William Fisher, CopyrightX: Lecture 4.1, Welfare Theory: The Utilitarian Framework

Hello. I’m Terry Fisher. This is the fourth of 12 lectures
on the subject of copyright. The topic I’ll be discussing
today is the welfare theory of intellectual property in general
and of copyright law in particular. The topics of all 12 lectures are
listed on the slide on your screen. If you’re viewing this lecture after
having watched the first three, then you’ll recall that
in lecture number one, I examined the foundations
of copyright law. More specifically, I began by discussing
the multilateral treaties that constrain the freedom of
each country in the world to set its own copyright laws. I then discuss the originality
doctrine and the distinction between ideas and expression, which
is fundamental to the copyright systems in all nations. In the second lecture, I discussed two
theories of copyright– the fairness, or labor dessert theory, which tends
to have greater salience in countries influenced by the common law tradition,
and the personality or personhood theory, which is greater salience in
countries influenced by the civil law tradition. Although it’s gaining in
strength outside that region. In the third lecture,
I surveyed the types of works that are subject
to copyright protection. I showed how the rules of copyright
law vary significantly by type, and consequently that
the business models that have developed on the basis of
those rules differ considerably. Today, we return to copyright theory. I’ll be examining the third
of the four general approaches to copyright law, which is
known as the welfare theory. You can see from the list
of topics on the screen where we’re going after this. The first segment of today’s lecture,
will describe the overall framework of the utilitarian perspective
that underlies the welfare theory. The second segment will
examine how, viewed through the lenses of the welfare
theory, copyright law functions. In the third and last
segment, I’ll explore a few of the many applications and
implications of the welfare theory. On your screen now should
appear a map, specifically the second of the two maps I’ve
been employing in this course. This one, as you can see, addresses
theories of intellectual property. The map itself, as I’ve indicated,
is available in several formats on the CopyrightX home page
and on my personal home page. The fairness theory, which
I discussed two weeks ago, centers on the proposition
that labor gives rise to a natural property right
in the fruits of that labor. Somewhat more specifically,
creative or intellectual labor, so the argument goes, gives rise
to a natural right to a reward or a set of entitlements proportional
to the amount of labor invested. Law, the argument continues,
should recognize and enforce that natural right. In lecture number two, I discussed some
of the implications of the labor theory and the ways in which it finds
expression nowadays in many copyright systems, including that
of the United States. I also discussed some
of the difficulties, complexities, and ambiguities
associated with the theory. The second of the four main approaches,
also considered in the second lecture, is the personality or personhood theory. Its premise is that law
should provide people, especially but not exclusively
artists, property rights over objects or intangibles that they need in
order to fully realize theirselves. This argument is grounded in
the writings of Kant and Hagel. In the second segment
of lecture number two, I examined some of the contemporary
applications of the personality theory. In particular, the ways in which
it has informed the practice in European countries of moral rights. I also discussed some
difficulties for complexities associated with that argument. Today, we turn to the welfare theory,
which has a very different heritage. The foundation of the welfare theory
is, as I mentioned, utilitarianism. Its patron saints are Jeremy
Bentham and John Stuart Mill, who established starting in the late
18th century a distinctive approach to political thought and
eventually economics. The key idea of utilitarianism,
undoubtedly familiar to most of you, is that government and
law in particular should be organized so as to promote the
greatest happiness of the greatest number. Somewhat more
specifically, law should be organized to induce
people to behave in ways that redound to the benefit
of the public at large. How? Primarily by creating combinations
of incentives and penalties to nudge people in socially
beneficial directions. Two characteristics of this
orientation bear emphasis and cause it to contrast sharply with
the fairness theory, its primary rival. First, the utilitarian approach
is prospective in orientation. In other words, it
looks forward in time. It seeks to craft the law in a way
that will induce people in the future to behave in a fashion that will
increase overall happiness or welfare. By contrast, the fairness theory, as we
saw, is retrospective in orientation. It seeks to create
rights that appropriately reward people for their
conduct in the past. The second characteristic
of the utilitarian approach that differentiates it from the
theories we’ve discussed thus far is that it’s collective rather
than individual in orientation. It focuses on the welfare
of society as a whole rather than on doing
justice to or serving the human needs of its
individual members. So that’s the starting point–
