Friday, May 25, 2018

Economic Value of Patents As a Direct Result of Supply and Demand, Not Labor Inputs

Stuart K. Hayashi

Imagine that I promise to pay you for a service, you perform the service, and I refrain from paying the promised amount. In such a situation, I would be stealing from you the value of the time and labor that you put into the performance of that service — time and labor you otherwise could have employed in some other more fruitful activity. When people make use of the talents of inventors and artists, inventors and artists expect to be compensated for their services just as you do.

When an artist, such as Justine, makes her motion picture commercially available, she avails it to other persons on the implicit contractual understanding that that those who consume access to her artwork will pay her for this access at the price that she sets. Just as my agreeing to pay you in the first place was a major consideration in why you performed that service for me in the first place, a major consideration for why Justine made her motion picture was that the parties that consumed access to her movie would agree to contribute to compensating her for the costs of having made the motion picture at all — with any revenue in excess of her expenses being able to fund future projects.

Imagine that I then make an unauthorized duplicate of her motion picture and watch it. I can rationalize endlessly that no theft took place, as my making an unauthorized copy of her motion picture does not deprive her of her master copy. The truth remains that by accessing the artwork’s value against the contractual terms that are implicit in patents and copyrights, I stole from Justine the value of the resources used up to make her movie a reality, value for which the artist was to be reimbursed.

When I point this out, those who denigrate the legitimacy of intellectual property rights (IP rights or IPRs) — often self-described “libertarians” — whack at a straw man that was stitched together by Tom Palmer of the Cato Institute (and which, unsurprisingly, Timothy Sandefur endorses). Following in Tom Palmer’s line of specious reasoning, these opponents of IPRs proclaim that my argument amounts to an implicit citation of Karl Marx’s “Labor Theory of Economic Value.” Tom Palmer would have us believe that a defense of intellectual property rights amounts to saying, The inventor or artist worked really hard on her creation, and that consideration alone demonstrates that the creation is a great economic value which entitles the creator to piles of cash rewards and also exclusive monopolistic ownership over the creation itself.

Then these opponents of IPRs proceed to “correct” me. The “correction” begins innocently enough — with the proper observation that insofar as there is a free market, the economic value and price of any commodity is the result of the convergence of two considerations: first, how much marketplace demand there is for the commodity, and, second, how much of that commodity can be supplied to the marketplace. The “correction” continues that in any market, a built-in constraint on how much of anything can be supplied is “scarcity,” meaning that there will necessarily be a finite quantity of units of that commodity available. Even if, in the long term, an infinite quantity of units of the commodity can be created, in the present and at any given moment, there is necessarily a specific number of units of that commodity in existence. And when that commodity is a manufactured good, this is the result of the fact that the inputs that go into producing units of the good are themselves “scarce,” finite. If the commodity is some naturally occurring substance, “scarce” resources still must be expended in the process of acquiring quantities of this substance and transporting it to customers and clients who otherwise would not be able to access it.

But the effort of IP’s detractors to  “correct” me goes awry. These detractors continue that the problem is that patents and copyrights are an attempt to claim exclusive ownership over ideas — and a computer-digitized artwork that is easily and cheaply duplicated qualifies — and that because ideas are intangible, not confined to the immutable rules of physics, there is perforce an infinite quantity of ideas. That is, because ideas are intangible and not confined to the immutable principles of physics, the “scarcity” present in all economic goods does not apply to such “ideas.” Hence, these opponents of IP conclude, in a truly free market only a physically produced unit of an invention or artwork should be recognized as private property, whereas private ownership cannot rightfully be claimed over the intangible design that serves as the basis from which units of the invention or artwork are produced.

Hence, they say, to be a stickler in saying that demand-and-supply is the direct source of a commodity’s economic value is to preclude an intangible design for a machine or artwork from being considered a private belonging over which the designer deserves first claim of ownership. And they add that on this basis, one can provide no possible argument for why an intangible design should be considered a private asset, or why the design’s very own designer should have first dibs on such exclusive ownership over that design, other than some crude or vulgar derivation of Karl Marx’s Labor Theory of Economic Value.

That is a complete falsehood.

I make the following points.

1. It is true that the economic value of a commodity is the result of the intersection of marketplace demand with supply, referring to both (a) the willingness and ability of clients or customers to trade something of value for commodity and (b) the consideration that the “scarcer” the commodity gets in its supply, the more that clients and customers who discern value in that commodity will willingly pay for it.

2. This means that how “scarce” the commodity is in quantity and supply does play a role in its being of economic value and being able to command a particular average equilibrium price in a free market.

3. IP’s detractors are incorrect in their assumption that there is no “scarcity” in the quantity or supply in the intangible designs protected by copyrights and patents. There is no “scarcity” in impractical, entirely fantasy-based ideas. Nor is there “scarcity” in very vague ideas that might one day be practicable if applied but which not yet have been thought-out carefully enough to be ready for implementation. But that is not what is enshrined in a patent or copyright.

4. Patents and copyrights are the recognition of private ownership over a specific original design. The patent is on a detailed, diagrammed set of instruction on how a specific device or procedure is to be assembled and operated, and the device or procedure must be able to function as promised when operated by someone seasoned in the field to which the device or procedure pertains. And how practicable or efficacious the design for an invention is, is an enormous consideration. Its practicability or efficacy is measured by how much marketplace demand would be satisfied by the supplying of units produced from the inventor’s specific design. And such practicable, specific original designs for inventions and artworks, able to supply the satisfaction of marketplace demand efficiently, are indeed “scarce.”

5. The reason why such practicable and efficacious, specific original designs are “scarce” is that, for them to work, the designer must make use of time and effort and testing equipment and other “scarce” depreciable resources, all of which impose financial expenses. Because the designer makes use of, and depreciates or depletes, “scarce” resources in the creation of practicable and specific original designs, which proves to be costly, very few people are willing to embark on such a long-term project. Thanks to the “scarcity” of the inputs that must be inputted in the production of practicable original designs, the practicable original designs end up being “scarce” in quantity and supply themselves. This is the first section of my argument that IP’s detractors insist on misidentifying as a citation on my part of Marx’s Labor Theory of Economic Value.

