 Our first speaker this morning, Stefan Concella. He's a patent attorney from Houston and the editor of Libertarian Papers. And his lecture this morning is gonna be on intellectual property and economic development. Stefan? Thanks, Mark. Very glad to be here at the Mises University. It was here a couple of years ago and it's always a great thing. So let me get right off the bat. I have a lot to cover, so I will try to go as quickly as possible without going too fast. So most of you should be already familiar with the basic idea of praxeology. There's a reason I'm gonna start with this. It'll become clear in a moment. So praxeology is the formal study of the implications of the fact that men use means to attain various ends. What we do is we start with incontestable or a priori propositions that are related to human action and its categories. Primarily for purposes of our lecture today, humans employ scarce means to pursue ends. And there are, of course, other categories implied in action, such as causality, choice, cost, profit and loss. Now another aspect of economic analysis is contingent facts. After we recognize and establish what the a priori categories of action are, we explicitly introduce certain contingent facts to make the analysis interesting. As Hoppe explains, Mises explains the entire body of economic theory as implied in and deducible from conceptual understanding of the meaning of action plus a few general explicitly introduced assumptions about the empirical reality in which action is taking place. So in other words, we make some assumptions to make the analysis more interesting and more relevant to our lives. And Mises, of course, talks explicitly about this. So the branches of praxeology, we're having some, the branches of praxeology would include both catalactics and say crucible economics, for example. So for example, we would assume private property rights and a market to make the analysis interesting. We would assume that there's a money society, for example, instead of just barter. So economic analysis presupposes some legal system as well and property rights framework. In a market economy, this includes at least private property and scarce resources and related rights like contract and negotiable instruments, promissory notes and debt, service contracts and so on. So when you see economists reason about a banking system or an economy, they're taking for granted or they're assuming that there is in place a certain legal system, a certain respect for private property rights. So these are not our priori assumptions. These are explicitly introduced background assumptions about the nature of legal rights that are possessed by actors. Now, we talked about economics is just a branch of praxeology according to Mises. It's the most developed branch so far. What other branches of praxeology could there be? And of course, economics can include crucible economics and catalactics. Mises says that other branches could include the study of war, game theory, things like this. Now, Roderick Long has a comment that the way we sometimes use economics is so broad that it's basically the same thing as praxeology. So it's not clear what types of fields would not be included in economics that would be praxeology. But in any case, you will see Austrians explicitly use praxeological analysis and economic analysis to analyze the effects of aggression as well as private property and the free market. For example, Mises analyzes the hampered market economy and state interventionism and Rothbard analyzes the effects of violent intervention in the market. So in this case, the explicitly introduced assumptions is the existence of a state and certain interventions in the economy that contravenes some kind of baseline in private property rights that we would analyze in a free market economy situation. Now, I'll bring this up because we wanna talk about intellectual property and we need to understand what we mean by the term and how it plays a role in economic analysis. So over the last couple of centuries in the Western legal systems, the Western legal systems have protected along with property rights and scarce resources, so-called intellectual property or IP rights. It's called industrial property in Europe primarily. Now, as a general matter, you can think of IP in the legal sense as legal rights related to creations of the intellect or the mind. That's why the word intellect is used. It traditionally includes four main types, patent and copyright, which I bolded here because this is gonna be the main focus of the discussion. Patents are basically a monopoly privilege granted by the state covering the exclusive right to make or use or sell an invention, say, think of a mousetrap. And a copyright is a similar monopoly privilege to be the exclusive person who can copy or distribute or perform publicly certain original works of expression, like novels or paintings or movies. Then, of course, we have trademark and trade secret. Trademark identifies the source of goods like the Coca-Cola mark tells you you're getting the Coca-Cola from a certain manufacturer and trade secrets describe useful knowledge that you keep secret, that helps you gain a competitive advantage and that the state provides certain protections for. So we're gonna focus primarily on patent and copyright. Now, these are not the only rights. These rights arose, say, roughly 200 years ago in the West in a systematic, modern form, but over the years there have been others added, such as boat hull designs, the semiconductor mask work protection. Trademark law was amended in 95 to add a dilution right, anti-dilution right. Of course, most of you may be familiar with the Digital Millennium Copyright Act of 98, which has resulted in a lot of these takedown notices on YouTube. There's a no-electronic theft act in 97, and even the Economic Espionage Act of 96 has some IP aspects to it. And of course, there's pending legislation and worldwide treaties. There's the anti-counterfeiting trade agreement, which is pending the Protect IP Act in the US. There's current clamoring for fashion rights. The fashion industry is not currently protected very much by IP and even database rights. So the term intellectual property, think of it in two different ways. It's used in the legal way that I've been describing to describe state-granted rights. But it's important here to recognize patent and copyright were not originally called property. And Fritz Maklop and Edith Penrose in a famous study, 1950, explained that those who started using the word property in connection with inventions had a very definite purpose in mind. They wanted to substitute a word with a respectable connotation property for a word that had an unpleasant ring privilege. So it was basically a concerted propaganda campaign to get to sell these ideas because there was some opposition among free market economists and other people with the idea of the government granting these privileges in a systematic way in a modern free market economy to certain people that applied. Now, if you