tool that congress could have in its arsenal And of course the congress passed the patent act the very next year. So they didn't waste any time Using it But you would think that in the last 200 plus years someone would have done a study Sort of unambiguously showing that the empirical claims That patent proponents make have been uh Born out but no one can do this all the studies seem to indicate way and we have lots of empirical examples and case studies and historical cases for example Uh the the typical the typical case trotted out as the obvious place we need patents is the pharmaceutical industry because If you don't have a patent or a monopoly on your Pharmaceutical compound as soon as you sell it then you're going to have imitators and competitors and you won't be able to recoup your Your r and d costs But the truth is that switzerland, italy, even germany for quite some time for decades in the 20th century had no A stringent patent protection of pharmaceuticals and they were among the world's most innovative pharmaceutical producers and innovators I think like 17 18 19 20 out of the top 20 medical innovations and drugs techniques in the last day 100 years Most of them had almost nothing to do with patents People just don't realize this It's too much to get into here But I would suggest for anyone who's interested in this take a look at chapter nine Of bolder and levine's book against intellectual monopoly. It's online for free at their site against monopoly.org And they go through in detail To discuss the empirical case about pharmaceuticals. They show why there's so many assumptions. They're just Um just wrong But what's the harm in it though? I mean somebody might say that yeah, maybe it's not necessary to have patents But what's the positive harm in it? Maybe it maybe it still backstops innovation in some way Certainly, there can't be any harm in it or can there Well, so so rockboard and and other economists milton Friedman and others have pointed out quite obvious Insight that that if nothing else the patent system distorts and skews innovation research and development because The patent system inevitably only protects some types of innovations and not others So for example, most patent systems don't protect Well, no patent systems protect abstract ideas Or scientific phenomena So for example, Albert Einstein equals mc square formula was not protectable itself by patent law And yet it it's so it's something that's clearly beneficial to the human race And so you have this artificial distorting effect companies will put more money into things they can protect by patent As opposed to they won't so it distorts The structure of innovation and research and that's not a good thing the government to come in and distort things And there's lots of evidence that patents reduce innovation and in reduce efficiency. So for example It's to a Packard and Canon and Epson all laser printer makers all have patents on their own laser cartridge designs and things like this and people cannot make Generic cartridges that are easy to use with their printers So they all have different standards. So it increases the diversity of standards. That's inefficient Um, and also there's increasing evidence that it reduces innovation. So for example Um in the smartphone context, we have apple samsung google Company the very large companies that are the big smartphone makers and they all have mountains of patents that they've acquired And it costs a million dollars to do this And what they will do is they will sue each other or rattle the savers And they will eventually come to a settlement agreement which increases the cost of their products and they pass these costs onto their consumers And yet small companies Can't even enter the market because they would be sued out of existence by one of these big players So it causes oligopolistic type cartels a reduced number of people that can compete So it actually slows down innovation. There's no reason to bother innovating if I can't sell a product in the field If I'm like a small company or an upstart or a new entrance so And then furthermore the studies that I've seen like the back of the envelope calculations. It's hard to get That's right, but my estimate is that patent system in the united states alone Probably imposes on the u.s. Economy at least 100 200 300 billion dollars a year of just dead weight Lost to everyone because of lost innovation costs of attorney fees litigation slowed down innovation So actually the patent system reduces Innovation and not only that it has other effects too. It actually it actually literally causes people to die kill people When drugs are not put on the market because Someone has a patent and they can't make enough of the drug like in the faberzyme case, which I think you'll need to um Or in the case of the anthrax scare a couple decades ago where sypro was the drug It was being made in limited quantities because one company had a patent on it or and or an fta sort of monopoly license Um and also it reduces freedom of speech means if it's adam coral case you mentioned in the beginning Here we have patents being used to threaten podcasting, which you and I are doing right now now This is one of the ultimate forms of freedom of speech The use of podcasting and we here we have someone some patent role holding the patent Who is threatening the right to do this? um That's a serious invasion of freedom of speech and I don't know if you want to get to this later But we could get to the patent role