the foundation of this approach. The way this venerable
broad perspective is brought to bear on intellectual property
is through the concept of public goods. This is a phrase common in
economics, although less familiar outside the field of economics. I’ll begin by defining it and
then discuss its implications. A public good economists
tell us, is a good that has two related features– it’s
non-rivalrous and nonexcludable. By way of contrast, consider an apple. An apple is said to be rivalrous because
consumption of the apple by one person is inconsistent with consumption
of it by a second person. If I eat the apple, there’s
nothing edible left for you. Partly because it’s rivalrous in this
sense, it’s naturally excludable. In other words, as long as
the apple is in my possession, it’s difficult for you
to gain access to it. A non-rivalrous good is
one whose consumption is not inconsistent with its
availability to other people. A classic example of this
phenomenon that figures prominently in the literature of economics is a
lighthouse or other navigation aid. Suppose that I erect a
lighthouse on a rocky headland. The purpose of the lighthouse is to warn
ships not to come close to the rocks, thereby enabling them
to avoid catastrophe. The benefit of that warning
can be provided simultaneously to a nearly unlimited number
of ships and their captains. Making the lighthouse
signal available to one ship does not diminish its availability
or benefit to other ships. The lighthouse is for that
reason said to be non-rivalrous. For a related reason, it’s
also said to be nonexcludable. As should be apparent by
now, it would be difficult for me, the creator of
the lighthouse, having made the signal available to one ship to
prevent others from benefiting from it. Consequently, it would
be very difficult for me to charge for access to the good. In theory, I suppose, I could
construct a fence of some kind 10 miles out from the lighthouse–
in other words, on the horizon this photo– and then charge
ships who want to enter the gates. But that’s plainly impracticable. These two characteristics
of lighthouses largely explain why there are almost no
privately constructed lighthouses or other navigation aids
anywhere in the world. The reason is that no private party
has an appropriate financial incentive to construct such a socially beneficial
facility because the builder would be unable to charge the persons and
organizations who benefit from it. Navigation aids are the example of
public goods most commonly deployed by economists. Here are some others. National defense. Once the benefit of an
army or navy is made available to one
resident of a country, it can be enjoyed by everyone
else in the country. Roads can be used by a very
large number of drivers simultaneously without
impairing usage by others. Now, as any commuter can
attest, there’s an outer limit to the number of cars that
could use a road simultaneously. But short of that limit, roads
function as public goods. Most important for our
purposes, the kinds of things that are at issue in
intellectual property, specifically inventions
and reproducible art, are classic examples of public goods. Here’s a simple illustration. Suppose that I’m a poet. I write a poem. I make it available to one poetry lover. She reads it and likes it. She’s likely to want to
share it with others. Why? Well, partly, of course, because of the
natural human impulse to share things. But also partly because by sharing it,
she would not be giving up anything. Even after sharing it, she could
reread or recite it anytime she wants. The practical result is that I
will have great difficulty charging successive readers
for access to my poem. Instead, it is likely to spread
from one reader to another without my knowledge or permission. Public goods, such as– as we’ve
seen, lighthouses, roads, and poems, are special in a couple of ways. First, usually though
not invariably, they have especially large social benefits. Second, they’re likely
to be under produced. In other words, to be generated
at socially suboptimal levels. In this respect, I,
the hypothetical poet, am in the same position as
a private party considering building a lighthouse recognizing
the difficulty of collecting money from readers unlikely to be
discouraged from producing the poem in the first instance. And society at large
will consequently suffer. If lawmakers wish to prevent
this unfortunate outcome, they have to act in some way,
have to provide a special stimulus for the creation of public goods. How governments can
provide so such a stimulus we’ll consider in just a minute. Before doing so, however, we have to
consider several circumstances that will either exacerbate or mitigate the
hazard that public goods will be under produced and thus increase or decrease
the need for governmental intervention. Listed on the screen
are some circumstances that are commonly said to
exacerbate the public goods problem. First, high cost of creation. If a public good cost a lot to generate,
the risk that it will be under produced is especially serious. In the intellectual property
context, the premier example is new pharmaceutical products, which
taking into account the money spent on failed experiments, cost roughly $800
million to $1 billion dollars apiece to produce. The second exacerbating
circumstance also true of the pharmaceutical
industry is high uncertainty. If a potential innovator