talk to businessmen and investors, they will often use the term IP or intellectual property just to refer to the knowledge that their company has or that a given target company has. They don't really mean patent and copyright. They'll talk about, well, my IP and they mean their secret sauce or the knowledge that the employees have, the way they have of doing things, what makes them unique. This usage is not incompatible with the free market and has really little to do with the state. In this meaning, the investor or the businessman, they would think of patent and copyright as just one legal way of protecting your so-called IP or your knowledge, but it's not the same thing as it. So for purposes of today's lecture and for purpose of economic analysis, we need to analyze each type of IP differently. We need to analyze state interventions that protect knowledge differently than the way we analyze the use of knowledge by actors and by entrepreneurs. So let's think of what the role of scarce means are in action and also knowledge. So both scarce means, scarce resources and knowledge are essential categories of action. This is why I started with praxeology. The structure of human action is essential to understand or purposes of seeing the role of knowledge and scarce resources. So the role of scarce resources in action, of course, is to be a means. Action, human action employs scarce means. A scarce means is that which is causally efficacious at achieving your end. So when you act, whether you're an entrepreneur or any individual even doing a non-commercial activity, you have some end in mind, some goal you want to achieve. You have to select a means that will help you achieve that and your action employs that means. These means, as Mises explained, are necessarily scarce. A scarce means is something that can only be used by one actor at a time. If two or more actors attempt to use this means, then there's necessarily conflict. Now, what's the role of knowledge in action? So the role of knowledge in action, you can think of knowledge as basically information, recipes, as Rothbard called it, ideas. They're a guide to action. As Mises wrote, action is purpose of conduct. It is not simply behavior, but behavior begot by judgments of value, aiming at a definite end and guided by ideas concerning the suitability or the unsuitability of definite means. This is an ultimate foundation of economic science. Guido Hilseman also has some good stuff on this, so do a lot of other Austrian writers, including Rothbard. So I'll elaborate on this further on in the lecture, but knowledge enriches and expands the universe of ends and means. This is why it's useful in action. So let me give a simple example. Imagine that your end is to satisfy your hunger. Let's say you're hungry. So this is what Mises might call a felt uneasiness. You're uneasy at the prospect of not eating something in the near future because you'll even get hungrier. So you want to satisfy your hunger. So you want to satisfy it in a way that you would enjoy. So you want some delicious food. Now, from your past knowledge and experience, you're aware of the possibility of making, let's say, a cake. You're aware that you like cakes. You're aware that you have ingredients and the ability to make a cake, scarce resources. You're aware of the technique you would use to make a cake, and you're aware of different types of cakes. So let's say you consider your ends. You can make a chocolate cake or a lemon cake. These are two ends that you consider. This is where choice comes into play. The human actor chooses which end he wants to pursue, and the one he doesn't choose would be the opportunity cost of the action. So all these action categories play a role here. Now, then the actor considers, based upon his knowledge, which means he's going to employ to achieve his end. Let's say he settled on the lemon cake. So he knows there are different means he can employ to achieve this lemon cake. He can purchase one from a store. He could hire someone to bake it. He could even steal it from someone, or he could acquire the ingredients or use the ingredients he has at hand and bake the cake himself. So he considers these different means, and then he makes a choice about what means he uses to achieve his end. So in this way, knowledge guides the actions that humans engage in, guides the selection of means, and the selection of ends. Now, imagine if you acquire more knowledge. You acquire knowledge of another type of cake, like coconut cake. Well, now if you're aware of this coconut cake, you're aware of three choices instead of two. So your universe of ends has been expanded by knowledge. So if you prefer coconut to chocolate and lemon, and if you choose the coconut, now you're better off than before because it's preferable to you over what the lemon was. So this knowledge helps to increase your wealth or your subjective satisfaction. Contrary also, if you know of another way to make a cake or to obtain a cake because of your technical knowledge, this helps you possibly choose a more efficient way to achieve your end. So you can see that knowledge, the more knowledge that's available, the more efficient action is, the more wealth-generating action is because we have more ends and means. Jeff Tucker and I wrote a few months ago an article trying to classify the role of knowledge and put it in the structure of human action and in economic theory, especially Austrian theory, and basically you can think of the means you use to achieve your ends as scarce goods, but you can think of knowledge like recipes, ideas, information as non-scarce goods. Of course, there's other things that are you can call non-goods. Scarce non-goods would be like a mud pie. It's a scarce resource, but it's not a good because it's not useful or poison or some of the Jeff Tucker's examples. Now, a non-scarce non-good would be something like a bad idea or an awful sound or gibberish text. It's not useful and it's not scarce. So this is a way to think about the role of knowledge and how to classify knowledge and to contrast it with what scarce resources are. Okay, so now let's think about property rights and scarcity. Given this understanding of the role of scarce means, what is the purpose of property rights? The very purpose of property rights is it's in response to this scarcity is to permit conflict avoidance. It's basically to assign an owner to a given scarce resource so that the resources, the means can be used productively and cooperatively. So this of course promotes efficiency in the division of labor. And as a simple example, let's go back to the cake idea. If I'm baking a cake, I might need, if I'm making it myself, I might need a mixing bowl and ingredients, a spoon, my oven, a kitchen, my own body, standing room, time, and knowledge as well. If I'm making the cake and my neighbor wants to also make a similar cake at the same time, we can't use the same spoon at the same time. And if he takes my spoon from me, he's deprived me of the ability to make it. And in fact, if we fight