issue that you alluded to earlier Yeah, in fact, yeah, let's let's do that actually because actually you and I talked about that off the air So let me just fill in the listeners. We were talking about the case of adam corolla Dealing with a patent role the patent role is trying to claim that he has a patent on what podcasting itself Yes So explain how that wasn't called it Yeah, so it wasn't called podcasting when he filed a patent on it He filed a patent on it before podcasting even existed But if you read the patent claims it just it describes something kind of similar to podcasting a sort of chronological serial Stream of of media files that are available from a central Sir, I mean, no, if you read the claim it seems to sort of cover what podcasting is Now patent troll is Technically called in the patent industry an NPE a non-practicing entity and that just means someone who has a patent That doesn't cover one of their own products But they can use it to extort payments from other people who do Have a product that the patent covers or a service that the patent covers um And these are called shakedown artists or patent trolls because the the metaphor is like a troll at a bridge Who exacts a toll for you to pass the bridge? um And everyone hates these patent trolls because they're they don't make products, but The patent system has never required you to make make a product that the patent covers um So it's really a bizarre straw man and as I told you earlier Although patent trolls are there studies showing that patent trolls that cost the us economy about half a trillion dollars in the last 10 years This is serious money um So I think they do slow things down. They're like a big tax on the economy and on the consumer and on innovation But that's all they are they drag it down. They slow it down They're more like the mafia in a neighborhood compared to the irf the mafia actually provides some services And only wants a taste they want to they only will whip their beak. They don't want to kill the goose and let the go of the neg patent trolls Are not competitors of the people they sue because they don't want to use the patent threat to shut down their The their victims they just want to extort a payment And they want them to go on making products and making a royalty making a profit so they can pay royalty payment to the patent troll So in that sense if I'm a company making a product and I get opposed by a patent troll The the downs the downside is I don't have A way to sue them back. I don't have a way to counter sue them for infringing one of my patents because they're not making anything But on the other hand all they want is money And they don't want too much money because they don't want to kill me But if a competitor sues me, especially if I'm a small company and a large company that the competitor or that I want to compete with Sues me using their patents. They don't want royalties from me They want to get an injunction from the from the courts that shuts me down And that's a more existential threat to a business than the patent trolls are so as bad as patent trolls are They're not nearly as bad as the people that Or actually practicing entities using their patents aggressively to maintain their sort of monopoly or oligopolistic position So the problem with the patent trolls then is that they Are annoying. They're shaking people down. They tend to be very High-profile a lot of people you know may be affected by them But once they get What they're looking for they go away. They don't try to shut you down altogether They don't try to drive you out of the market. They're not actually a competitor. They're not providing a good They're just trying to drive you They're just trying to drive you to pay them something They just want to earn They don't want to destroy you because then they won't be able to get anything from you So it was it was interesting to read your take on the patent troll to find out that that of all the problems with patents And people exercising them in an anti competitive way This is the least of the problems now I want to go back to something you said earlier though because you seem to be implying That there are philosophical errors at the root Of the argument leading to Patents as being desirable. There's a problem That some libertarians have in clearly understanding what property is and what entitles you to property I'd like you to explain that because I think if we think about this clearly Then we begin to understand that there may indeed be something problematic with intellectual so-called property Well, I what what I've come to see is that the uh to have a really clear view of this, okay My my sort of trilogy of thinkers on the issue is it needs is rockboard and hop up I think the insights of those three thinkers have have developed and have expounded Enable us to see things more clearly That we need to see more clearly now. I think 20 50 70 years ago The more metaphorical walkie in type language was was adequate because we didn't live in a digital age In all four property Was not a huge problem. It worked in the background It only affected a small number of industry players. The average person didn't really have to deal with it And so just the idea that you have You have a right to homestead Unknown resources like land Because you mix your labor with it as lock would say Makes perfect sense But if you drill down into the details of and the way lock worded his argument The way lock worded his argument it was he was responding