is unsure of success, he or she is especially likely
to give up at the threshold. This tendency is exacerbated
in social settings where potential innovators
are risk averse. By contrast, high degrees of uncertainty
are less problematic in social settings where potential innovators
are risk preferers, meaning naturally inclined to gamble. This is an interesting contested theme
in the context of intellectual property because some commentators relying
either on anecdotal evidence or in a few cases empirical work,
contend that some kinds of artists are risk preferers. This matters from utilitarian
standpoint because to the extent artists or authors are
gamblers by temperament, we should be at least
marginally less concerned with giving them strong
legal protections. A third circumstance that is said to
exacerbate the public goods problem is low marginal cost of production. If it’s easy to make
copies of an innovation, then the risk that it will be spread
willy nilly without any compensation to the original creator
are especially high. Again, drugs provide a clear example. New pharmaceutical
products, at least if they consist of so-called small
molecules as opposed to biologics, are easy to replicate cheaply. As a result, the hazards of
under production are high. In the copyright context, this
worry is even more serious nowadays with respect to digital embodiments
of recorded entertainment. Sound recordings, which we
discussed last week, or films. It’s virtually costless to reproduce
and redistribute digital recordings. In other words, the marginal cost
of the copies is close to zero. That creates well known hazards
for the creators of such things, increasing the argument for some
kind of governmental response. In the same vein, ease
of reverse engineering exacerbates the public goods problem. The easier it is to figure out how
a particular product was created, the easier and cheaper it will be
to replicate it without permission. Most copyrighted materials are
highly vulnerable on the score. Reverse engineering a poem, for
example, is a simple matter. There are, however, a few exceptions. I discussed one of them in the
previous lecture– software. Software enjoys a modest, natural
shield against some kinds of copying. After a program is written in a
language comprehensible to people, it is compiled into so-called object
code– the sequence of ones and zeros comprehensible to computers. Proprietary software is
typically distributed to the public only in object code form. In other words, the source
code, the human readable code, is not contained in the CD-ROM you
purchase or the copy of a program that you download. Now, there exists things called
decompilers– devices that enable one to infer source
code from object code. But they remain imperfect. As a result, software developers are
able by keeping the source code secret to discourage replication of that code. Members of the public
can, of course, make verbatim copies of the object code. That’s what the term software
piracy usually refers to. But they have a harder time getting at
the source code, and thus a harder time modifying or adapting the program. The key to this modest
amount of natural protection is the difficulty of
reverse engineering. Last but not least, the
public goods problem is especially worrisome
when the product in question has strong positive externalities,
meaning that it confers benefits not merely on immediate consumers,
but also on third parties. The context in which this
issue arises most often is with respect to
informational products that have infrastructure or generativity
benefits, to use terminology developed by Brett Frischmann
and Jonathan Zittrain. The key example is the set of
protocols that underlie the internet. The reason that such
externalities matter is that would be especially tragic
if the incentives for the creation and improvement of such things
were insufficient to foment them. So to review, there are
five main circumstances that can exacerbate the
public goods problem and thus heightened the need
for governmental intervention to overcome it. Those circumstances are high creation
costs, uncertainty, low marginal cost of production of copies
of an innovation, ease of reverse engineering, and
strong positive externalities. On the other side of the
ledger are circumstances that mitigate the public goods
problem and therefore reduce the need for governmental involvement. First, in some contexts,
innovators obtain through lead time enough of
an advantage over copyists to enable them to recover the
costs of their innovations, thus reducing the need for
a governmental stimulus. Justice Breyer of the
United States Supreme Court, long ago when he was an assistant
professor at Harvard Law School, wrote an article developing this
argument in the context of trade books. One of Breyer’s contentions was
that the writers and publishers of so-called trade books– for
example, the textbooks that are used in US high schools– enjoy at
least a moderate lead time advantage. It takes a while, he contended,
to reproduce and redistribute books of the sort. During the window of time before
competitors can enter the field, the first publisher
can earn quite a bit. Perhaps enough to render uncertain the
social need for copyright protection with respect to such books. Hence the title of
Breyer’s famous article, “The Uneasy Case for Copyright.” Another context in which lead
time may be sufficient adequately to support innovation is fashion,