6. Because there is “scarcity” in the quantity and supply of specific original designs enshrined in copyrights and patents after all, it happens that before patents and copyrights were ever recognized, the principles of marketplace demand and supply already applied to such designs — except that no designer could implement the full value of her practicable original designs until copyrights and patents were codified. That is just as no homesteader could implement the full value of the land he improved until laws recognized private ownership in human-improved land.

7. Hence, the considerations (a) that a commodity’s economic value and free-market price come directly from the confluence of marketplace demand and supply and (b) that the commodity’s supply is limited by its “scarcity,” fail to preclude the practicable, specific original designs protected in patents and copyrights from being of economic value, from commanding their own free-market price, and from being worthy of being codified as private property.

8. This is the second part of my argument that too many opponents of IP insist on misconstruing as a reliance on Marx’s Labor Theory of Economic Value: once it is established that an asset can rightfully be considered a form of private property that possesses economic value and can command a price negotiated in a free market, there is still the issue of which party should have the first claim of rightful private ownership over that asset. A principle of John Locke’s applies here, as there are two types of commoditized value that are created anew, bringing about a quantity of economic value and economic utility exceeding the combined economic value of all the man-hours and raw materials and machinery that were inputted in their creation. John Locke pointed out that the first type is human improvement over land — the value of a human-improved plot of land to human beings is greater than the value that same plot had when it was still unimproved, and the net increase in value was the result of what the homesteader put into it, which is why the homestead who improved the land should have first claim of ownership over it.

Likewise, when an inventor’s specific original design enables the production of units that satisfy marketplace demand more efficiently and effectively than all the similarly-used units that were produced prior to the inventor introducing this new design, that improvement in efficiency and effectiveness is new economic value and new wealth that the inventor has created.

The homesteader should have first claim and control over the land he improved on account of his producing a net gain in value from the homestead.

By the same token, the inventor or artist should have first claim of ownership and control over the design she created on account of the net gain in economic value emerging as a consequence of her new design being put into production. To recognize this truth does not conflict with the recognition that the economic value of the inventor’s design itself results from both the natural limit or “scarcity” in the quantity of such practicable designs. Nor does that truth conflict with the fact that the implementation of the inventor’s practicable design results in the supplying of an enhanced satisfaction of marketplace demand.

* * *

A Review of Stuart’s Case for Intellectual Property Rights
As I wrote before, those who denounce intellectual property rights (IP rights or IPRs) as invalid happen to knock at a straw man when they speak as if a patent is a claim of ownership over a basic idea for whole category of product, such as “airplane,” and as if a patent confers upon its owner a government-enabled monopoly over an entire industry. From the years 1867 to 1957, the U.S. Patent and Trademark Office (PTO) issued over 16 U.S. patents to over 15 separate parties for the paperclip. In that 90-year span, the interims between each new issuance of a U.S. patent on the paperclip was shorter than 17 years — every new U.S. patent on the paperclip was issued prior to the expiration of the U.S. paperclip patent directly preceding it. The reason for this is that no U.S. paperclip patent conferred upon the patent holder exclusive ownership over the basic idea of “paperclip” — an object that fastens together separate sheets of paper but which makes no puncture in the sheets, hence such a fastener being easier to remove from those sheets than would a staple.

A patent does not claim ownership over a basic idea, but ownership over a highly specific and precise implementation of that idea, and there are multiple separate methods whereby that same idea can be implemented. The patent is a highly detailed description — usually accompanied by diagrams — on how that idea is to be implemented in a fashion that successfully yields the desired results when used as intended, as which can be understood by someone experienced in the field to which the invention’s function pertains. That is, if there is a patent on a new sort of steel furnace, it can be operated or constructed by a seasoned steelworker. The patent’s detailed set of instructions for implementation of an idea is a specific original design. It can also be called a “model.” As is the case in my other essays on IP, by model here I do not mean a working physical model, such as a prototype, but the aforementioned detailed and diagrammed description of the device and the instructions for assembling and operating it.

A common pronouncement about the evilness of patents is that it often happens that multiple separate parties, each unknown to the others, arrive at the exact same invention at the exact same time and yet, due to a patent conferring a monopoly and going to but one party, only one of these simultaneously inventing parties will receive its patent. Conversely, it is said, the other independent inventing parties will be forbidden from producing units of the design they created through their own independent R-and-D. This scenario is false. Multiple parties can arrive at the same general idea, independently of one another, within a relatively close or small span of time. But their own specific original designs are not exactly alike, and each party can receive its own patent.

It is frequently said that Alexander Graham Bell and Elisha Gray filed for the same patent for the telephone at the same day. Actually, Gray filed for a patent caveat, which was a warning issued to other would-be inventors that he planned on seeking a patent for a specific technology in the near future. More importantly, the plans in Gray’s filing were not for the same invention as Bell’s. Bell invented an electric telephone — a device that took in speech on the transmitter end, converted that sound into electricity, and then converted that electricity back into intelligible speech on the receiver end. Gray’s plans were for a harmonic multiple telegraph, which would also take in sound on the transmitter end, convert it into electricity, and convert it back into sound on the receiver end, but which was not sophisticated enough for the sound on the receiver end to come out as coherent speech. What both Bell’s and Gray’s plans had in common was that they employed the principle of “variable resistance” in their attempt to transmit a nuanced re-creation of sounds.

Patent litigation still arises between such parties on account of the areas in which the two designs are very similar — that is what I call an “overlap” in their designs. At Texas Instruments, Jack Kilby came up with the Integrated Circuit and his patent focused on the circuit itself, whereas, at Fairchild Semiconductor, future Intel-cofounder Robert Noyce arrived at something similar but, in his own patent, put more emphasis on how the Integrated Circuit was to be wired with other components within a computer. Such disputes have historically been settled privately when these separate parties agree to pool their patents into a single trust. This option puts such disputes to rest. Note that this situation does not discredit the legitimacy of patents per se. Nor does it justify the rationalization that if two parties can arrive at similar inventions within relatively close temporal proximity to one another, that that somehow legitimizes the pirating of the inventors’ designs by third parties that contributed not a cent to any of the R-and-D to led to the breakthroughs making the invention possible.

