Distinguishing IP and real property

Derek points to a discussion between Profs. Volokh and Solum on the rise of the social construction of property and how rivalrousness may or may not be the basis for distinguishing intellectual property from real property.

At the heart of both discussions is the notion that property rights are instituted in societies to give economic agents the incentives to develop and improve these assets in ways that ultimately yield benefits to society as a whole. By yielding certain aspects of control to these agents, we all gain from the rents that can be extracted by these actors are they charge for certain goods which derive from these controls. The incentives deriving from property rights lead to actions that benefit society overall. The parallels between these ideas and the notion that IP generates incentives to create are obvious, although the notion of development and maintenance implicit in the original ideas are a little more difficult to translate into IP.

While these are discussions that are well worth tracking, it’s important to note that there are other theories that have been employed to support the notion of property. The network economists rely upon a different notion; rather than focusing upon the maintenance and development of property, these economists suggest that the reason for the institution of property is to reduce the externalities in transactions between economic agents, and that what’s important is transactions, not development.

Consider that the original allocation of resources among individuals is not necessarily efficient – that there are exchanges that could take place among these actors that would lead to all being better off at the conclusion of the exchanges. Coase’s theorem says that, in the absence of transactions costs, these efficient resource exchanges will occur irrespective of the original allocations of resources.

However, the transactions costs are actually quite high. The costs of information exchanges, for example, are significant in these situations, as are the costs of policing/enforcing them. Certainly, the government could step in and extract this information and then direct these exchanges, but the costs would be high. What would it take to get the individual actors to develop this information, as well as ensure that the government can stay out of this process?

According to Harold Demsetz (“Toward a Theory of Property Rights” 1967, AERhis followup paper from 2002 outlines the arguments in the first), property rights lead to the the necessary internalization of the costs of exchange. By developing this idea of ownership and control, the property holder has a stake in developing the information necessary to achieve transactions, because that’s where the value of the asset derives in a market (consider the price of a peice of real estate, for example).

In this regime, the purpose of property is to limit externalities in transactions. What, then, does IP do to limit those costs? Increasingly, what we are actually seeing is that IP is being used to increase the costs of transactions — consider the broadcast flag, the content scrambling system and digital rights management. Suddenly, a host of players who have heretofor been completely independent of the IP industry are now being obliged to incorporate technologies (and their associated implementation costs) into their products and business practices.

This is not to say that the incentive notion should be abandoned — but it’s not at all clear that the incentive to create is the entire discussion, either. IP is imposing certain costs — a certain drag, as it were — on a set of technologies that are increasingly important. We need to make sure that we don’t sacrifice too much of one to satisfy the interests of the other.

There’s a question of balance that is noticeably lacking and needs to be restored.