A new book by Brink Lindsey and Steven Teles, The Captured Economy, contains important insights on how the U.S. copyright system impedes economic growth and promotes income inequality in America. Lindsey, vice president of the Niskanen Center, describes himself as a libertarian. Teles, a professor of political science at Johns Hopkins University, describes himself as a liberal. Their basic thesis is that powerful corporations and professionals use government regulation to eliminate competition and increase their wealth, thereby promoting inequality and slowing economic growth. Intellectual property law is one of their case studies.
Readers of InfoJustice will be familiar with the arguments in the case study that: copyright has expanded greatly since 1976; this expansion has not been necessary to incentivize creative activity; the number of works produced has increased dramatically in recent years notwithstanding content industry complaints about the Internet facilitating infringement; the expansion of protection has imposed significant costs on the economy; the content industries are highly concentrated, to the detriment of artists and consumers; the moral case for strong copyright is weak. However, the case study is an important contribution to the policy debates surrounding copyright because it synthesizes these abstruse topics in an engaging and persuasive manner. Further, it examines copyright in the broader context of economic stagnation and income inequality. Hopefully this wider lens will encourage policymakers to understand that more IP protection is not always in the national interest.
The Basic Thesis
The concept of regulatory capture has been around for over a century. It is typically understood to mean that industries “capture” the instruments of government that are supposed to regulate them, and then prevent effective regulation. From a conservative perspective, regulatory capture is a good thing, because regulation interferes with the operation of the market. From a liberal perspective, regulatory capture is a bad thing, because the market needs to be regulated to prevent the depredations of capitalism. The liberal solution to the problem of regulatory capture is more regulation and better enforcement.
The FCC’s rescission of the Open Internet Order can be seen as a classic example of regulatory capture. The new FCC chairman, Ajit Pai, previously worked for Verizon, and the rescission he has championed benefits his former employer.
Lindsey and Teles argue that this narrow understanding of regulatory capture ignores how industry players often use their influence to increase regulation in a manner that benefits them by preventing competition. In these instances, liberals should support reduced government intervention because that actually would lead to more competition and income equality. Likewise, conservatives should focus more of their small-government efforts on regulatory activities that stifle growth and “redistribute upwards.”
Lindsey and Teles provide four cases studies: finance, intellectual property, occupational licensing, and land use. Within the intellectual property chapter, they examine both copyright and patent. I will concentrate on their discussion of copyright law, but their analysis of the impact of patent law is also worthy of study. Because of the power of their language, I will quote their expression extensively—within the bounds of fair use, of course.
The IP Case Study
Lindsey and Teles note that in their “rogues gallery of case studies, copyright and patent law are the wolves in sheep’s clothing.” In the “ingenious and highly effective rhetoric of their supporters, these laws are the very antithesis of rent-seeking.” Rather than “conferring special and undeserved privileges,” these laws “merely defend rightful property owners…from ‘theft’ and ‘piracy.’” Because they “unleash artistic creativity and technological innovation by securing for artists and inventors just recompense for their efforts,” they are claimed to be “a vital linchpin in innovation and growth in the contemporary knowledge-based economy.”
Lindsey and Tele acknowledge that IP laws do give artists and inventors stronger incentives to create and innovate. However, “the problem is that IP protection also imposes costs. Not just on consumers who have to pay higher prices for copyrighted and patented goods, but also on other artists and innovators.” They explain that “a radical and ill-considered expansion in the scope and reach of this protection over the past few decades has resulted in a dramatic escalation of those costs with little in the way of compensating benefits.” The result is “the rents that now accrue to movie studios, record companies, software producers, pharmaceutical firms, and other IP holders amount to a significant drag on innovation and growth….”
Lindsey and Teles then list the various changes to the copyright system starting with the adoption of the 1976 Copyright Act: the elimination of formalities such as notice and registration; the extension of protection to unpublished works; the lengthening of the term of protection from 28 years with a 28 year renewal to the life of the author plus 70 years; the increase in criminal penalties; the adoption of civil asset forfeiture; and the adoption of the anti-circumvention provisions of the Digital Millennium Copyright Act. Under this provision, “the effective scope of the fair use doctrine, an important check on the perverse consequences of expanding copyright restrictions to encompass derivative works, has been reduced for digital goods by allowing copyright holders to decide how consumers can use the products they buy.”
The Elusive Benefits of Expanded Protection
Lindsey and Teles ask what have been the benefits of this “surge in regulation.” They review the traditional “market failure” rationale for IP protection: “if the fixed costs of creative expression or innovation are high, but the costs of imitation are low, artists and inventors would frequently be unable to recoup those fixed costs in the absence of copyright and patents.” Artists and inventors would “tend to underinvest (from the perspective of total social welfare) in expression and innovation.”
They contend that “the facts on the ground don’t provide much support” for this argument. They observe that “the market failure theory suggests that a vulnerability to copying and imitation creates serious disincentives for cultural production and technological innovation.” Nevertheless, “we regularly see robust, ebullient creativity and innovation even where intellectual property protections are absent or increasingly porous.”