Likewise, enforcement of a copyright on Lord of the Rings will not guarantee that the copyright holder can successfully sue a writer who pens a novel boasting the same basic premise of Lord of the Rings and places the story in a similar setting; nor can the copyright holder even be sure he will win a lawsuit against a writer who copies the plot beat-for-beat. Enforcement of this copyright does ensure that if someone makes unauthorized duplications of the text verbatim, or copies most of the text with but a few minor cosmetic changes in phrase in each paragraph, the copyright holder has a strong legal case.

Moreover, some patents are more practicable than others, just as how, even if two homesteaders each squat on their own similar adjacent plots, one plot can emerge as more productive than the other on account of one homesteader making wiser decisions. If a man received a patent, and would necessarily win every patent infringement lawsuit he filed, he still would not necessarily profit from the patent at all — not if the design he patented was for something so unwieldy that no profit-seeking firm would produce it, not even to infringe it. There are many such patents. No more than 2 percent of patents generate a profit for their owner. Those few truly profitable patents are not only on specific original designs, but are also efficacious and practicable specific original designs. As in my other essays on the topic, by efficacious and practicable I mean that if the specific original design in the patent were put into production, the resulting units would supply the satisfaction of marketplace demand to such an extent that market participants would pay for access to these units at a price that ultimately exceeds the average cost per unit.

At this point, for the benefit of my Objectivist readers, I have to explain what “scarcity” means in an economics context. A commodity’s free-market economic value — at least, as far as we are concerned with the price at which a commodity is sold — is determined by the junction of marketplace demand for the commodity with how much supply there is of that commodity. And supply of any commodity is affected by “scarcity” — the fewer units there are of a commodity for which there is much marketplace demand, the higher price the vendors can conceivably charge per unit. And the “scarcer” are the resources go into the production of units of a commodity — the scarcer are the tools or raw materials or willing available man-hours that are required to produce such units — the higher the average price must be to motivate would-be vendors to go through the trouble of availing that commodity to clients or customers.

The Faulty Syllogism of the Opponents to Intellectual Property Rights
In this philosophic debate, the opponents of intellectual property rights (IPRs) rely upon a psychological bait-and-switch. IPRs’ opponents proclaim that private property rights are only applicable to values that are “scarce.” Then they say that ideas are not scarce at all. And that is true for (a) impractical, fantastical, scientifically unsound ideas and (b) ideas that might be practical and sound in a very generalized context but have yet to be fleshed out to the point where the idea can be practicably implemented. Those sorts of ideas are easy to come by.

The specific original designs are “scarce” for two reasons:

  1. A party must invest considerable time and effort and material resources to produce a new design that plausibly possesses the potential to satisfy marketplace demand profitably. Very few parties are willing and able to take on this financial risk.

  2. As a consequence of the variability in human experience, even when separate parties implement the same basic idea, the final result of each party’s effort ends up with its own unique qualities.

And yet IPRs’ opponents place the highly specific, granular, and scientifically tested designs that are patented or copyrighted under the umbrella of “ideas.” They rely upon people noticing there is no “scarcity” to impractical, fantasy-only ideas or to potentially-practical-but-still-vague-and-unexplored ideas. In a supreme conflation, IP’s detractors proclaim that because everything is just “ideas” sans all important distinctions, it follows that the non-scarcity of impractical ideas and vague ideas necessarily applies to the practical and specific idea-implementations in patents and copyrights.

We are to believe that their argument follows this syllogism. In category A is “ideas,” category B is “not scarce,” and category C is “cannot be rightful private property.” Then, applying Aristotle’s syllogism “If A = B and B = C, then A = C,” they put forth this:

  1. Ideas (A) are not scarce (B). (And this is definitely true of impractical ideas and still-only-vague ideas.)
  2. That which is not scarce (B) is that which cannot be rightful private property (C).
  3. Therefore, ideas (A) are that-which-cannot-be-rightful-private-property (C).

The fallacy is the presumption that the specific, practicable, and tested ideas protected in IP belong in category A alongside the impractical ideas and vague ideas. Let us be more accurate and say that impractical ideas and vague, unexamined ideas are in category Y and that the specific, practicable, and tested ideas codified in IP are in category Z. The reasoning of IPRs’ opponents thus ends up like this:

  1. Impractical and vague ideas (Y) are not scarce (B). True.
  2. That which is not scarce (B) is that which cannot be rightful private property (C).
  3. Therefore, specific-practicable-tested ideas, Z, a category we haven’t examined, are C, that which cannot be rightful private property.

You see how that is actually a non-sequitur?

How the Default, Inherent “Scarcity” in Practicable Original Designs Affects Their Supply, With or Without Governmental Recognition of Intellectual Property
The commodity’s free-market economic value and free-market price are set by the converging considerations of marketplace demand and supply, and supply is a function of “scarcity” in this respect: the “scarcer” is the commodity or the inputs that go into producing the commodity, the more reluctant are would-be vendors to vend the commodity in the absence of a high price to make it worth their while.

When economists say that “scarcity” applies to the quantity and supply of a commodity, that is not necessarily a concession on their part to Rev. T. Robert Malthus’s notion that human beings will keep depleting nonrenewable natural resources until everything is gone. In most discussions of economics, to say “scarcity” applies to a commodity only means there is a finite quantity of units of that commodity available at a given moment. Say there are 100 widgets produced and a single party purchases 95 of them; there are only five left on the market for other would-be purchasers. Hence, “scarcity” applies to the widgets, even if 100,000 additional units might be produced in the three months ahead.

Note that this consideration shall be important later, as it is at the heart of the refutation of libertarian IPR-deniers who insist that a defense of IPRs amounts to an invocation of Karl Marx’s labor theory of economic value. The important consideration is twofold: First, of course the economic value of a specific original design is found in the conjunction of marketplace demand with supply, wherein inventors are able to charge a specific price — royalties — for their services on account of there being a “scarce” supply and quantity of specific original designs from whence come units for products that adequately satisfy marketplace demand. Nonetheless, second, the direct cause of the “scarcity” in the quantity of practicable new designs for products is the fact that practicable original designs emerge primarily as a result of their designer using up such “scarce” inputs as time and man-hours and material resources for experimentation, all of which impose financial costs upon the designer in this endeavor, thereby resulting in there being a “scarcity” in the supply and quantity of practicable original designs themselves. And this constraint on the supply and quantity of practicable original designs is a default, constant condition in the market for human-made goods, emerging prior to any statutory recognition of patents or copyrights.

