Stuart K. Hayashi
Note: This essay is something of a follow-up to two others from this blog: “How Intellectual Property Rights Address Economic ‘Scarcity’ ” and “Economic Value of Intellectual Property As a Direct Result of Supply and Demand, Not Labor Inputs: The Shorter Version.”
Market Economics Not a Result of Edenic Abundance Changing to “Scarcity,” But a Result of Transitioning From Poverty to Wealth Creation
“Scarcity” — meaning the fact that there are a finite number of units of a desired good available on the market at any given moment — does influence the free-market price for a good or service. If I really want
X and the number of units is dwindling, I have to go through more effort to get it. That would increase the price. But while “scarcity” is important, it is not primary.
Saying “scarcity” is primary in economics gives a false impression. That impression is that the standard with which economics begins is the abundance of Eden, wherein there being an infinity of every desired item reduces each item’s price to zero. To add that economics is about reconciling this “scarcity” with our “unlimited wants” is to imply that we started with this Edenic cornucopia, only for us to have fallen into a degraded state where there are a finite and “scarce” number of goods, for which we must make payments to stingy vendors. On that interpretation, it is not surprising that so many university students are led to believe that vendors make everyone else poorer instead of richer.
For ancient people, some goods, such as fresh air, were a given that indeed could be damaged by more primitive forms of industrialization. (Contrary to much rhetoric from the early 1970s, the solution to such damage is not cutbacks on productivity, consumption, population size, or industrialization, but simply
more advanced and efficient forms of industrialization.) But, for the most part, the economic
default for ancient people was poverty.
The economic value of most natural resources is not obvious. Lithium is found in the wilderness, and ancient people didn’t find all of its value to be obvious. It took scientists, engineers, and entrepreneurs to discover that, per gram, lithium conducts comparatively large quantities of energy in ways most other metals cannot —in ways even copper cannot. Hence, we use lithium in smartphones. The default is poverty; economic value and wealth — which refer not to monetary units, but the goods and services for which the monetary units are exchanged — are, for the most part, created.
Economic Value Not Inherent in Natural Resources, But Placed Into Them By the Practical Application of the Creative Mind
John Locke at least partially understood this principle. If someone is to rise above mere subsistence, then the land, as it currently exists, is not adequate for living. A homesteader must plant crops and irrigate them. It takes creative effort to convert a patch of land into a habitat suitable for above-subsistence living. But, for this effort, Locke used the term
labor, which successors such as
David Ricardo and Karx Marx apparently took to mean that physical motions — manual labor only — was the prime mover for wealth creation. But it’s not just movement of the arms and legs that are involved.
Another bodily organ must be used — the cerebrum. Homesteaders have to use their mind to figure out which are the most strategic crop to plant, how best to manage the soil, and how to engineer irrigation channels. The part of the body most responsible for improvement of land and nature is not the arms but the mind. That is the entrepreneurial side of what the homesteader does — the inventive side. The term I use for it is “creativity.” That is the creativity that recognized that wireless telephones could be made smaller and more powerful if a previously overlooked metal called lithium was used in them. And, as John Locke and, to some degree, Adam Smith,
conveyed at least implicitly, it is because of the homesteader having created new value in the plot of land that the homesteader should be recognized by law as rightfully owning and controlling it. Logically applying this principle further extends to specific original designs
per se — designs for useful products and for artwork.
Two Sides of the Creative Entrepreneurial Process: The Business Executive More on Handling the Labor, The Inventor/Engineer More on Handling the Natural Resources
The consistent theme in economics is that while natural resources and manual labor are important in the creation of material value, they are nothing without Mind Power. When it comes to coordinating the efforts of the manual labor, the mind power comes from the party that is the managerial businessperson — what this essay shall henceforth identify as the “business executive” or just “executive.” Without the business executive providing proper instruction and oversight to them, the manual laborers will be unable to use their muscles to convert the natural resources into useful products. Capital — meaning the machinery and the allocation of resources to the machinery — is also important. But all capital itself is the result of the application of Mind Power in enabling manual laborers to convert natural resources. Capital itself is a product of that process.
When it comes to the use of manual labor to convert natural resources, the business executive’s role, again, falls more on managing the manual-labor side than the natural-resource side, in that the executive focuses more on the overseeing of the manual laborers. That consists of hiring competent ones and rewarding them accordingly, while firing unproductive ones. Engineers and inventors, too, provide instruction to manual laborers to convert natural resources into useful products, but the focus is more on the natural-resource side. Engineers and inventors start off with a knowledge of the scientific principles governing natural resources, and it is from this understanding of natural laws the engineers and inventors draw up their original designs for product features that are useful, practical, and cost-feasible. The inventor-engineer’s instructions to others come in the form of these designs — that is, the diagrammed designs found in patents.