meaning the design of high end clothes. At least until recently,
a fashion designer enjoyed a window of time
between the first introduction of a new design and the moment
when knock offs became available. During that window, the designer
could and did sell his or her dresses and suits for a very high price
to wealthy and fashion conscious, or perhaps prestige
conscious, consumers. As a result, innovation has
long flourished in fashion, despite the fact that in many
countries, including the United States, new clothing designers do not enjoy
copyright protection or indeed any other type of intellectual
property protection. Now, this argument, I hasten
to add, is controversial. Some commentators and
designers disagree sharply, and most commentators acknowledge that
the lead time window is getting shorter as the technologies for quickly
reverse engineering and replicating fashion innovations are advancing. Another circumstance that may
reduce the public goods problem and therefore reduce the need
for governmental involvement is the presence of customary
or extra legal norms that forbid or discourage
unauthorized, uncompensated usage of the good in question. Again, trade books may be an example. If there is a custom adhered to by
all of the publishers in the field not to knock off each other’s works,
then the need for legal intervention diminishes and indeed
may evaporate altogether. This argument may also be
found in Breyer’s article. Another potential example of extra
legal norms is stand-up comedy. Professors Dotan Oliar and Chris
Sprigman argue in a recent article that comedians have a fairly
elaborate set of customs that discourage
so-called stealing jokes. Not all comedians abide by those norms. Robin Williams, for example,
is famous for defying them. But most do. To the extent these
customs are effective, then legal intervention may
be less necessary to provide an incentive for the
creation of new jokes. A third circumstance that can
mitigate the public goods problem consists of opportunities for increasing
excludability through self help. That’s a somewhat cumbersome
phrase, but here’s the basic idea. In some contexts, innovators
can use self help maneuvers to prevent promiscuous
reproduction– the creation and distribution of knockoffs
of their innovations. Innovations in the fields of soft
drinks and chocolate, for example, are usually protected by keeping the
formulas for the innovations secret. Think Willy Wonka. Encryption is a modern
analog to secrecy. In some contexts,
innovators nowadays are able to impede reproduction
of copies of their innovations by encasing each copy in a
technological wrapper of some kind. Think Blu-ray disc. I’ll return to this
strategy in just a minute. Yet another self help
technique relies on contracts. An example– in the United States,
in contrast to many other countries, the primary databases for
legal materials are not free. Instead, they’re hosted by
private companies, specifically Lexus and Westlaw. And those companies charge a
fair amount of money for access to their databases of judicial
opinions and statutes. How? How do they protect
themselves from competitors who have an obvious incentive
to copy their databases and make them available more cheaply? Well, for the most part, not
by relying on copyright law. In the United States, in
contrast to many other countries, governmental works including
judicial opinions and statutes are not covered by copyright. They are in the public domain. Anyone is free to copy them. The way in which Lexus
and Westlaw nevertheless discourage competition and
maintain their business models is by requiring subscribers
to agree to limitations on copying and
redistributing the materials. Violation of those agreements
is not copyright infringement, but it’s actionable as
a breach of contract. The net result, Lexis and Westlaw don’t
need intellectual property protection to maintain their business models. The fourth circumstance that
mitigates the public goods problem is that with respect to
some kinds of innovations, alternative motivations for
production can substitute for governmentally organized incentives. A non-exhaustive list
of such alternatives is set forth on your screen. The most obvious, passion. Many artists love their
work and would continue to do it even in the absence of
any monetary reward whatsoever. To the extent that’s true,
the utilitarian argument for intellectual property or any
other governmental intervention falls away because the good in
question will not be under produced. Assume for the moment that all
poets write for love, not for money. That, from the utilitarian standpoint,
would provide a compelling argument for withdrawing copyright
protection from poetry. Now, there are other arguments reviewed
previously in this lecture series for affording poets strong
intellectual property protection. But from the utilitarian
standpoint, the fact, the possible fact that
a particular producer is motivated by non-monetary
incentives reduces the need for law. Prestige, fame, tenure– these play
powerful roles in academic communities. Most scholars make no money
whatsoever from their articles. Some make money on books, but
from articles, almost never. So why do scholars write them? Well, first, to get tenure. And then, in some cases, to
increase their prestige or renown. Less selfish is the next entry on
the list– the norms of science. Specifically, truth seeking. This figures, at least to some degree,