to filmer who was defending The monarchical system So lock wanted to distance himself from that So he started out saying everyone's a self-owner and you own if you own yourself you own your labor And if you own your labor you own what you mix it with So he came up with this argument to try to justify Personal individual ownership of things that God gave to the world in common Instead of this atom is a monarch had idea which filmer would use to justify Monarchical holdings So I think in a way lock overemphasized this You own your body because God gave it to you you own yourself You own your labor and therefore you own what you mix with it. Um, it's understandable why he did it, but nowadays we need to get really precise about this because uh This this way of putting it can lead to two lines of thinking And one would lead towards the intellectual property idea and one would lead gain fit Lock's original insight, I believe is totally congruent with what hoppa and um and rock bard and mesas would emphasize Which is the role of scarcity? Means we live in a world where we can't do everything we wanted every time There are scarce means there's a possibility of conflict among them And the use of resources which only have one use at a time And if we want to live in a peaceful and harmonic Cooperative society where we get along with each other instead of fighting all the time over resources Then we have to have rules for who could use a given resource at a time So all rights and all property rights ultimately are about Who it's going to be the owner or the rightful controller of a given scarce resource So it all comes down really to that and locks a few point stores that but when he starts talking about how we own labor I think that's the mistake and people will get that in their head. So you'll hear that the modern expression is Everyone's entitled to own the fruit of their labor or they'll say things like um, uh, they they own the sweat of their brow Which is actually a doctrine in copyright law until fairly recently until the fight decision in the 92 Um, and so these are metaphorical descriptions. I mean, we don't really own the sweat on your brow I mean actually you do but that doesn't mean what people mean to me And in my view labor is just a type of action And it's a confusion to say that you own your action because your action is what you do with your body So under libertarian principles, we do have a property rights as human beings in our body But that gives you the right to use your body as you wish. So the action the right to action is a consequence of owning Your body and if you don't make the mistake of saying you have a property right in labor And in fact, some people argue that uh locks mistake about uh, not just locked the peace thinkers of this time Mistake which we called the labor theory of property In a way contributed to the labor theory of value Which was adopted by adam smith and then which contaminated march and led to Communism and the whole thing. So I think you have to make a choice Do we have property rights and scarce resources? Do we have reasonable rational rules for allocating property rights there? Or are we going to go with this metaphorical idea about labor being the central thing? And I think we really have to jettison this idea of labor being central to really anything I don't think it's central to economic analysis. It's not central to Labor value theory and it's not central to proper property rights theory either Well, also, of course the idea of ideas Is tricky from the point of view of property because ideas as you and others have said are not Scarce the fact that you can have an idea and if I have the same idea in my head It doesn't preclude you're having that same idea simultaneously I can multiply the idea in many people's heads And yet no one is deprived of the use of the idea because more heads are entertaining that idea So we're dealing with something that certainly is not is in some other realm And intellectual property particularly in the case of patents here It looks to me as if what you're saying is that you are claiming you the patent owner That because you have an idea of how to arrange certain Physical things into an invention That your idea in your head is something that you can own It's a type of property that you can own But in expressing that idea you what you are saying is that people Who have real property real things real pieces of wood real hammers real nails are not allowed to use those physical goods Because of some phantom in your mind Yes, and this is why I said that the ideas of needs is really are the most important things to really get straight If you want to understand these issues because needs is Uh his his idea of praxeology his idea of the the logic of human action He's just very it sounds like a complicated word, but it's just a very simple common sense way of understanding what we do as humans What he said is we act and we'll be act we We look at the world We have an idea about what's going to happen in the future. We're never completely sure But we're not completely unsure either and we had a feeling about What's going to happen if we don't intervene? And we have a feeling about what state of affairs we would prefer to happen in the future if we do intervene So we look around the world we use our knowledge of our own Abilities the way your body can work the way we can interact with the world the tools available to us Or the means or the scarce resources available to us And we make