For example, they note that even though the Internet has facilitated certain forms of infringement, the number of new albums, films, and books has increased significantly. (The growth of creative activity they document matches the results found in The Sky is Rising!)
Lindsey and Teles ask how such “a significant decline in effective copyright protection” brought about by the Internet could occur simultaneously with “a surge in creative expression.” Their answer is that “the same digital revolution that has facilitated unauthorized copying has also slashed the costs of producing creative works.” This means that “the net effect on the financial incentives facing artists may well be a net wash or even favorable.” Moreover, the market failure theory overlooks the fact that “nonpecuniary considerations predominate in motivating creative expression.” Although “the overwhelming majority of creative works don’t sell much,…the intrinsic satisfactions of artistic self-expression are so powerful that people will engage in creative pursuits regardless.” As new technologies continue to drive down the cost of creative expression, “we can expect an ever richer bounty of cultural works no matter what the economic payoffs for a lucky few may be.” Lindsey and Teles find that “strong copyright protection may be important for inflating the monopoly profits of giant media companies, but it is far from clear that it is needed to ensure a vibrant cultural marketplace.”
The Hidden Costs of Expanded Protection
After showing the weak (or non-existent) evidence of the benefits of copyright protection, Lindsey and Teles examine its hidden costs. They say that “hostility to unauthorized copying in virtually any form, the core principle of the copyright, stands in direct opposition to the logic of the Internet, the greatest technology ever devised for reproducing and disseminating information.” Thus, copyright “casts a pall over the most promising arena for technological and economic progress in the current age.”
Lindsey and Teles review copyright’s “long history of antagonism towards technological progress in sharing information more widely and efficiently.” They discuss the opposition of music publishers to player pianos and sound recordings; broadcasters suits against the early cable television industry; the film industry litigation against the Sony Betamax; and the recording industry campaign against file-sharing.
Lindsey and Teles proceed to claim that “the principle that all unauthorized copying is legally suspect hangs like a sword of Damocles over the whole Internet.” They describe all the unauthorized copies made by users and service providers in the course of basic Internet activities such as browsing, searching, and sending email, and the potential liability of statutory damages, “depending on the vague parameters of fair use and implied license.”
They assume that “the courts or Congress will prevent copyright law from preventing the Internet outright.” However, they state that “the current law’s antipathy to free information flows ensures that many efforts to realize the Internet’s wondrous potential will be hobbled by copyright considerations.” They describe the Google Books Project, recognizing that for “the roughly 70 percent of all books that are out of print but still under copyright, Google Books can offer only brief snippets of text in response to searches, and its right to do that has been vindicated only after a decade of court battles with authors and publishers.”
They then turn to the orphan works problem. They assert that automatic copyright protection without formalities combined with the extended copyright term has resulted in large numbers of works whose copyright holders are unknown or unreachable. “Although mass digitization holds out the possibility of making virtually everything ever published accessible with a few keystrokes, millions of works continue to languish in limbo simply because of the uncertainty of who owns the rights to them.” Thus, copyright has interfered with “efforts to digitize and make publicly available the vast troves of recorded music, films, video, photographs and artwork currently moldering in library archives.”
They also discuss the problem with scientific publishing. They describe how publishers such as Elsevier, Springer, and Wiley “rake in profit margins in excess of 35 percent as subscription prices for university libraries race well ahead of inflation.” They acknowledge the genius of these publishers’ business model, based on selling back to the universities the scholarship these universities’ scientists have produced, written, peer-reviewed, and edited largely for free. Copyright has driven off-shore websites such as Sci-Hub, which provide free access to these scientific articles.
At the same time that copyright undercuts the Internet’s promise, Lindsey and Teles contend, it also increases the risks of the digital revolution. The DMCA’s anti-circumvention provisions raise obstacles for security researchers probing for vulnerabilities to viruses and hacking.
Lindsey and Teles argue that the monopoly power created by copyright “encourages industry concentration, inflates corporate profits, and exaggerates the tendency toward winner-take-all ‘superstar markets.’” As copyright terms have lengthened, the entertainment industry “has become progressively more organized around the maximization of returns from the occasional runaway crowd favorite.” The effort requires “large-scale investments in talent search and marketing for success in the long term, which means developing a diversified portfolio of talent and a growing inventory of cash cows to milk as efficiently and as long as possible.” Additionally, the absence of copycat competition allows “industry leaders to take fuller advantage of the potential scale economies that the nature of their industries permits.” The result is high concentration. Four record labels account for 85 percent of U.S. record music sales and 70 percent of global sales. Similarly, five movie studios (soon to be four, assuming consummation of Disney’s purchase of 21st Century Fox) control 80 percent of the U.S. market and 70 percent of the global market.