in all fields of scholarly endeavor. Most people who work in
research universities are primarily focused on
contributing to human knowledge, not on earning more money. Scholars who’ve written powerfully about
the implication of this fact for patent law and about the risks
we run by contaminating this ethos with monetary incentives
include Arti Rai and John Golden. Advertising– I mentioned
this in a previous lecture. In some contexts,
intellectual property products will be generated even in the
absence of legal protection because they serve as
advertising for other things. For example, it’s sometimes
said controversially that sound recordings function as
advertisements for performances, specifically for concerts,
and thus that we should not be troubled from a
utilitarian standpoint by the decline in the
monies that could be earned by selling copies of the
recordings themselves. Next, collaborative voluntary creation. In some contexts, people love to
contribute without monetary rewards to collective creative enterprises. A rich array of such settings is
examined by my colleague Yochai Benkler in the two articles
listed on your screen. Perhaps most familiar
modern example is Wikipedia, which now rivals in influence and
accuracy proprietary encyclopedias like the Encyclopedia Britannica. The people who have built
Wikipedia don’t make any money. So why do they do it? Well, primarily because it’s fun. It’s fun not just to
contribute to knowledge, it’s fun to engage in a collaborative
enterprise of that sort. Again, the general point is that to the
extent such motivations are operating, the need for governmental
incentives diminishes. Finally, that need is
also reduced to the extent that innovators in a particular context
are supported by private philanthropy. For example, as Mike Scherer
emphasizes, once upon a time, philanthropy was a main way in which
musical composition was funded. Another example– in the United States
today, the news, gathered and broadcast by Public Radio stations, is
funded in significant part by listeners who voluntarily
contribute funds. Again, to the extent that’s true,
the need for governmental support is reduced. So to review, we’ve identified a
special and especially important category of goods known by
economists as public goods that are subject to a unique danger. The danger is that unless
government stimulates in some way their
production, they will be generated in socially
suboptimal quantities. There are, with respect to
some such goods, circumstances that exacerbate the
hazard of under production and thus intensify the need
for governmental engagement. Conversely, there are with respect
to other types of public goods circumstances that reduce
or mitigate the difficulty, and thereby reduce the need
for governmental engagement. So let’s assume that
we’re dealing with one of the many types of
intellectual products where the public goods
problem is serious. Say, full length entertainment
films or new vaccines. If a government recognizes the risk
that such things will be under produced and seeks to overcome
it, how could it do so? Well, over the centuries,
governments have attempted to resolve the public
goods problem in five different ways. They’re listed on your screen. I’ll survey them
briefly and then zero in on the one that’s most relevant
to this course of lectures. Number one– the government can
provide the public good itself. Recognizing that it will be under
produced by private parties, the government can produce it. An example is space research. In most advanced countries, government
agencies conduct space research. In other words, governments don’t rely
on private parties to do the research. Rather, governments take
on the task themselves. In the United States, this
approach may be corroding a bit, but it’s still the dominant one. Similarly, much agricultural research is
currently conducted in government labs. Likewise, the provision
of national defense is almost always done by a government. Mercenary armies are rare,
at least in the modern world. The final example mentioned
earlier– navigation aids. Throughout the world, almost all
lighthouses and buoys and so forth are built and operated by governments. Not surprisingly, the density of those
aids varies with the amount of money each government is able and
willing to devote to the project. So there are many more buoys per mile
along the coast of the United States than, say, along the coast of Croatia. Number two– instead of
providing the public good itself, a government can select and
subsidize private parties who are able and willing
to provide the good. The premier example of this strategy
in the United States is the $27 billion per year that the National
Institutes of Health pay to private parties–
typically universities– that, in the government’s
view, are likely to conduct socially beneficial medical research. Much smaller scale is the grant
program of the National Endowment for the Arts, which subsidizes
some kinds of cultural production. In Europe, governments commonly
subsidize private filmmakers. In other words, give them
grants that supplement the money they can earn from box
office revenues, performance licenses, and so forth. Where do the European
governments get the money that they then pay to the filmmakers? Well, sometimes from
general tax revenues. Sometimes by taxing television
stations or television advertising. Implicit in this portion of the