Were the patent-haters correct that my argument was merely an extension of Marx’s labor theory of economic value, then I would have been arguing that an engineer’s design possesses great economic utility within itself simply by virtue of the engineer having made many strenuous physical motions in drawing up that design.

But no, I recognize that the economic utility and economic value of the engineer’s design comes directly from both consideration of how the engineer’s design satisfies marketplace demand and of how the reality of markets themselves, sans governmental interference, places a constraint on the quantity of practicable original designs that can ever be supplied. It is not my fault that the fact that the requirement of inputs of “scarce” resources in the production of practicable original designs necessarily limits the quantity and supply of practicable original designs themselves. Nor is it my fault that this fact plays an important and indirect role in how the supply of practicable original designs in products is matched to the marketplace demand for units produced from such designs.

Perhaps that can be understood more clearly upon a reading of my essay “Three Important Aspects of Marketplace Demand and Three Important Aspects of Supply” over here.

Locke’s Designer-Entrepreneur-As-Owner Principle Easily Reconciled With Supply-and-Demand Economics
Again, a major reason for the denigration of IPRs is a misunderstanding of economic “scarcity” on the part of IP’s detractors. They misidentify the works encoded in patents and copyrights as just “ideas,” as if theses specific original designs are no “scarcer” than throwaway impractical ideas like “glow-in-the-dark sunscreen” or potentially practical ideas that remain vague on account of no one yet following up on them. That is not a mere difference in degree; the difference in degree is of such extensive magnitude that it becomes a difference in kind.

Consider this: land, as such, is actually not very scarce. Half the human population dwells on one percent of the Earth’s land. Ninety percent of the human population occupies ten percent of the land. An entire continent, Antarctica, has no human colony on it. To be more precise, when I say “hospitable land,” I do not mean “land that was good enough to our hunter-gatherer ancestors”; what they put up with back then, we need not and should not tolerate today. By “hospitable land,” I mean that if you settled on it, you could be sure that it is within a society with an infant mortality rate lower than 20 percent.

When a homesteader takes a tract of land that was once inhospitable and converts it into a tract that is hospitable, that homesteader creates no new materials or matter; the materials and matter on the tract was already in existence, and yet the newly emerging hospitability of that tract is new economic value created, economic value that was not in the economy until the homesteader produced it. Land, as such, is not scarce, but insofar as once-inhospitable land has become habitable, the new inhabitability is economic value that is “scarce.”

Locke’s homesteading principle (actually, designer-entrepreneur-as-owner principle) provides the proper rebuttal to a favorite collectivist talking point that was at least as old as the late Renaissance, when Locke’s philosophic foil and direct opponent, Sir Robert Filmer, alluded to it. The collectivist talking point is that there is no natural, default division in land. And yet boundaries separating one plot from another are enforced by the State even in the many cases where there is no physical marker of that boundary on the actual ground. The property line separating parcels, then, does not exist in any market by default, but is an artificial imposition by the State, a “Creature of the State” (sound familiar?).

And no landholder actually created his own land; all the land that humans occupy already existed prior to there being any humans. Hence, the actual creator of the land is God, and every landholder is usurping a value he did not create when he has no more rightful a claim on that land than the many people who hold no land. The normal implication of this argument is that either land should not be considered anyone’s private property, or that all the land should be considered socialistic public property.

(Sir Robert’s conclusion is similar to the latter, but he adds that because some patriarchal authorities are keener decision-makers than most people, authority over management of the land should be delegated to nobles. One can interpret this as meaning that Sir Robert dos not believe that nobles have true ownership outright over land, but that the land is public property in a public trust, and the nobles are merely stewards who must manage this public property for everyone’s benefit.)

Locke’s reply is that while no one person created unimproved land, which is non-scarce, it did take human effort and initiative — and, ultimately, creative designing and entrepreneurship — to render the land improved and congenial to human habitation. That new hospitability in the land Is new economic value created by the homesteader and that is why the homesteader holds rightful claim of control over the improved land — that is the means whereby the homesteader is to continue to control and benefit from the new value he has originated.

Locke phrased this as,

Though the earth, and all inferior creatures, be common to all men, yet every man has a property in his own person: this no body has any right to but himself. The labour of his body, and the work of his hands, we may say, are properly his. Whatsoever then he removes out of the state that nature hath provided, and left it in, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property.

By this, Locke means that, qua creative designer and entrepreneur, a person such as a homesteader creates new economic value and that first claim ownership over new economic value created should go to the very party that created that value. But the use of the word labor is what Marx conveniently misconstrues in an attempt to peddle a conclusion opposite of Locke’s while falsely touting it as the logical conclusion to be drawn from Locke’s own premise.

Karl Marx proclaims that if a homesteader mixing his labor with the soil of his parcel, touching and manipulating the soil with his bare hands, gives the homesteader proper ownership over his parcel and all the fruits reaped from it, then it follows that manual laborers in factories touching and manipulating the factory equipment — mixing their manual labor with the factory equipment — directly confers upon those manual laborers complete proper ownership over the factory equipment (the entrepreneur and investors be damned!) and all the revenue generated from the units produced from the manual laborers’ operation of the factory equipment.

This is a conflation on Marx’s part. When Locke says that the entrepreneurial homesteader mixes his labor with the soil and therefore deserves the profits therefrom, the term labor dos not refer exclusively or primarily to the homesteader’s physical motions, what in centuries subsequent to Locke’s own lifetime would come to be thought of as the manual labor of factory workers.

By labor, Locke means any conscious human effort that successfully produces economic utility. And although the wealth generated from the homesteading would not be generated if not for physical motions performed by the homesteader, what most contributes to success in the homesteader’s actions is intellectual in nature: the physical actions performed by the homesteader, such as digging in particular places and planting particular patches, are beneficent only insofar as the homesteader, meticulously evaluating the nature of his region, employs wise decisions. Regardless of how hard he works, the physical exertion of the homesteader is fruitless if he unthinkingly digs in the wrong spot or plants varieties of crops that are clearly unsuited to the geographic environment. According to Locke’s argument, it is primarily in the role of a for-profit entrepreneur that a homesteader creates new economic value that he should privately own and from which he is to profit rightfully.