over the spoon, we're both engaged in the activity of conflict and we're not going to be productively engaged in using the resources, we're going to be engaged in destruction and clashing in war. So the purpose of property rights is to allocate an owner to the spoon so that it can be used at least by that person productively. But if my neighbor has his own ingredients, his own spoon, his own mixing bowl, and we both know how to make this coconut cake, we can both use the same recipe at the same time. We don't need ownership of that recipe in order to use it productively as action. That knowledge can guide, we can each use that knowledge to guide our actions at the same time. So this is how property rights are used for scarce goods, but they make no sense for knowledge. So, given this, what is the nature and the function of the IP rights the state does grant? That is the monopoly privileges the state does grant in ideas in the form of patent and copyright. So what they do is they don't protect property rights, although they're called intellectual property rights. They restrict the flow of information. This is what they do. They restrict the use and flow of information. And you can see from our previous discussion that the more knowledge actors have, the better. And if you restrict it, it can only be harmful to economic productivity. In fact, there's a free market economist who wrote fairly recently in favor of patent and copyright, he said to paraphrase the late economist, Joan Robinson, patent and copyright slow down the diffusion of new ideas for a reason to ensure there will be more new ideas to diffuse. Now I wouldn't agree with the latter comment, the latter part of his statement, but he's admitting that patent and copyright slow down the diffusion of ideas. And this is supposed to be an argument in favor of this. Another advocate of IP, and he's not a free market advocate as far as I know, he's just a standard law professor. He wrote, governments adopt intellectual property laws in the belief that a privileged monopolistic domain operating on the margins of the free market economy promotes the long-term cultural and technological progress better than a regime of unbridled competition. So you can see the effect of patent and copyright is basically to protect people who have certain knowledge from competition when they use that knowledge in producing something on the free market. The entire purpose of patent and copyright is to protect people from competition. You can see here in this quote, the fear of unbridled competition. Now, I don't have the best chart here, I used a free service to try to do this, but you can think of it this way. This is how most advocates of IP view the world. On the bottom axis, the horizontal axis, basically they're afraid of competition being too easy. So if it's too easy for someone to compete with you, then these people think there should be a law in place that will make it harder for people to compete with you. Raise a barrier to entry, give you some kind of monopoly for a while, something like that. So for example, in the case of recipes, which I have in the middle of the bottom, what they see is the need for IP law increases as it gets easier to compete with people. So you can see that this is not really a pro free market or a pro competitive idea. In fact, one wonders if that competition gets easier in the realm of scarce goods, will these people start advocating protectionist or mercantilist type measures? I mean, borders just went out of business because of competition from Amazon. Competition is getting easier in some ways nowadays, even in the realm of brick and mortar businesses and scarce resources because of the internet, because of expanding division of labor, because of increasing population, because of many developing countries coming into the capitalist system. So as we have more competition, the regular economy is going to approach the way the digital or the knowledge economy is. That is there will be more competition. So will the people that advocate IP laws now be afraid of this increased competition? So one thing to recognize is that this system is administered by the state, so it's no surprise that it does impose waste and costs on the economy in a variety of ways, and also because it's the grant of a monopoly privilege which stifles competition. So we can expect to see, so here's sort of where you can economically analyze the effect of state IP law. We can see what kind of results we would expect to see and that we have seen. We can expect to see lots of costs like litigation costs, reduced innovation, right? If you protect someone from competition, they don't have to innovate as much, and reduced competition and the formation of oligopolies. So let's just consider some of these costs here. So one of the costs would be lost innovation. So if a group of companies or one company dominates a given field with their early innovations, which they patent, let's say, outside companies are afraid or actually prohibited from entering that field, they're not going to bother investing resources to innovate in a field they can't compete in. So you definitely have lost innovation from patents. The proponents of the patent system would say the patent system incentivizes some innovation. I don't believe that's true, but even if it does, the point is it definitely also reduces some innovation. The patent system costs billions of dollars a year in addition to any innovation suppressing costs. I've estimated $41 billion a year in the US because of patents alone, and I think this is very conservative to be honest. I wouldn't be surprised if it was hundreds of billions, and that's just the cost of US patents. Other costs of IP is it helps to justify the FDA system and its cost, these sort of feed on each other. People say, well, if you have an FDA system that regulates pharmaceutical companies, then we need to give these companies a patent monopoly to protect them from the increased cost that they suffer under the FDA system, and there are arguments that go back the other way. And the US system is probably the worst, the most draconian patent and copyright system in the world, and I have a link to a blog post here, India Shrugging. There are some companies now that are afraid to enter the US market because they're just stepping on so many patents, they're afraid they're going to be sued. There are some software developers that are now withdrawing their apps from the Apple iOS market, et cetera. Just to give you a flavor of what this patent system encourages, let's take a look at some recent patent suits. So we have Lodesys, now suing Apple iOS developers. We have the Android app is in serious trouble, I'm sorry, the Android smartphone platform is in serious trouble. Apple is suing Samsung over its Galaxy products. Of course, Samsung is striking back at Apple with 10 patents of its own. Microsoft is demanding that Samsung pay $15 royalties from every Android phone it sells. On the other hand, Microsoft's on there receiving in some times of these