a decision about how to use these tools To change the course of events to try to achieve an outcome in the future that we prefer better That's called profit or success or just you know Just successful human action But if you understand human action in this way you see a clear distinction between You don't really even have to say that ideas are not scarce. You just have to recognize the difference um The difference in human action between knowledge Or information or recipes as rockboard calls it Basically knowledge or information and the tools that we use with this information So the information that we have about the way the world works Guides our decisions about how to use these resources And the way property rights work is they provide exclusive rights of control Recognize the legal system To the means of action to the resources that we need to use but the information that guides our choices Is not subject to property rights or should not be need not be subject to property rights Yes, because it's not scarce, but simply because it's not That's not the role of it in human action The very reason for property rights is because of the possibility of comp When we all want to use the same resource to accomplish a given end That conflict cannot arrive If we all want to use the same recipe to use our own resources to achieve a similar result So for example, if a million people want to build log houses using the same design They can all do it as long as they all you they use their own Lumber Right, or if they all want to make the same type of chocolate cake Using the same recipe they can all do it As long as there's property rights defined in the ingredients used to make the cake But there need not be property rights defined In the recipe used to make the cake that's knowledge that guides the human actions So I think if you keep these distinctions in mind it helps you Realize what the big mistake is in trying to treat information Like if the scarce resource that subject to property rights Now Stefan the common argument for patents is the utilitarian one that without them Will have less innovation and you even hear libertarians saying this without patents Will have less innovation now, of course that is not a good libertarian argument because I could think of a lot of ways to encourage innovation that would be unlibertarian We could have outright subsidies for innovation We could have a policy whereby we we break we crack the kneecaps of everybody's Competitor if if they manage to invent something first then they they get to crack the kneecaps of all their competitors That'll get everybody rare and to go for innovation But that obviously would not be good and it would not be compatible with libertarianism So of course it's not enough to say it encourages innovation It has to also be consistent with libertarian property rights But having said that 98 of the public perhaps even including libertarians for all we know Is still going to be moved by that utilitarian argument now at the beginning we referred to some of the scholarly literature That has shown that this is not nearly the home run that people think it is But let me just ask you Even granting that this is not a good argument for patents from a libertarian perspective nevertheless How do you answer the traditional argument that if it if it weren't for patents Why would I go to the trouble of Many many years of research into some great Improvement in consumer welfare if I can't capture profits from it if it's immediately taken by people Who invested none of the the money that I did in developing the product? It is like a free rider problem. How is that overcome or can it be overcome? Right. Well, I mean there's a lot of Answer to this theoretical to practical Number one Usually I hear that argue from people that really don't actually rely on that. It's just a hypothetical. It's like Why would I write the world's best-selling novel if I don't have a copyright? And you know, they're not usually jk rolling. They're just someone who says they might write a novel someday Um in my experience and then the experience of everyone I've talked to who is in the field Listen, we deal with engineers and and big companies and companies that have research and development I tech all the time. I've never seen in my life and the last 20 plus years of patent experience I've never seen anyone Actually come up with an idea for the benefit of patents board They would have done it anyway because they need to do it to Make their products better than their that of their competitors or to satisfy the needs of a given customer You know, you have to innovate to make a product to do what your customer wants it to do Um So I would say that number one Um There's simply no proof. I mean my view from seeing the evidence and seeing what's going on is that we would have much more innovation Without the patent system. So the patent system encourages All oligopolies and monopolies and it reduces competition And you can tell this and by the way john lock and thomas jefferson, for example, who were all Ended in favor of the IP idea as a policy tool But none of them thought it was a natural right which you can tell because they thought it should last for 17 years or some limited term Natural rights property rights don't expire after a given term So even john lock didn't really believe that his his ideas supported the idea of Of IP Right. So I would just say that the evidence shows that all patents do is And look in its proponents explicitly