Yet Marx would have us believe that Locke means that it is only qua manual laborer that the homesteader is economically productive. As a corollary, Marx implies that it is only qua manual laborer that the homesteader gains rightful ownership over the land he worked and whatever financial benefits are to be reaped from such efforts. To apply Marx’s labor theory of economic value, the economic value of a commodity is directly determined by how much hard work went into it and how costly the commodity’s production was to the enterprise — regardless of the “scarcity” in the supply of the commodity or how much marketplace demand there is for it. An implicit corollary to that idea is that the one true “morally correct price” of the commodity is directly determined by how much the production or acquisition of the commodity imposed a financial cost to its vendors, the hard work that went into the production or acquisition of the commodity especially being included in that financial cost.

Years before Karl Marx, David Ricardo presented a similar idea — that the direct source of a commodity’s economic value is the cost expended to avail that commodity to the market. David Ricardo wrote, “The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not as the greater or less compensation which is paid for that labour.”

I grant that the costs incurred by an entrepreneur influence the price the entrepreneur wants to set for her output insofar as the entrepreneur wants the price she charges for each unit to exceed the average cost it took her to produce that unit. But it does not follow that the economic value of a unit or its final free-market price are determined primarily by the costs the entrepreneur had to take on.

It may be the case that, too lazy to do any market research beforehand, I decide to produce units of glow-in-the-dark sunscreen, which I assume has good uses beyond that of a novelty item or gag gift. The result might be that, on average, it costs me $35 to produce each box, but consumers are only willing to purchase my product at the price of $10 per box. To apply Ricardo’s interpretation, the proper and correct price cannot be lower than $35 per box. Yet free-market economics recognizes that the proper and correct price of the glow-in the-dark sunscreen is set by the confluence of marketplace demand and supply, which means the proper free-market price is indeed $10 per box, and, insofar as I want to reduce my losses, I ought to settle for selling my inventory at $10 a box (the alternative is to keep the price tag at $35 per box and probably end up without any revenue at all).

I point out that if some value being “scarce” is a precondition to that value being properly recognized as private property, then the practicable and specific original designs enshrined in patents and copyrights successfully meet that criterion. Such practicable and specific original designs only arise as the result of the designer taking on a major financial risk in inputting the “scarce” resources of time and effort and testing equipment that are needed to produce such designs. Hence, the practicable and specific original designs end up being “scarce” in quantity and supply in turn. The economic value of the design is the result of the confluence of (a) marketplace demand for units produced according to that design with (b) the naturally “scarce” supply of practicable original designs from which any units can be produced. I merely point out that the “scarce” resources of hard work and testing equipment used up in the production of practicable original designs for the purpose of showing IP rights’ detractors that such practicable original designs are themselves “scarce.” That such efficacious, specific original designs are “scarce” indicates that the principles of marketplace demand and supply apply to them no less than they do to any other asset and that they, too, derive their economic value from the confluence of marketplace demand with supply.

Private Land Ownership Is an Obvious Right, But IP Is Not?
This brings to mind Timothy Sandefur’s repeated insistence that because a defense of intellectual property rights was not frequently included in Enlightenment philosophers’ treatises of natural rights, it follows that IPRs are not consistent with the Objectivist defense of IPRs. That is a non-sequitur for multiple reasons, the first of which is his false assumption that the Objectivist theory of individual rights is the same as the natural rights theory of Enlightenment philosophers. It is true that the Objectivist theory of rights draws from the Enlightenment philosophers’ natural rights theory, insofar as the focus is on rights to life, liberty, and private property to which a person cannot rightfully be deprived of force, but which are not entitlements that a needy person must receive from the State at the forcible expense of others. But as Craig Biddle has pointed out, the Enlightenment philosophers’ defense of “natural rights” to life, liberty, and property as being self-evident or granted by a deistic God, is too primitive for Objectivists to find satisfactory. The Objectivist theory of rights fills in the many gaps left by the Enlightenment’s natural-rights philosophers, including their insufficient attention to IPRs.

A presumption frequently conveyed in Sandefur’s derisory remarks on IPRs is that the right to private ownership over land is obvious — hence such a right being commonly defended by the Enlightenment’s natural-rights philosophers and the Objectivists after them — whereas a right to IP is often omitted from the treatises of the Enlightenment’s natural-rights philosophers on account of a right to IP being far from obvious. And such a right to IP being far from obvious, continues Sandefur’s presumption, is entirely consistent with his conclusion that a right to IP is just plain invalid. This assertion — that defenses of IP being infrequent in Enlightenment philosophers’ treatises on natural rights is sufficient to consider a defense of IP to be inconsistent with Enlightenment liberal philosophy — seems to be Sandefur’s other favorite rationalization for writing off IP rights as illegitimate, second only to the repeated falsehood that “scarcity” does not apply to the specific, detailed, nuanced, diagrammed designs that are copyrighted and patented.

This is silly; that an idea was not obvious to the Enlightenment’s natural-rights philosophers does not preclude that idea from being the result of the logical extension of the more rational aspects of their philosophy being taken to their logical conclusion. It was not obvious to Locke that his defense of freedom of thought and freedom of religion would also logically extend to atheists. It was not obvious to Thomas Jefferson that his defense of an individual’s rightful ownership of his own life would logically extend to nonwhites. Nor was it obvious to Albert Venn Dicey that his defenses of an adult male’s freedom should logically extend to women.

Moreover, that there should be a right to private ownership over land is actually not more obvious than the idea that a designer should have the first rightful claim of ownership over her design. Over 99.9 percent of the history of the genus Homo consists of such hominins being only hunter-gatherers. For over 89 percent of the history of Homo sapiens, this species has only performed hunter-gathering, functioning as nomads. The idea of a settling on the same plot of land for years was alien. Even when human beings finally began to farm plants as hunter-horticulturalists, and started the first villages, a long-term ownership over the land was strange. The convention was for hunter-horticulturalists to settle in a village for about 15 years at the maximum — by the end of those fifteen years, the number of parasites had built up, and the quantity of available game for food had dwindled, prompting the hunter-horticulturalists to abandon the village and set up another makeshift settlement elsewhere.