patents. I4I recently run $300 million from Microsoft in a patent infringement claim. Just in the last month or two, Nordtel went bankrupt and had 6,000 patents that were being auctioned, and Google first bid $1 billion or square root of $2 billion, and then they bid $2 something billion, and then they bid $5 billion, $3.14 billion for the patents, and still lost. A consortium of rival smartphone makers primarily, RIM, which makes the Blackberry, Microsoft, which makes the Windows phone, Apple, the iPhone, and others came together in a consortium and bid $4.25 billion in the biggest patent sale in history to buy these 6,000 patents. And the reason they did it was because Google doesn't have a lot of patents. Google is one of the least offensive companies in this regard, and Google, let's say, has 700 patents, so Google and their Android platform is vulnerable to being sued by rivals like Apple, as we see in the earlier bullet points higher on the page. So Google wanted these 6,000 patents not to go around suing people and extorting money from people, not for shakedown purposes, but simply it's like a porcupine defense. Google wanted to have a big arsenal of patents to make Apple and Microsoft and RIM and others afraid to sue them, because if Apple sues Google for patent infringement, then Apple knows that Google can pour through its 7,000 high stack of patents and find something that Apple may be infringing and countersue them. And so basically all these large companies have these patents solely to keep each other from suing each other. And of course the small guys on the outside have no defense, they have no quills, there are no porcupine quills, so they can be sued by anyone inside these sort of walled garden so they don't enter the field, they're afraid to. Moreover, if they're sued, they can't even afford the $3 million they legal fees, not to mention the $300 million damage award that they were to lose. So you can see what this does is it creates oligopolies, oligopolized industries who are protected from competition by raised barriers to entry. But in any case, these companies bid $4.5 billion just to keep Google from having a defensive shield. So this is one case where our normal opposition to the FTC and the antitrust law might be a little bit, I wouldn't cry if the FTC were to look at this consortium of Apple, Microsoft and Sony and RIM and others using the monopoly granted by the state, the patents in a monopolistic way, although we can endorse that. Now RIM, on the other hand, stroke a licensing deal with Intellectual Ventures, one of these patent rolls for 30,000 of their IP assets. So in RIM, the blackberry maker had previously had to pay $600 million to NTP for patent infringement. So you can see most of these companies are being hurt and helped by the patent system, although overall they're being helped in the sense that outside competition from small upstarts is quashed. And there's some other results here. This is a slightly older chart just showing just some of the patent lawsuits in the mobile smartphone area as of a couple of years ago. I mean, this is not the free market. I just updated this last night. Just yesterday, Google's general counsel Kent Walker said because they lost this pi billion dollar bid for the Nortel patents, he said, well, software patents are kind of gumming up the works and innovation. I just wonder kind of and just software patents. I guarantee that the patents that Apple and RIM and Microsoft have are not just software patents that they're using, targeting the Android system with. The problem is patents in general, not just software patents. Now, what other costs of IP are there? Well, they're also used to justify restrictions on free trade, even by libertarians and free market economists, in particular in the case of the drug re-import situation where the FDA regulates drugs, only permits, only authorizes certain drugs, approved drugs to be sold, and they're patented usually. And the manufacturers in the US will export them to other countries like Canada, which have price controls. So they have to sell these drugs at a reduced price, say in Canada. Now, we're not in favor of price controls, but evidently Bayer and others think they can make a profit, selling it at $100 instead of $300 or whatever. So you have a drug that's been legally manufactured and sold to a buyer in Canada, and this drug is then re-imported to the US and resold. This is just arbitrage. Now, it doesn't violate the patent law because there's something called the exhaustion doctrine, which means the maker can only take one bite out of the apple. When they sold it legally in Canada, they've already exhausted their patent monopoly, so they can't complain about it that way. So of course, what they do is they get the FDA to block the import, saying that, well, we haven't approved it yet, even though it's the same drug by the same company that's approved in the US, but it's sold in Canada first, so it's not approved here. And you have free market economists, Richard Epstein, Doug Bandau from Cato, Michael Krauss, arguing against re-importation of drugs, arguing that the federal government through the FTC or other means should prohibit free trade because it would violate, it'd be a way of getting around the patent rights of US pharmaceutical companies. So you can see how this patent mentality corrupts even the free trade bonafides of libertarians and free market economists. It also leads to calls for extensions and extensions of the patent system, I mentioned earlier, fashion is being lobby poor now, et cetera, and American and Western imperialism internationally through the World Trade Organization and this Act of Treaty, they're trying to get, twist the arms of other countries, Russia, China, India to adopt American-style IP law. They're trying to extend it to other fields like fashion, even mixed drinks, bartenders want that, recipes, newspaper headlines in Germany, they wanna copyright on the headline of a newspaper article. And they're expanding the penalties. It's like the drug war, right? The drug war, they always wanna ramp up the drug war and impose a death penalty, put people in jail for longer times. Same thing is going on here as people are more and more able to evade IP law, especially with the internet, encryption, torrenting, file sharing, what they're doing is they're trying to increase the penalties, including a no-do process, administrative, accusation of three strikes and you're out and you're banned from the internet for life. These kinds of things are coming, it's scary. Now, what about other costs of IP? Well, first of all, it makes everyone a criminal, everyone, there's a study by John Tehranian where he estimates that by typical activities, most people that have access to the internet, engage in every year, we each rack up a liability of $4.5 billion a year, each person. This is not even an exaggeration, this is literally true, this is the effect of these laws and you can see it in some of the notorious examples that we've seen, Jami Thomas, some