system is a controversial judgment that film is a more worthy art
form than television programming. Finally, sometimes the
European governments get the money through taxes
on box office receipts. That at first seems very
odd, until one realizes that the governments are
trying in this fashion to diversify the kinds of
films that are produced. In other words, a portion
of the ticket prices paid by the patrons of
mainstream films are used to subsidize films that
are less popular, perhaps because they’re unconventional,
or because they’re made by first time filmmakers. Arguably, the ultimate objective is
to elevate the tastes of moviegoers. Whether the European governments are
justified and successful in this regard is a question to which we’ll return
later in this lecture series. Number three– instead of giving
private parties grants in hopes that they will then
generate public goods, the government can offer to
give the private parties prizes if they generate socially
beneficial public goods. In the context of inventions, the former
Soviet Union and the People’s Republic of China have pursued this
strategy aggressively. In the United States,
it’s used much less often, but innovations in atomic
energy are stimulated by the government in this fashion. In the artistic context, the Audio
Home Recording act in the United States contains a mechanism for
distributing government funds to the owners of the
copyrights in popular songs. Several European countries have
much more extensive levee systems that work essentially the same way,
all reliant prizes to induce innovation that arguably would not otherwise occur. Solution number four consists of legal
reinforcement of self help strategies. A few minutes ago, I mentioned
that in some contexts, secrecy or encryption can
substitute for governmental funding and supporting innovation, specifically
by providing innovators protection against competition and thus helping
overcome the public goods problem. Secrecy and encryption
are not perfect, however. They’re threatened by economic
espionage, by faithless employees, and by encryption circumvention. So governments can come
to the innovator’s aid not by paying them money, but
by establishing and enforcing penalties for evading the innovators
private self help strategies. That’s basically what
trade secret laws do. It’s also the essence of the Boat-hull
Protection Act in the United States, which forbids certain ways
of reverse engineering the design of recreational boats. Last but not least, this approach
underlies the recent addition to the copyright universe of
so-called anti-circumvention rules. In brief, these rules impose
fairly strong penalties upon non-permissive trafficking
in circumvention technologies, and in some cases, upon the act of
encryption circumvention itself. The idea behind these rules
is to buttress encryption as a strategy for discouraging
non-permissive reproduction of cultural products. I mentioned these rules
in the first lecture. And we’ll come back to them and examine
them in detail in the 11th lecture. This brings us finally to the
fifth, and for our purposes here, the most important
of the approaches. The fifth strategy for overcoming
the public goods problem is that governments sometimes
protect the producers of public goods against
competition through law. So here’s a quaint example. In the 19th century, governments would
sometimes authorize private companies to create toll roads or bridges. In other words, to construct turnpikes
or bridges over rivers, and then charge the travelers
who wanted to use them. But here’s the key feature. When doing so, governments would
frequently promise the companies that no competitor would be permitted
to construct a rival road or bridge, at least for a certain period of time. The purpose and the effect
was to enable the companies to charge high tolls,
at least for awhile. High enough to defray the construction
costs and to make a tidy profit. Now, a footnote. The governments didn’t always
make good on their promises. For example, the famous Charles River
bridge case in the United States arose out of a breach of
a promise of this sort. A promise to limit the set of
bridges across the Charles River here in Cambridge to
the first developer. Investors expectation
that governments might renege in this way limited the
effectiveness of this approach. Putting that important
nuance to one side, the key point is that
governments sometimes encourage private parties to make
socially beneficial things not by giving them grants or offering them
rewards or helping them to lock up their ideas, but by
suppressing competition, giving them for limited
periods of time monopolies. Intellectual property, and the law of
copyright and patent in particular, constitute an application
of this approach. At least when viewed through
the utilitarian glasses, the point of such laws is to give
authors and inventors exclusive rights to make and distribute
copies of their creations, and thereby to charge
high prices for them. High enough to offset the cost of
creating them in the first instance and, even more importantly,
to induce creative people to become authors and inventors
rather than lawyers or financiers. In the next segment
of this lecture, I’ll examine in detail how the copyright
system works, how exactly it functions to overcome the public goods problem.

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