Over the past 5,000 years, when humans had finally decided that farming grains, rather than hunter-gathering, would be their main source of food, they developed an understanding of long-term settlement on real estate in manner dissimilar from what Locke and the Enlightenment’s other natural-rights philosophers envisioned. The first long-term land settlements consisted of chieftains and nobles proclaiming that a plot of land belonged not only to the people currently living, but also to their descendants and to the spirits of their long-dead ancestors, whom they had to consult when making decisions on how to alter the land. And those plots of land were “privately owned” only insofar as they were considered the joint property of one collective society as opposed to other collective societies.

The legitimacy of private land ownership is not even obvious to self-proclaimed libertarians who cite the Enlightenment’s natural-rights philosophers. That is why the early editions of Herbert Spencer’s Social Statics argues that land, not having been created by humans, cannot rightfully be privatized. It is also why there are self-styled “geo-libertarians” today who advance that very same conclusion. A right to private ownership over land is not fundamentally more obvious than a designer’s right to exclusive control over her specific original design — not to human beings in general or to Enlightenment-inspired natural-rights theorists in particular.

As I have discussed elsewhere, the homesteader’s right to own the land and other natural resources he improved — entities which had no owner prior to his improvement of them — is the original intellectual property right. Karl Marx obfuscates the meaning of Locke’s statement that the “labour” of the homesteader’s “body, and the work of his hands, we may say, are properly his,” and therefore what the homesteader “removes out of the state that nature hath provided, and left it in, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property.” By removing Locke’s use of the words labor, body, and hands, and putting special emphasis on these words in a new context, Marx bamboozles his readers into believing that Locke’s argument is that the physical motor movements employed by the homesteader are the direct cause of the addition of new economic value to the land. But the homesteader’s most essential investment in the improvement of the land was the intellectual effort — the intellectual labor — in studying the terrain and employing the proper plans that would yield the most efficacious results.

A homesteader who plans carelessly will yield pitiful results even as he exerts just as much physically strenuous effort as does another homesteader who invested considerable time and effort in learning the scientific properties of the terrain and plans accordingly. It is qua inventor and designer, not qua manual laborer, that the homesteader took resources that were no one’s private property and, from such resources, produced a form of economic value that had not existed previously. The same principle even applies to a hunter-gatherer who takes sticks and stones that no one had previously claimed as personal belongings, and then fashions them into a stone tool — it was not mostly the physical actions, but the hunter-gatherer’s use of his mind, that produced this new value. And it is not an accident that the socialists’ argument against privatized real estate is nearly identical to the IP-opposing libertarians’ argument against IP — that there being “gray areas” in the establishment of the boundary separating one piece of property from another is somehow enough to invalidate private ownership in this context altogether. A homesteader’s right to what he homesteaded is one of the earliest recognized intellectual property rights. And the intellectual property rights in the creation of such new value is the source of all wealth. It is therefore self-contradictory to claim that private ownership over improved land is a legitimate natural right whereas IP is not; private ownership over improved land is a form of IP.

Rightful Ownership of One’s Design Comes From Locke’s Designer-Entrepreneur-As-Owner Principle, Not From Labor Theory
In a fit of Orwellian mental gymnastics, many IP-haters have decided to focus only on two aspects of my argument — 1.) my pointing out all the time and effort and other costs that the inventor put into the practicable original design and 2.) my saying a homesteader or designer should have first claim of ownership over the new value she created. These detractors launch their attack while ignoring my larger point that the inputs of time and effort and testing-costs impose “scarcity” upon the practicable original designs and thereby meet the IP-haters’ own criterion for what can constitute rightful private property. Hence, they draw from Tom Palmer’s misrepresentation of defenses of intellectual property rights, mischaracterizing them as saying simply, The inventor worked really hard on her invention, and the simple exertion of hard work is sufficient to conclude that the inventor should own the invention. Palmer condescendingly labels that the “just deserts” argument and then repeats the falsehood I refuted in my prior essays — that a patent is a government-enforced monopoly on a general idea for a category of product.

Drawing from Palmer’s straw-man, the IP-haters have misrepresented my argument in particular as amounting to, The direct source of the economic value of an artwork or invention is the hard work and financial investment that the artist or inventor put into it, and that is sufficient grounds for considering the artist or inventor the exclusive ownership over the innovation, for which the artist or inventor deserves a government-enforced monopoly so that she can rake in big bucks from it. Implicit in that false accusation is the idea that I think that the proper free-market price that the designer charges — the royalties paid by licensees — is determined directly by the costs and financial risks that the R-and-D process imposes upon the designer. The idea is that my argument is a Labor Theory of Economic Value that is similar to David Ricardo’s at best and similar to Karl Marx’s at worst.

And in such mental gymnastics, they ignore my explanation how, prior to governmental recognition of any patents or copyrights, economic “scarcity” already applied to the same sort of practicable and specific original designs that would eventually be enshrined in patents and copyrights, and how this means that the default condition in any market is for there to be a “scarcity” in the quantity and supply of such practicable original designs, making them an economic value that is subject to marketplace demand and supply.

It is true that a person owns his or her own manual labor. As a corollary, it is rightful for someone sell his time and labor if he so chooses. Contrary to Marx’s insinuation that the entrepreneur appropriates the value of manual labor without paying the factory workers their worth, the entrepreneur already paid the factory workers the value of their work; that is their wage. The economic value of, and price for, manual labor (wages) is, too, set by the confluence of marketplace demand for labor with the supply of available labor. Insofar as the market is peaceable and free, everyone is paid what his job is worth, set according to that demand and supply. If, in practice, a laborer was paid less than what it was worth to him, he would quit.

Contrary to Marx, the entrepreneur and investors are not unimportant to the production process. By covering a business’s immediate debts, investors are the party that primarily takes on the financial risks associated with the enterprise in case it doesn’t succeed. Laborers take on the same financial risks as the investors only insofar as the laborers are investors into the business themselves. The entrepreneur provides important instructions to the laborers on what to do as they operate the equipment to convert raw materials into finished products; absent of the entrepreneur’s human-resources-management contribution, the labor and equipment and raw materials are not put into proper use by the firm and end up going to waste.