single mother who downloaded like 18 songs and ended up losing and being fined millions of dollars, things like this. It also leads to calls for federal government stimulation of innovation through taxes, because after all, the argument is that if we don't have patent and copyright law, there'll be a suboptimal production of songs and music and inventions. So in some ideal world, we're gonna have this much but we only have this much because of market failure, the public goods problem. So the government comes in, gives these monopolies, raises the level back to where it should be. Well, how do we know that we're at the optimal level? Maybe the patent system helps get us to a higher level of innovation but not quite high enough. Maybe the real ideal level is even higher and in fact, this is what a lot of IP advocates call for. They call for the federal government to tax people, collect the money, give it to a panel of government appointed experts and bureaucrats and look around the country and see who's innovation that year is deserving of a little reward and hand out the rewards. And in fact, even some free market economists have called for an $80 billion a year taxpayer funded innovation price just for medical technology, just for medical. So if you think of all the areas that patents cover, chemical, electrical, software, business methods, and if you think about other types of IP copyright, if you scale this up, it could be trillions a year, trillions a year of taxpayer robbery to incentivize innovation even beyond what the patent monopoly could do. And in fact, one of these free market gods even supports for the arts what he calls artistic freedom vouchers, $20 billion a year to give money to creators and artists. And of course, there are other costs of IP, death, jail and censorship. There are literally people dying today in America because of patents or going to jail or being threatened for jail. There's a recent lawsuit where some guy owning a patent is trying to force Ford not to use certain safety features in their car because it violates their patent. Now they really want money from Ford but the implicit threat is if you don't pay me money, I will use the courts to make you take this safety feature out of the car. People would die because of the patent. There is a case going on right now where there is a maker called Genzyme which makes a drug called Faberzyme which is for rare disease and it is short supply because only one company has the patent and they're selling most of the drug to Europe because they have a better profit there because of this particular case. And so there are Americans who can't buy the drug and there are no competitors because competition is outlawed. Now there is one substitute drug being made in Europe but it can't be imported here because the FDA hasn't approved it. So it also leads to forum shopping. Marshall, Texas, not too far from Houston is the patent litigation capital of the world because they give the highest awards as a whole industry there. At least the patent trolls like Intellectual Ventures and copyright trolls like the notorious Wright Haven. Copyright is literally and often used for censorship. Howard Hughes one time, for example, almost succeeded in using copyright to try to block a biography. He didn't like, he just bought the copyrights to some information that was going to be used in some biographies. Some filmmakers have used it to censor criticism. JD Salinger got a court to literally order a sequel, an unauthorized sequel to Catcher and the Ride to be blocked from publication by a US court. It's literally censorship and thought control. Now patents, from the examples I gave earlier, it also should be clear that patents lead to a lot of waste. You have these companies spending billions of dollars for patents that only serve to keep their competitors, their big competitors from suing them. So this is just a dead weight loss in society and it reduces competition from smaller upstarts. So I've already mentioned this, so let me go on here. Now Rothbard talks about another effect of patents for example, on the market. And that is that patents are always arbitrary in what they cover. They reward some types of things, but some types of inventions and innovation are outside the scope of patents. For example, mathematical algorithms or certain types of medical procedures nowadays. What you have then, and certain abstract of like theories of physics, equals MC squared was not patentable on Einstein for example, even though it was also beneficial to mankind, although Einstein actually didn't invent it equals MC squared, so bad example. But, so as Rothbard points out, when the patent system will give you a monopoly over a certain type of innovation, people are going to tend to divert their R&D efforts in that direction. So this distorts the economy from what it otherwise would be. Milton Friedman also recognized this, that the existence of patents tends to divert activity towards patentable inventions. So it doesn't have a neutral effect on the market. It distorts the market. Now, what about empirical studies about these claims that patents actually improve innovation? I'll just go through a few of these here, but basically economists regularly and almost universally concede that there's no evidence and in fact the evidence is the other way around. Levine says empirically IP doesn't increase creation innovation. Fritz Maklop in 58 said that economists do not have enough information to conclude that the patent system confers a net benefit or loss. He says, we just don't know. We can't know the answer to these things. George Priest in 86, in the current state of knowledge, economists know almost nothing about the effect of social welfare on social welfare of the patent system. A recent study in 04 by two French economists concludes something similar that we don't know anything anymore now than we knew in Maklop's day when he concluded that we just can't know. Recent study by two law professors, Miran Benson, they conclude empirically on average the patent system discourages innovation. So these are the effects. This is the economic analysis of state IP. It reduces competition. It raises barriers to entry, creates oligopolies, reduces innovation, creates societal waste and cost, distorts R&D, does injustice to individuals, causes Ritz seeking and ever expanding laws along the lines of controls pre-controls. Now let's switch to free market IP or knowledge. So the role of knowledge in a free society, as we talked about already, greater knowledge expands the universe of ends and means, it improves action, it increases efficiency and wealth, it enables human progress and more societal knowledge is good. This is what allows human progress over time. The pool of knowledge we can all draw on to make our decisions about what means to use, what ends to pursue always grows. This is why, or one reason why we have social societal progress. Now let's get to sort of what I was aiming at through all this preliminary talk. What are the sources of wealth? So