William Fisher, CopyrightX: Lecture 4.3, Welfare Theory: Applications and Assessment

William Fisher, CopyrightX: Lecture 4.3, Welfare Theory: Applications and Assessment

Posted by


This is the third and
last segment of a lecture on the Welfare Theory of Copyright. In the first segment, I discussed
the so-called public goods problem; the kinds of circumstances that either
exacerbate or mitigate that problem; and the five ways in which governments
have, over the past several centuries, attempted to overcome that problem. One of those five mechanisms,
as we saw, consists of the creation and enforcement
of intellectual property rights, including copyrights. In the second segment of the lecture, I
used a stylized version of a real case study, involving sales of
copies of a documentary film to examine in some detail how the
copyright system does, or might, advance the goals of the welfare theory. In this third and last segment of
the lecture, I’ll do two things. First, I will explore a few of the
many applications and refinements of the welfare theory that
economists and legal scholars have developed recently. And second, I will offer a preliminary
survey of the strengths and weaknesses of copyright assessed from the
standpoint of utilitarianism. The first and most general
application of this theory begins with the observation that
from a utilitarian standpoint, copyright is not an unalloyed good
but is rather a necessary evil. Social welfare is advanced
when ideas flow freely and when producers compete to satisfy
consumers’ desires efficiently. Copyright impedes both of those ends. The reason that, nevertheless,
the copyright system is in the aggregate
of socially beneficial is that it is necessary–
so the argument goes– to stimulate the creation
of intellectual products from which we all benefit. Notice that this orientation
differs very sharply from the way in which copyright is
seen through the lenses of the fairness theory, or the personality theory–
both considered in lecture number two. Viewed through those glasses, copyright
deserves our unqualified support, because copyright law
tracks and enforces the natural rights, or the fundamental
human needs, of artists and authors. The support provided to copyright by
the welfare theory is more grudging. The conception of copyright
as a necessary evil has a crucial practical implication. Copyrights should not be used in
context in which they’re not necessary. In particular, copyright
protection should not be extended to kinds of innovations that
would be produced in optimal numbers without those protections. So what kinds of innovations
might fall into this category? I mentioned a few in the
first segment of the lecture, when discussing circumstances that
can mitigate the public goods problem. Perhaps the most obvious
candidate, already mentioned, would be advertisements. You will recall, I hope, Justice
Harlan’s dissent in the 1903 Bleistein case in which he contended
that advertisements should not enjoy copyright protection. A welfare theorist
might agree with Harlan, not on the grounds that ads are not
art, but on the ground that companies have lots of other incentives to
produce and disseminate advertisements. So if you eliminated
copyright protection for ads, you would not likely see any
diminution in their output. Much the same could be said for
scholarly articles, also mentioned in the first segment. Arguably, these are already produced in
numbers that exceed the social optimum. But putting that source of unease to one
side, the various non-pecuniary motives that drive scholars– such as tenure,
reputation, fame, altruism, insecurity, boredom, and so forth– are more
than adequate to incentivize the creation of those
articles– a possible objection. Well, maybe so, but social welfare
requires more than inducing scholars to write articles. It also requires the establishment of
adequate incentives to publish them. Copyright protection may not
be necessary for the authors, but it is necessary for the publishers. This is a very important
refinement of the welfare theory. Indeed nowadays, economists, who write
in this vein, tend to be as or more concerned with creating optimal
incentives for the commercialization of innovations as they are with creating
optimal incentives for generating those innovations. However, arguably,
this legitimate concern has little grip in the context
of scholarly articles, at least nowadays, when the cost of publishing
them has, courtesy of the internet, dropped so low. So here’s the general guideline
suggested by these two examples. If you find the welfare
theory congenial, you should be watchful as we proceed
through this course for circumstances in which copyright entitlements
are not necessary to stimulate creative activities or the
commercialization of their products. In such circumstances,
the policy argument for the elimination of the
entitlements at issue is strong. Here’s the second implication
of the welfare theory. You’ll recall, I hope, that
in the previous lecture, I discussed the disaggregation
of the copyright system– the ways in which the rules applicable
to specific types of innovations differ. The welfare theory offers potential
justification for this disaggregation. Why? Because as we’ve seen, the severity
of the public goods problem varies by type of work. In addition, the best way of offsetting
the hazard of under production varies by type of work. Thus, the scope of the
set of entitlements enjoyed by different
creators should differ. Here’s an example, duration. Currently, both patents and copyrights
last for the same period of time, regardless of the type of
work they’re applied to. Patents last for 20 years from the
date of the patent application, while– at least in the United
States– most copyrights last for the life of the
author plus 70 years. Those terms don’t change when
the type of work changes. Arguably, from the standpoint
of welfare theory, they should. To be sure, there are
welfare-based counter arguments for the impulse toward disaggregation. Most importantly, subdividing
the universe of copyrighted works into even more distinct varieties,
each subject to even more customized sets of rules, would increase
administrative and litigation costs. Equally serious, that the risk that
the lobbying power of companies that stood to gain by tweaking the
increasingly specialized sets of rules would grow, which would be good for
those companies but bad for the public at large. These competing
considerations are nicely explored by professors,
Mark Lemley and Dan Burke. A third application
of the welfare theory consists of a guideline for
comparing the relative desirability of the various rights that we
might give to copyright owners. Specifically, it suggests that when
choosing among possible rights, we should attend carefully to the
ratio between the incentives generated by each entitlement and the social
welfare losses that come with it. Other things being
equal, we should strive to give copyright
owners entitlements that have large incentive-to-loss
ratios and deny them entitlements that have low ratios. Here’s an example. Should we permit copyright owners
to prevent quotation of excerpts from their works in critical reviews? Viewed from the standpoint of welfare