When the entrepreneur’s business brings in revenue, she must first pay her creditors, the first set of which are her employees to whom she contractually promised remuneration for the time and labor they sold her. The entrepreneur also pays for the equipment the laborers operate and the raw materials that the laborers convert into the finished product. Once the entrepreneur’s expenses are paid, the profit left over for the entrepreneur constitutes the customer’s payment to the entrepreneur herself specifically for the service of organizing the labor, equipment, and raw materials in such a manner as to supply the satisfaction of the customers’ and clients’ marketplace demand. One might say that insofar as the price the customer pays per unit is sufficient to cover what it cost the entrepreneur to produce that unit — the costs of the labor, raw materials, and equipment that went into producing that unit — the customer is reimbursing the entrepreneur for those very costs, and the profit left over is the customer’s direct payment to the entrepreneur for her creative contribution. And that profit is the market-based, supply-and-demand-caused economic value and price of the role that the entrepreneur played in supplying the satisfaction of marketplace demand.

Once improved land is properly recognized as the homesteader’s private property, the price the homesteader charges for it — be it the price of the land outright to purchasers, or the rent he charges to tenants — is set by the confluence of marketplace demand and supply. If would-be tenants valued only the land itself and none of the improvements, they would simply squat on wilderness area and become homesteaders themselves. The rent or price for which people are willing to pay for living on improved land is the fee that these people ultimately pay to the homesteader for the service of having used his mind to improve the land; that is economic value that had not previously existed in the land when it remained unimproved; the economic value is conferred upon the land by the homesteader himself. That is, the preexisting forces of marketplace demand and supply did not create the economic value of the homestead — the homesteader created that value — but once the homesteader has created new economic value by improving that land, that economic value that the homesteader created IS subject to the principles of supply and demand.

Likewise, once a designer is properly recognized as the designer’s rightful private property, the price the designer sets for it — be it the price she may charge to any firm for outright ownership of the design, or the license she charges to firms wishing to make use of her design — is set by the confluence of marketplace demand with supply. If would-be consumers valued only the physicality and tangibility of a novel —its ink and paper and binding — and not the intellectual efforts of the novelist, they would simply purchase ink and blank sheets of paper. If would-be consumers valued only the tangibility of a product — that it can be touched and that there is only finite number of units of the product in existence — and not the easy functionality in the product that was inputted into it by the inventor herself, then such consumers would merely purchase the raw materials from which the product was assembled.

Insofar as the royalty paid to the artist or inventor is incorporated into the price of each unit, the royalty paid to the artist or inventor for adding new value to a physical object that had not previously existed in the tangible substances from which the physical object was assembled.

That value did not come directly from the muscle power of the manual laborers who assembled units of the invention, nor even directly from the entrepreneur who managed and oversaw those manual laborers, even if that entrepreneur is more competent at human resources management than anyone else. It was the designer who provided the innovative design — the all-important set of specific instructions — for producing units that supply the satisfaction of marketplace demand to an extent greater than all comparably functioning units that were on the market prior to the new design’s introduction. And the world’s great manual laborers and human-resources-managing entrepreneurs would be unable to provide that new utility if not for the effort the inventor or artist expended in producing that new design.

I want to clarify further what I mean when I say that a particularly efficacious and particularly practicable original design produces a net increase in value in the economy. Throughout centuries, people have wanted to be able to communicate instantly with others miles away, not always needing to be directly face-to-face. An early method of such long-distance communication was making a fire and sending out smoke signals. However, given how difficult it is for someone to control a cloud of smoke, the number of different general messages that could be conveyed by a fire was quite limited. If economic value could be measured in “utility points,” we might imagine that when the knowledge and ability needed to make smoke signals became common in a hunter-gatherer society, access to this technology gave an average 100 utility points to a person.

Eventually there was an electrical method of instant communication over miles, coming in the form of telegraphs. One could send and receive such instant messages without such a great risk of being burned or inhaling toxic smoke. However, the messages sent through telegraphs could only come in the form of a series of short beeps and elongated beeps. A new esoteric language — Morse Code — had to be devised so that written English messages could be encoded into, and then deciphered from, a sequences of short beeps and elongated beeps. Each telegraph was a unit produced from a particular design, and it can be said that someone with ready access to a telegraph might gain an average 1,000 utility points from it.

Then Alexander Graham Bell introduced the telephone. It could transmit and receive electrical signals from distances comparable to those sent and received by telegraphs, but learning and deciphering a code such as Morse Code was no longer needed. There was the new convenience of simply being able to speak one’s own language and to be understood readily by anyone on the other end of the line who used the same language. Each telephone was a unit produced from a particular design, and it can be said that someone with ready access to a telephone might gain an average 1,500 utility points from it.

Once the point is reached that many people in the West can access telephones at least as easily as their predecessors could access telegraphs, it follows that the widespread availability of telephones supplies the satisfaction of marketplace demand to a greater extent than what occurred with the widespread availability of telegraphs. If a man who once was able only to use a telegraph obtained 1,000 utility points from that telegraph, and now obtains 1,500 utility points from his telephone, then he has experienced a net gain of 500 utility points. That net gain in 500 utility points per user is the net increase in economic value. And that net gain in economic value is not sufficiently explained by the mere manufacture and distribution of many units of the telephone. The manufacture and distribution of many units of the telephone would not have been possible if not for the Bell and engineers he later employed having devised the designs which provided the proper instructions to manufacturers on producing such demand-satisfying units. The inventor of the practicable new design deserves credit for the increase in the economy’s utility points — in the economic value available — and the royalties paid to the designer are for the service of creating that net increase in economic value.

Hence, we find that the preexisting forces of marketplace demand and supply did not create the economic value of a design — the designer created that value — but once that designer has created that new economic value, that economic value is subject to the principles of supply and demand.