we're talking about economic development. As Hoppe explains, there are only three ways to generate wealth. You can acquire and increase wealth either through homesteading, production and contractual exchange. Those are the only three ways or through expropriating that from others. So let's look at these three types. We have original appropriation, that is you're taking something that was unowned out of the commons. That is a way of creating new property. That's the only way to create new property. So that is a way of increasing wealth. The person who homesteads something is better off after the acquisition. Production now means not to create something new out of nothing. It means to transform property you already own. And that also creates wealth. If you beat metal into a sword, now you have a more valuable object to you, something that's more valuable to you. You've created wealth. You use knowledge to do that, but you don't create new property titles. And finally, there's trade or contractual exchange. And of course, when two people make an exchange, each one is better off after the exchange. They're not equal. It's not true that if you pay $100 for an iPod, that the iPod is worth $100. The iPod is worth more than 100 to you, and the $100 is worth more than the iPod to Apple. So both parties are better off after the exchange. And this is implicit in Rothbard's toward a reconstruction of utility and welfare economics. So the only way that we can guarantee that there's wealth generated in society and that everyone is better off is if there is no aggression and property rights are respected. So when you have property rights, and when you have contract, contract simply means the right of the owner of property to do what he wants with it. He's the one who gets to give permission, someone can use his property or to deny permission, or in the case of external resources to alienate it or to sell it to others. So when you have property rights in contract, you have a free market that leads to trade and wealth is created in that way. And in production, this is universally recognized by the great libertarian thinkers, Rothbard, Rand, Mises, and Hopp. They all explain that we create wealth by rearranging resources that we own already. Now there's a common fallacy that we produce things and this is actually part of the Randian mistake about IP. They think, well, if you produce something, you own it and we produce ideas that are valuable, so we should own those. But the mistake they're making is they're overusing or misusing a metaphor. When we say we produce something, all we mean is we transform something owned already. We make it more valuable. So you can see Rand recognized this in another context. He said, the power to rearrange is the only creative power we possess. Creation does not bring something into existence out of nothing. It just means to bring into existence an arrangement. Of course, you have to own some object to rearrange it. Rothbard said the same thing or something similar. He said that men can work with numerous elements he finds in his environment. These are scarce means. By rearranging them in order to bring about the satisfaction of his ends. And of course, Rothbard has been accused of borrowing his ideas from Rand, which is false. As we can see, Mises wrote, even before both of them, something very similar, that there's a widespread misconception about the nature of production. So he talks about this naive view that it's bringing something into existence that didn't previously exist. But he says, no, what production is, is you combine your personal forces, that's your human action, with the forces of nature. These are scarce resources in the world, so that you bring about a particular desired arrangement of material. And he says here, no human act of production amounts to more than altering the position of things in space and leaving the rest of nature. That means using causal laws, okay? So how does knowledge and the free market play a role in these three sources of wealth? Original appropriation, trade, and production, or transformation. So we can focus on three aspects of the market, which enhance or enable these three ways of creating wealth. So we first have, in an advanced free market economy, when property rights are respected, we can expect to see cooperation among people. They're not just isolated. We don't have crucial economics. We have an advanced society with cooperation where people can use each other's means in means of the sense. And the division of labor and the specialization of labor. We also have the continual acquisition of knowledge or learning and emulation by people. And we have market competition. Let's look at each of these three things in turn and see how they affect the three primary sources of wealth generation. So learning is acquiring knowledge. When you have property rights respected and freedom, then people will learn. They'll learn from others. They'll learn from the culture that we've been born into and from observing other people, even other people on the market, even their competitors. And they'll sometimes emulate them. This leads to the acquisition of more knowledge. If you see a competitor open a grocery store and have wider supermarket aisles and attracts more customers, you've learned something about the way the world works. So as we discussed earlier, this enlarges your universe of possible ends and means, which enhances wealth. When you have more ends, as we discussed earlier, when you know of more possible ends, then we can have greater wealth satisfaction, lower opportunity costs. I gave the cake example earlier, but you could also think of this. Instead of building, if you need to cross a river or have a way to cross a river, you could build a long road around it or build a boat. But now, if you know that there's a bridge that's possible, that's your end. You might choose to build a bridge instead, right? And a larger universe of possible means also enhances wealth creation. It allows a more efficient use of causal laws to achieve our ends. For example, instead of making a bridge on beams or on arches, now we could make it with a cable. That's another means we know of to make a bridge. So how does this play a role in the creation of wealth? So the greater knowledge of possible ends and means, technical knowledge, scientific knowledge, causal knowledge, even cultural knowledge and artistic knowledge, it helps you be a better homesteader. For example, instead of throwing oil away as being some kind of a bad, now you're aware that oil can be used productively. So you now homestead the oil productively. Now your wealth has increased. Production, of course, when you transform goods, if you know of better techniques to transform the iron into steel instead of just an iron sword, you make a better sword, right? Or you might make a car instead of a chariot. And even contractual exchange could be enhanced by more knowledge because the parties know more about how they can use the things they're trading, they know more about possible