Yes, the Business Executive Is Important and Must Be Wise: Yes, He Still Relies on the Provider of the Patented Invention
By now, you know very well that I think the important and creative role of the executive is underappreciated in our society. You have read
my rebuttals to the frequent accusation — made most famously by Karl Marx, but which is far from exclusive to, and long preceding, him — that the executive is a parasite who contributes nothing and simply skims off the manual laborers and the natural environment, who do all the real work. Without the creative and rational decision-making of the business executive, nothing gets done. In this very essay I will add that, by that very same token, the executive is helpless without the inventor and engineer. That is where patents come in.
All products that exist today had to be invented. That even applies to crops. And,
since the 1980s, even sexually-bred cultivars have been properly recognized as intellectual property; these are
Plant Variety Protections issued by the U.S. Department of Agriculture. Every unit produced by a business comes from a design that was formulated by some engineer. And very few of the most beneficent features of a specific company’s product were designed in-house. The best design features of most companies’ products came from somewhere else.
In an economy without patents, there would be only two avenues in which an inventor can be remunerated for her having originated the useful design features:
- The inventor works for a specific firm. The firm pays the in-house inventor.
- The inventor is not an official employee of the firm, but the firm pays the inventor directly in the role of some independent contractor or consultant who tells the firm which design features to include in its products.
Again, the problem here is that most firms’ products’ design features were not originated in-house. And if there is no intellectual property protection, every firm can copy every desired design feature without compensating the originator.
Patentable Designs Are the Result of More Than Meditating, Sitting Cross-Legged, and Humming “Ohmmmmmmmm”
This greatly shortchanges the originator — the inventor of the beneficent design features — as design features that are both cost-effective for producer-firms and useful for customers don’t come out of the air. They are the result of an arduous process called Research-and-Development. The “intellectualism” of intellectual property doesn’t mean just sitting on a mountain meditating, sitting cross-legged, and saying “Ohhhhhhhm.” The intellectualism also means going out in the field, performing experiments and, through sensory experience, observing the results. This involves investment capital and natural resources that go into the equipment for conducting these experiments. The development of a new invention is, on the inventor’s part, a combination of both thought and assiduous action, just as it is with a homesteader improving a plot of land.
Now let’s say there’s a business executive who notices beneficent design features that some inventor produced for a product. The inventor doesn’t work for the executive’s firm; that inventor is not paid in-house. And the executive doesn’t have to contract out to the inventor to obtain the results of the inventor’s services. Even if the executive must defray some costs in the process of reverse-engineering the invention, the executive does not have to devote any of the expenditures that made possible the invention. And, without there being any patent protection, this executive can copy the inventor’s design without paying the inventor anything — which means that this executive appropriates the results of this inventor’s creative efforts while contributing nothing to reimbursing the inventor and the inventor’s investors the costs of the R-and-D that made the invention possible.
Without the inventor being reimbursed and remunerated for the R-and-D that produced the invention, we can’t expect many more great inventions in the future — where will the inventor get the resources needed to conduct the R-and-D for her next great invention when she can’t even cover the costs of her most recent invention?
Here, we should not fall prey to a common retort that, in the absence of patents, inventors will still be compensated by being directly employed in-house by firms, which, on account of being the market’s “first mover,” will still rake in a hefty profit before other firms spot the invention on the market and then produce their own knockoffs of that same design. We know that that will not happen. As a case in point, Chinese knockoffs of Yekutiel Sherman’s invention — a smartphone case with a built-in selfie stick —
made it to the market before Sherman’s own units did. Firms that pilfer someone’s original design can pilfer the “first-mover advantage” as well.
Such a business executive who pirates inventors’ designs might be wise in many respects. He might be able to identify workers who slack off, and fire them. He might know how to make productive employees feel empowered, with just enough autonomy to keep them satisfied. He might know how to minimize overhead costs, having the best timing in replacing depreciated factory equipment. All of these decisions would be genuine intellectual achievements.
But to the extent that this executive is producing units of an inventor’s design without remunerating the inventor, this executive is freeloading off of the inventor. To the extent that the executive pirates the inventor’s design, that executive
is being exploitative and a parasite — and in a manner far more detrimental than anything from Marx’s fevered dreams. And that is indeed the same, in principle, as it would be if you devoted years of creative effort in making a livable homestead, only to find me squatting on it against your consent and providing no remuneration to you.