It is a collectivization of real estate, consistent with much Marxian doctrine, that would cheat the homesteader. While unimproved land is not “scarce,” improved land is scarce as a consequence of the fact that very few people are willing and able to bear the financial risk that goes into inputting the time and effort and material resources necessary in rendering the land inhabitable and valuable in supplying the satisfaction of marketplace demand. The homesteader homesteads a plot of land on the implicit contractual condition that if other parties wish to make use of the same plot of land in which the homesteader invested efforts and other “scarce” resources, those other parties will pay the homesteader the price that the homesteader asks. That price usually comes in the form of rents that the land-improver charges to tenants. But if socialists got their way and land was recognized not as private property but only a public-domain commons, any would-be squatter would be able to invade the homestead, paying nothing. The result would be the homesteader recouping none of the costs of the “scarce” resources he invested into improvement of the land; he would be ruined. Every other would-be land-improver would see this and refrain from investing in their own land-improvement projects. Improved land would grow scarcer — “scarce” in the Malthusian context — and urban development would largely cease.

As the homesteader is not merely the manual laborer in Marx’s pontifications, but more importantly the creative designer and entrepreneur celebrated by John Locke and Jean-Batiste Say, it happens that the Marxian denial of a homesteader to his selfish private ownership over the economic value he imputed into his land would result in the ruination of the very same homesteader whom Marx cites as the inspiration behind his incessantly extolling the value of manual labor alone over the creativity of the designer and entrepreneur.

And the State refusing to recognize private ownership in practicable and specific original designs would have the same effect of a State refusing to recognize private ownership in improved land.

While impractical ideas are not “scarce,” and neither are possibly-helpful-but-still-unexamined-and-untested ideas, it happens that the practicable and specific original ideas enshrined in patents and copyrights are scarce. As stated before, these designs are “scarce” as an unavoidable consequence of the fact that very few people are willing and able to bear the financial risk that goes into inputting the time and effort and material resources necessary to produce the specific, original, detailed models from which better products are to be made. Again, these models are practicable enough to provide instruction on the production of new units that will supply the satisfaction of marketplace demand to an extent greater than do comparable units that are already on the market. The designer unveils the original design to the public on the implicit contractual condition that if other parties are to access and make use of the design, those other parties will pay the inventor or artist the price that the inventor or artist asks. That price usually comes in the form of royalties ultimately paid to the designer. But if patent-denouncing libertarians got their way, and practicable and specific original designs were recognized not as private property but something existing only in a public-domain commons, anyone would be able to pirate the design and pay nothing.

The result would be the designer not being reimbursed for costs of the “scarce” resources she used up in making possible her practicable and specific original design; she would be ruined. Many manufacturing firms will pirate an inventor’s design while paying nothing to the inventor, and, initially, it may seem that there is an increase of lower-priced units on the market that are produced from the inventor’s design. But the long-term result would be that every other would-be inventor or artist would observe this situation and refrain from investing in the creation of any designs that they would otherwise want to commercialize. Practicable original designs would become “scarce” in the Malthusian context—and innovations would largely cease. (It is not an accident that after the fall of Rome — where copyrights were recognized — progressed was relatively slow for centuries during the Middle Ages, only progress sped up again during the Renaissance, when patents on inventions were first recognized, and in which copyrights were being recognized once again.)

The reasons why a particular plot of improved land can and should command a high price on the supply side, is twofold. First, a plot of land is rendered inhabitable as a result of human effort and initiative, and only a few humans are willing and able to exert the effort and initiative that is needed. That consideration, by itself, is the source of the “scarcity” of improved plots of land. Secondly, each homesteader must make his own judgments in how to improve his land, resulting in different homesteaders making different choices, with some of these choices being better than others. Hence, although two homesteads may have started out as very similar pieces of geographic terrain, one might be more suitable than the other, in terms of supplying the satisfaction of marketplace demand, on account of one homesteader making wiser choices than the other.

Likewise, the reason why a particular patented original design can and should command a very high price — be it the royalty charged to licensees or the price a firm must pay for the whole patent itself — is twofold. First, a general idea is fleshed out and converted into a practicable original design as a result of human effort and initiative, and only a few humans are willing and able to exert the effort and initiative that is needed. That consideration, by itself, is a major cause of the “scarcity” of practicable original designs. Secondly, each inventor must make her own judgments. Hence, different inventors trying to solve the same basic problem will approach that problem from different angles and make different choices. Hence, although two patents might approach the same basic problem or even result in similar devices, one might be more suitable than the other in terms of the satisfaction of marketplace demand.

Thus, there is no basis to the accusation that my defense of the designer’s right to IP amounts to an attempt to apply the “labor theory of economic value” to inventions and artwork. I have not said that hard work or the inputting of “scarce” resources is the direct cause of the design’s economic value or the prices that the inventor should be able to charge. Both (1) the economic value of the practicable original design and (2) the prices that inventor may charge for her services, are the direct result of the practicable original design’s ability to supply the satisfaction of marketplace demand. That the inventor had to invest so much hard work and “scarce” resources in order to create her practicable original design, however, factors into both (a) the “scarcity” of practicable original designs as such, and (b) the particular original design’s ability to supply the satisfaction of marketplace demand.

Yes, the economic value of the inventor’s invention comes from how the invention supplies the satisfaction of marketplace demand — a new supplying of new satisfaction of marketplace demand that had not happened before. And here is why first dibs on rightful private ownership over the invention should go to the inventor herself: any time new economic value is created, first dibs on rightful ownership over that value must goes to the very same party that created that value. When land is made more valuable on account of the homesteader improving it, first dibs on ownership over the value in that land must go to the homesteader himself. To recognize that is not to deny that the direct source of the improved land’s value is its ability to supply the satisfaction of marketplace demand. It is just to recognize that the homesteader’s contribution is what made it possible for that improved land to supply any satisfaction of marketplace demand. Likewise, as an efficacious original design for a product generates a net increase in value in the economy, first dibs on ownership over that value must go to the party that created it: the designer herself.

Therefore, yes, John Locke’s Designer-Entrepreneur-As-Owner Principle applies here. Just as a homesteader holds the rightful first claim of ownership over his homestead on account of his imbuing it with new economic value, the designer holds the rightful first claim of ownership over her design on account of it being a new economic value she originated. That is entirely consistent with the consideration that once the design is created, the design’s economic value comes from the confluence of supply and demand and is subject to such supply and demand.

On June 14, 2018, I added the paragraphs about the homesteader’s right to the new value he created in the land, coming from the use of his mind, being one of the earliest recognized intellectual property rights.