trades out there, they know more about other prices that have been exchanged in the market, et cetera. So all three ways of creating wealth are enhanced by greater knowledge. And finally, of course, competition, when competition is permitted on the market, when IP laws don't come in and protect market actors from competition, then emulation is possible. And emulation leads to competition, leads to constant striving to satisfy consumers, to increase efficiency and lower costs. And you can use better means to do this if you know of more possibilities. You can innovate, you improve products, so you have more production and more trade. So basically competition, emulation, the division of labor, cooperation and the spread of knowledge, possibility of learning on the market leads to immense wealth creation and the improvement of living standards, technological economic and social progress. Thank you, I'll take questions now. Yes? Sorry? Oh sure, I will. Okay, so the question is, if you hire a software developer to develop software and you have a contractual restriction on his leaking the information or using it for his own goods, for his own purposes, what happens if he violates the contract? So you said that he's in trouble for breach of contract, which I agree with, but what's the status of the knowledge? I think the knowledge is out there and the knowledge is now public, public knowledge now, public domain in a sense, because knowledge cannot be owned. People that now have received this information have not signed a contract with the original parties. So they have no contractual obligation. So part of the damage that the defaulting party has or the contract breaching party has done is to reveal this information. I mean, you can think of it in a simpler way. What if there's just a secret fact about a person? I mean, forget about software, just the fact that I'm missing my middle toe. You know, I'm an actor and my image is very important. I'm missing my middle toe and I've kept this secret all my life and I agree to tell a friend if he promises never to reveal the information and he agrees to pay me $1,000 if he does or a million dollars, whatever. But he goes and tells it to the National Enquirer and soon everyone knows that this actor only has nine toes. All the people in the world are aware of this fact now. Can they be forced not to act on this fact? Can they be forced to forget it? No, it's just knowledge, it's out there. But I think that this is actually the case now, right? I mean, it's even with IP laws, it's very difficult for companies to keep things secret, to stop some copyright infringement or stop some pirating. So they have to deal right now with that reality. They have to enter the market knowing that it's possible for information to get out there and to take precautions against it. But if those precautions fail, they just have to keep innovating or find a way around it. Yes. So the question is, it's very expensive to produce pharmaceuticals, drugs. Would companies have enough incentive to engage in R&D without the patent system? Well, today there are undoubtedly drugs that could be developed, which companies don't engage in R&D and because it's too expensive, right? So the market always is gonna have a line about what's worth investing in and what's not worth investing in. So there would be some innovation that would be done. The answer I would say is the free market is going to determine what's worth investing in and what's not worth investing in. Now, as an empirical matter, I would just suggest that you take a look at, I think it's chapter nine, is the pharmaceutical patent case in the book Against Intellectual Monopoly by Boldrin and Levine. And they do a detailed empirical analysis just exploding all the myths. This is the example you get all the time. What about drugs? What about drugs? What about drugs? But they don't look at the evidence. If you look at the evidence, it's actually not a good case. There are examples of countries in the past that have not had patents that have been powerhouses in innovating. And not only that, I would say that the biggest cost imposed on companies is not the fact of piracy or competition. It's the state of penalizing, regulating and taxing these companies. You take a typical R&D company and a drug company and they're paying half their income in a sense to the government through regulations, pro-union legislation, environmental laws, tariffs, inflation, reduced consumer demand because consumers are taxed, et cetera. So if the government would just get off the backs of companies, these companies and the entire economy would have so much more wealth to use to invest in R&D. I think it would be better off that way. Yes, ma'am. So the question is, for novelists and others who write to write, who publish, should they have a contract with every buyer? I mean, economically and ethically, I can't say. My view is that it's just, as a business matter, it's impractical. In other words, if you wanna buy a book, a Kindle book from Amazon in a free market, let's say where there's no copyright law and it's $3, $5, whatever. And the author or Amazon has insisted that to buy this book, you have to sign a contract saying that if you ever use the knowledge you got from the book, then you owe millions and millions of dollars of damages to Amazon, I might move on to the other bookseller. So I just don't think it's practical. You're not gonna be able to get consumers to agree to such draconian penalties. And if the penalties are not draconian, then it's not gonna really do much good. So I think you could try, but I don't think it's going to work. I mean, you see in the Amazon, sorry, in the iTunes case, sort of pro IP or as IP using as Apple is, even Apple bowed to the pressure and Apple actually fought to remove DRM from music because consumers don't want the DRM on music files. They wanna be able to easily use it. I don't think consumers would want to be liable for millions of dollars to some publishing conglomerate for reading a book. Now you can say, well, you can use the information but you can't copy it. Well, there's a fine line between using and copying. I mean, copying is just one type of using. And furthermore, even if you were able to do that, what you would have is you'd have a subset of society that had agreed to these contractual restrictions but everyone outside of that contractual regime would be free to pirate. So they'd be, you know, they'd have in a party, having free books being exchanged. And so the people on the inside would gradually defect and go to the outside. So I think that, and furthermore, most authors actually don't make a lot of money from publishing and most of them do it for self-promotion purposes, self-expression purposes or other purposes. The publishing company to make a lot of money, partly because of the copyright monopoly. And some of the big authors do but people write for other reasons. They write to express themselves. They write to build a reputation. They write to enhance their services. And some people could