Lindsey and Teles argue that the aggregation of market capitalization and profits in IP intensive industries translates into “soaring wealth and income for shareholders, employees, and professionals.” In addition to the “mind-boggling payout for those at the top of the income scale,” any pass-through of rents to employees in the form of higher wages will go mainly to the more highly educated and skilled employees. This will “further increase the inequality between the highly skilled and everyone else.”
The Moral Case for IP
Lindsey and Teles assert that the expansion of IP in the face of its negative consequences for economic growth and income distribution is attributable in part to the power of the moral case for IP: the Lockean notion that people deserve to enjoy the fruits of their labor. And they agree that authors should be able to sell the books they write to publishers—that authors should be able to decide whether and how to disseminate the expression they create. Copyright, however, goes far beyond this right of first publication. It also allows authors to control how others use their expression after it has been disseminated. And for Lindsey and Teles, this is where the moral case for copyright as currently constituted goes off track. Because copyright can be used to prevent others from producing their own original works, it violates the principle on which copyright is grounded in the first place: entitlement to the fruits of one’s labor.
Originally, U.S. copyright law only prohibited the wholesale copying of entire works. Over time, copyright expanded to cover the creation of derivative works: translations, abridgements and adaptations. Lindsey and Teles acknowledge that this expansion “was checked, to a limited and uncertain extent, by the concurrent rise of the doctrine of ‘fair use.’” Fair use permits some derivative uses, such as parodies or short quotations. But most derivative uses are considered infringements. In such cases, “artists can expend mental effort to create something new and original,” but they are “deprived of their basic rights to the fruit of their own mental labor.”
It is the exclusive right to prepare derivative works that, to Lindsey and Teles, renders unconvincing the claim that copyright holders “are rightful property owners who are only receiving their just due.” To the contrary, copyright law “regularly deprive[s] people of their rightful due” to benefit from their creations. In the absence of a strong moral or utilitarian case for copyright, Lindsey and Teles contend that it is appropriate to strip copyright law “of its sheep’s clothing and to see it for what it is, a major source of economic stagnation and a tool for unjust enrichment.”
There is a vast academic literature condemning the expansion of copyright law in a manner that frustrates its constitutional purpose of promoting the progress of science and useful arts. What is significant about this book is how it clearly and succinctly synthesizes this literature and places it in the broader context of powerful interests using the levers of government to prevent competition, thereby impeding growth and promoting inequality. In other words, this book may enable copyright policy to enter the broader discussion of the challenges facing the U.S. economy in a thoughtful and sophisticated manner, beyond the simplistic “more is better” approach advocated by the entertainment industry.
With respect to the details of their analysis, Lindsey and Teles certainly are correct that the scope of copyright protection has increased dramatically starting with the adoption of the 1976 Copyright Act. They similarly are correct that it is hard to identify the societal benefits that have flowed from this increased protection, particularly given the “non-pecuniary considerations” that motivate much artistic creation. Moreover, there is no justification for extending copyright term retroactively; there is no need to incentivize the creation of works that have already been created, especially if the author is deceased. Copyright holders argue that the DMCA’s anti-circumvention provisions have enabled the emergence of legitimate online platforms for distributing content, but they mistakenly attribute this development to the legal prohibition on circumvention as opposed to the underlying digital rights management technology.
Lindsey and Teles generally are on target in identifying the hidden costs of copyright, although they at times overstate and understate the problem. They overstate the problem to the extent that they claim that the threat of copyright liability is a “sword of Damocles” over the Internet. To be sure, it would be a sword of Damocles but for the safe harbors of the DMCA. Those safe harbors, enacted by Congress in 1998, ensure that firms can provide critical services such as Internet access, caching, hosting, and search, without facing ruinous liability for third party activity. For activities not within the safe harbors, courts have applied the fair use and Betamax doctrines appropriately to permit innovation to proceed. Of course, litigation is costly, and smaller companies have abandoned projects in response to content industry threats. Furthermore, courts sometimes reach the wrong result, as did the Supreme Court in the Aereo case. Nonetheless, so long as the DMCA safe harbors remain intact, copyright infringement liability is not a sword of Damocles over the Internet.
At the same time, Lindsey and Teles understate the harm caused by the anti-circumvention provisions. Software controls a wide range of products, from cars and tractors to thermostats and refrigerators. Manufacturers can use software locks to restrict who can repair or modify these products. The anti-circumvention provisions prohibit the unlocking of these software locks by the products owners. This enables manufacturers to control aftermarkets to an unprecedented degree.
Lindsey and Teles could also have cited other examples of how copyright prevents the Internet from reaching its full potential, such as the absence of a digital first sale right. Or the cost copyright imposes on people with disabilities or education at all levels. Or how the derivative work right not only undermines the moral case for copyright, but also poses a serious impediment to creative activity (e.g., having to license the use of music samples). Or that the Federal Circuit’s 2014 decision in Oracle v. Google may interfere with interoperability, thereby decreasing competition in the software industry. But then Lindsey and Teles would have had to devote an entire book to the subject of captured copyright, rather than a single chapter.