The Value of a Unit of Product Being Not Only in Its Physicality, But in Its Design, Which Is What the Inventor Provided
Many separate parties, prior to the Wright brothers, tried to produce heavier-than-air flying machines. One such party was Samuel Pierpont Langley, a wealthy official from the Smithsonian Institution and a blood relative to the great financier J. Pierpont Morgan, Sr. But these other parties failed to produce an airplane that had all three of these traits: 1) it could be propelled into the air, 2) it would retain lift while in the air, and 3) it could be steered in the air. The Wright brothers were able to achieve all three criteria because of R-and-D efforts which they had made and which other competing parties had not. Their special advantage, coming from their work, was in their ability to steer their flyer by warping the shape of its wings.
The Wright brothers’ having fulfilled all three criteria was new wealth created. And that new economic value, which heretofore had not existed, can and should be isolated from what an airplane-manufacturing firm does. If a business executive was wise in all of his human-resources management decisions and overhead-cost-cutting, but pirated the Wright brothers’ designs for the units he sold or leased, and profited therefrom, that executive would indeed be stealing from the Wright brothers. He would be stealing from the Wrights the value of the resources they inputted into the R-and-D for their flyer, and for which they were to be reimbursed by any customer or client who directly made use of the product of their R-and-D.
Patents are the recognition that, by default, the inventor places her specific original design on the market on the implicit contractual understanding that those who directly make use of her design will, according to her terms, reimburse and remunerate her for the “scarce” resources she inputted in the creation of her design.
It is through the practicably intellectual combination of thought and action that a homesteader makes a plot livable, thereby producing in land a new value that was not present before. It is by the same token that, through a practicably intellectual combination of thought and action, an inventor produces a cost-efficient and consumer-satisfying new design. And, without these inventor efforts, the business executive is unable to produce units with greatly enhanced and customer-satisfying features.
This is not a Labor Theory of Economic Value but a Creativity Theory of Economic Value.
Economic Value Does Not Come Directly From Inputs of Cost or Labor, But Inputs of Cost and Labor Do Directly Influence the Supply Curve
This should not be misrepresented as a Labor Theory of Economic Value in the tradition of David Ricardo or Karl Marx. I am not saying that an item’s price or value is the direct result of the labor or cost inputted into the production of that item. The item’s free-market price and economic value are indeed the direct result of the intersection of the marketplace demand curve with the supply curve. But those who bother to give a close look at marketplace demand and supply, each, will recall the definition for each. The “supply” curve maps the principle that, the more money will be paid to people for providing a particular service, the greater the number of people or firms there will be trying to provide that service. On the converse, if no one can be expected to be paid for rendering a particular service, we should not be surprised if the number of people or firms willing to supply that service dwindles close to nothing.
And a major reason for why it takes a higher price to induce a larger number of people or firms to provide that service is: the provision of any service imposes a cost upon the provider.
Implicit in the supply curve is the inquiry, “Why doesn’t everyone just supply 100-percent of their services for everyone else for free?” The reason why you don’t give away everything you have, and almost work for nothing, is that every service or good you supply to others imposes a cost upon you — a cost in the form of labor or a financial investment. In most cases, people become more willing to supply their services or goods if the price they charge exceeds the cost. Hence, as shown in the supply curve, the higher the price that can be charged for something, the larger the number of people there are who are willing to supply that something.
Because providing a service imposes a cost on the provider, it is not surprising that someone’s willingness to provide that service grows along with the size of the profit that can be realized by becoming a provider. And that applies to the service of providing original new designs which are to be incorporated into units of products.
Because R-and-D costs, in terms of time and resources, are so great for inventors, someone’s reluctance to go through the trouble of producing useful new design features for products will be overcome if there is a lot of money to be made for producing such inventions. Conversely, if there is no money to be made in producing useful new designs, we should not be surprised if hardly anyone is willing to do it.
And because most useful new design features in products are not produced in-house, it is through patents that inventors and engineers are paid. It is through their patents that inventors and engineers are paid for the service of introducing useful new design features to be incorporated into the units of products sold — a service without which business executives cannot substantially improve the units they sell.
Patents As They Relate to the Creativity Theory of Economic Value
The inputs — labor or other costs — that go into supplying a product to the market do not directly determine that product’s economic value. The product’s economic value is directly influenced by the intersection of marketplace supply with demand. But as the scarce inputs — labor and costs — that go into supplying that product do influence the supply curve, such inputs do influence the supply and quantity of innovative new designs regularly introduced onto the market. In that respect, the costs and labor of invention do indirectly influence the supply-demand nexus, and, with it, the economic value and prices of innovative new products. To deny this is to deny the very definition and principle of the “supply” curve in the supply-and-demand nexus.
To damn intellectual property rights is to deny to inventors any formal ownership over the creative efforts that are
the fountainhead to all wealth creation.
On December 25, 2019, I edited out of the final two paragraphs, removing two sentences I thought were redundant to the point I already made in the first two sentences of the penultimate paragraph.