say this There are there are quotes from free market thinkers They will say we can't have a receive of unbridled competition In other words, they want a bridal competition So what they're doing is invoking the idea that's used all the time and protectionist arguments You will have some uh, some uh, instant industry And they will claim they need protection from competition from china or japan or whatever So they will beg the legislators to erect tariff barriers or protectionist barriers to protect them Literally it's protectionism right so they don't want the competition because their their complaint is If I have too much competition I can't prosper And this is exactly what the advocates of the patent system say they say well If I spend money to innovate and come up with a profit if it's too easy for people to compete with me And how can I make a profit? And you know, I think that's how to make a profit is an interesting question And it's a tough question and it's what entrepreneurs face every day But asking the question is not the same as posing an argument And uh, uh, there may be some endeavors that are not profitable and should not be engaged in And in fact something you alluded to there are actually A free market or quasi free market thinkers and even some libertarians Um who had proposed explicitly augmenting or replacing the patent system with a system of taxpayer financed genius awards And I think the one I heard was uh something on the order of on a hundred billion dollars a year from medical medical patent innovations And if if you understand the patent system and realize that that's only one slice of all the things the patent system covers If you were to extend this idea generally, we're talking two three four Five 20 trillion dollars a year the government would have to extract from the taxpayer And then have some panel of experts distribute to deserving recipients Um of innovations. There's just no stocking point Um in a way that type of system would be a more honest system Um because it would show It would expose the cost of the system. It would be the taxpayer dollars that were being extracted and spent The patent system hides that it's the patent systems are the same thing in a possibly more Um inefficient and sinister insidious way because it's hidden and it poses as a property right At least it was a welfare benefit like the national endowment for the humanities and the national endowment for innovation That was funded to the tune of a trillion dollars a year. Everyone would say hey I'm getting taxed to support everyone who appeals to this government board For reward every year. That's clearly not free marketing. I just remembered something. Sorry. I'm just remembering something Hold on a minute. Okay Or seven as we wrap up now Uh, I want you to tell people two things first. How can they find you online and second? Uh, just very briefly. What's the title of the work that you did? Which I guess was an adaptation of an article you wrote for the journal of libertarian studies on the subject of intellectual property Okay, fine. Yes Um, I have a website and I have one dedicated towards innovation in intellectual property Which is probably the easiest way for people interested in this topic Which is c4sif.org which stands for center for the study of innovative freedom Um, and the book uh, the monograph I wrote was called uh against intellectual property And you can find it on that site free to download and uh, I hope to produce a successor volume someday called Copy this book Nice. Nice. All right. Well, Stefan. I appreciate your time is obviously a lot more that can be said on this topic But I have people basically begging me to talk about it and I thought well Let's start with patents because the even patents you could do multiple episodes on but at least this helps us get our feet wet On an important and controversial issue. So thanks again, especially thanks again for Thanks for taking some time out of your vacation to come on my crummy show I appreciate you doing that. Thanks a lot. I love your show. It's an honor. Good to do it Thank you very much, Stefan. Stefan Kinsella everybody c4sif.org Is the website you want to check out? Let's talk about the remaining programs for this week tomorrow. We're going to be talking to One of the authors of the new book make it stick the science of successful learning Maybe in trying to master all this material you're doing it all wrong Maybe you're pursuing avenues and means of study That are actually ineffective. And I think I've been doing that myself We'll learn tomorrow about well, frankly how to learn so that the material stays with you On friday, we'll talk to will greg a friend of this program about the situation in Ferguson So you'll definitely want to tune in for those remember you can learn the history and economics. They didn't teach you At my website libertyclassroom.com. Thanks so much for your support everybody Thanks to my supporting listeners in particular at supporting listeners.com Who are getting transcripts of all the interviews discounts at liberty retailers all over the place and the kindle version of my forthcoming book And many goodies to be added in the next few weeks. It's unbelievable one day You're going to go to the supporting listeners.com and there's just going to be an explosion there Of all kinds of fun stuff that you guys will get in exchange for helping me out supporting listeners.com All right, everybody how to learn tomorrow. We'll see you then The tom woods show