theory, the answer is probably no. Why? Because on one hand, giving
copyright owners this power would not enhance their revenue, much. On the other hand, it would lead
to large social welfare losses by reducing the informational
value of critical reviews, thereby diminishing the
ability of customers to decide whether they want
to go see a particular movie, to read a particular book, and so forth. In sum, the incentive-to-loss
ratio associated with this particular
potential entitlement is low. Therefore, if we are faithful to
the welfare theory of copyright, we should deny this right
to copyright owners. And in fact, most jurisdictions
do deny it to copyright owners by creating an exception or limitation
on copyright for critical reviews. As you can see from the map, there
are many more potentially illuminating applications of welfare theory. Some of them, I’ll take
up in subsequent lectures. So now, armed with these various
applications and insights, let’s return to a general
question I implicitly left open in the first
segment of this lecture. Copyright law, I argued, is only one of
five possible ways in which governments could and do seek to offset
the risk that public goods will be under-produced. Is it the best? Or somewhat more subtly, what are
the advantages and disadvantages of copyright compared to
the other four strategies? One of the motivations for
undertaking this survey is that it’s far from obvious
that copyright will always be the best way of stimulating
every type of intellectual product. As sectors of art and
business evolve, it’s possible that one of the
other four strategies may surpass it in relative
social desirability. So the map sets forth
an initial catalog. As a mechanism for inducing
socially beneficial creativity, copyright has four main advantages. First, it relies upon the
market to drive innovation toward areas of high social value. Potential creators,
knowing that their revenues will be increased by
the number of people who will purchase their products,
direct their creative energies towards zones where there are
lots of potential customers. And that, usually, corresponds
roughly to high social value. Now, not always. Research on new drugs,
which tends to focus on ailments that afflict the
rich and neglects ailments that afflict the poor, is perhaps the
sharpest counterexample, but roughly. Second, the copyright system does not
rely upon government administrators to determine the best paths
for research and innovation. Instead, it places control in the
hands of private parties, who typically have better knowledge than
the government administrators concerning the costs and benefits
of alternative potential lines of research, writing,
artistry, and so forth. Third, the copyright system,
like the patent system, has the social welfare advantage of
imposing the costs of innovations upon the users of those innovations. The practice of recouping costs
through monopoly pricing– that we’ve explored in
detail in this lecture– has a commendable ancillary benefit. The people who benefit
from a film or drug pay not just the marginal
costs of reproducing it but a share of the cost of
creating it in the first instance. Not only does that seem fair, it avoids
the kinds of slippage and inefficiency that result from misalignment
of payers and beneficiaries. Fourth and finally, copyright, and
intellectual property in general, tends to foster fast, focused
research and innovation. Why? Because innovators know that only if
they reach the finish line first– produce the film, create
and test the new drug– can they recover their costs of expression
by securing and then exercising– as we’ve seen– market power. In this respect, copyrights
and patents contrast sharply with government grants as a
mechanism for stimulating innovation. Grants are less likely to generate
the same aggressive, fast, focused innovative activity. Because the government grantees,
once they have the money in hand, have no special incentive to hurry. So those are the four primary advantages
from the utilitarian standpoint of the copyright system. They are substantial. Historically, they’ve been widely
thought to be decisive with respect to alternative ways of generating
most forms of art and literature. There are, however, some
disadvantages to intellectual property as a response to the
public goods problem. And in some contexts, those
disadvantages may be increasing. The first, we’ve already
discussed in some detail. The pricing practices
enabled by copyright usually give rise to socially
pernicious dead weight losses. To review, when the prices
of films or drugs rise, some people cannot afford them. At a minimum, that’s a cause for regret. In some contexts, it can be tragic. Next, copyright and patent systems have
administrative and litigation costs. Significant resources are
devoted to lawyers and courts necessary to interpret and
enforce authors’ rights. From the standpoint of social
welfare, that’s a waste. Third, copyright and
patent systems sometimes create impediments to
cumulative innovation. That phrase refers to
the common phenomenon in which one innovator builds
on the work of another. It’s not inevitable that copyrights
gum up cumulative innovation. As we saw in lecture number three,
licensing systems, for example, of the sort that are
well-developed in the film industry can enable, even catalyze,
sequential innovation. But licensing systems work
well, in this respect, only when they can rely upon
comprehensive registration of intellectual property rights. If you can’t ascertain who owns
the rights to a particular work, you can’t get a license
to build upon it. Copyright– as we’ll see
in lecture number six– is notoriously bad from
this standpoint, because it has no comprehensive
registration system. The fourth disadvantage is known
by economists as rent dissipation. What does that mean? It’s shorthand for the unfortunate
tendency of intellectual property rights, both patents and copyrights,
to draw excessive numbers of people into the competition for generating
a socially beneficial innovation. Sensitivity to this
effect has recently been heightened by the work of Chris
Yu and Michael Abromovitz. Last but not least, as we saw in the
final phase of the CDF case study, the copyright system works
optimally as an incentive for creativity only when there are
reasonably effective mechanisms for enforcing the copyrights. As undoubtedly you’re
well aware, the mechanisms for enforcing copyrights with respect
to digital recordings of entertainment products are deteriorating. Consequently, the frequency of
non-permissive, presumptively unlawful redistribution of those
recordings keeps going up. And the business models that depended
upon the suppression of that behavior are crumbling. There are many possible
ways of responding to this crisis in the
entertainment industry. Some of them involve reinforcing
the failing enforcement mechanisms. But if that proves unfeasible, or to
have excessive negative side effects, we may have to consider one of the
other four possible ways of ensuring that the music and film we so much
value continue to be produced. Thank you.

Leave a Reply

Your email address will not be published. Required fields are marked *