make money selling books. They just wouldn't have the ability to stop people from competing with them. So the question is what's the relationship between plagiarism and copyright infringement? Yeah, this is one of these, people who advocate for copyright law and even patent law often will use, they'll just throw out the word fraud or plagiarism as if these are all synonymous. They really don't make a distinction. Really plagiarism has almost nothing to do with copyright infringement and vice versa. Copyright infringement usually wouldn't be plagiarism. Like copyright would be, you know, if I take your book and I just copy, publish a copy of it, I'm not gonna say I wrote it because I wanna sell it. I mean, you know, if I wanted to sell the latest John Grisham book and compete with him, if I put Stefan Kinsella on there, people aren't, they're not gonna buy it, right? So usually wouldn't plagiarize. So most, so people that complain about copyright violators being plagiarists, they are actually not willing to let you copy if you don't plagiarize. They don't want you to copy at all. Plagiarism is just a social, cultural, and contractual matter. You know, you could think of it as a contract between you and your university where they say, look, you're taking this course, you have to write your original essay, and you can't borrow too heavily from other sources, and if you do, you have to quote it, and if you quote it, you have to give attribution, et cetera. So that's plagiarism. That's just dishonesty. And I just think cultural and social norms and contractual relations would govern that. Now where you draw the line, if I were to publish Stephen Cancelo's Nica Monkey and Ethics tomorrow, not many people would buy it, and I would look like a fool. But if I publish, you know, Stephen Cancelo's new Aristotelian Ethics, and you know, 90% of it is just blatant verbatim quotes without even quote marks, you know, people are gonna think it's kind of a shoddy book. So I don't know where you draw the line, but I mean, if you have a few scattered quotes that you quote, but this is just a social matter. I think it has almost nothing to do with patent and copyright. Another thing I mentioned was fraud. People will say, well, it's fraudulent, it's fraudulent. They use it to justify copyright law and trademark law. But trademark law, for example, doesn't stop only fraudulent sales. Some subset of the trademark infringements that trademark law targets could be considered fraud, but only a subset. So for example, if I sell you a knockoff Rolex watch and I represent to you that it's genuine and it's not, I've defrauded the buyer. I've basically stolen his money by trick or by deceit. Of course, that situation is hard to imagine and is rare because if I sell the watch for $20, he knows it's not a real Rolex. He's buying it for $20. He's buying a fake one on purpose so that he can get a cheap knockoff. But that would be prohibited by trademark law, even though it's not fraudulent at all. The seller is not committing fraud and the buyer is not harmed. On the other hand, if I sell it for $10,000, you have to wonder why this guy's paying $10,000 for a fake Rolex from someone. I mean, do I have a store in the mall that says Rolex dealer? I mean, how did I get the capital to build up a store like that if I'm going around defrauding people all the time and getting sued all the time for fraud? I mean, you tend to see knockoffs or either gonna be shoddy and obvious knockoffs and therefore not fraud, or you're gonna see genuine products. I mean, anyone that has a reputable business wants their own name. Dave, the founder of Wendy's, he didn't wanna call his restaurant chain McDonald's. He wanted to call it Wendy's. So people wanna put their own names on things that a reputable business meant. So they're kind of wouldn't, you don't need to regulate this. All you need is the law of fraud. So the question is, in the absence of patents, how would companies respond, say on the free market, with no patents, what measures would they take to protect their ideas and what would they reduce innovation in R&D? Well, we already seen that patents have a skewing or distorting effect. So there are some things now that there's less innovation in because it's not rewarded by the patent system. And there are some things that there is at least relatively more R&D and because there are patents. So if you remove this skewing effect, you're gonna have some change in the market for some companies. I think companies basically face this dilemma. But this is the dilemma faced by all entrepreneurs. If I decide to invest in a given business, I know I'm going to face competition, right? I mean, the ideal market, the long run, is there's no profit, right? Because there's tons of competition. So this is what always happens. You have a successful business idea, you attract competition, your profit margins get eroded and you have an incentive to think of something new or to do the job better or to rest upon your reputation or to take lower profits after your initial higher profit phase has ended. This is no different from what innovators face. It's just a difference in degree, not a difference in kind. So what you have is, let's say a company comes up with a unique method for manufacturing something or a unique feature to a new mousetrap. Well, he can keep it private, he can keep it secret but then he can't profit off of it. If you want to profit off this mousetrap, you have to sell it. And to sell it for most types of innovations, you're going to reveal to the world what your innovation was. Just like the entrepreneur starting a new business is revealing to the world his new business model idea. I mean, this is part of what the market is about. So they would have to decide, is it worth, can I make a profit off of entering into this field by selling this innovation? Now, they would undoubtedly try to use trade secrets to keep something secret, but as I said, that's somewhat limited. In fact, usually when you promote a new product, you're going to want to trumpet the features on the advertising. You're gonna say, hey, this new mousetrap has this features, different from all the others. So you're telling the world what you're doing. There may be some products where you can keep the process secret. In today's world, companies face a dilemma because if you, say, keep a nozzle in a chemical plant that makes your chemical in a more efficient way, if you keep that secret, you could keep a secret for 30, 50 years theoretically. But in the meantime, someone else could independently reinvent it, file a patent on it and stop you from using your own idea. So right now, you're actually dissuaded from keeping things secret because there could be a potential drawback. In a free market, in a free society, with no IP law, you could keep things secret if you wanted to. And the only risk is that eventually the secret will get out, but you can keep it secret for longer that way. So trade secrets would be a stronger method you could rely on in the absence of patents.