A Libertarian Alternative to Patents and Copyright
I would like to introduce a new way for inventors, artists, musicians, writers, and scientists to become rich by sharing their ideas with the public without relying on government granted intellectual monopolies, trade secrets, non-disclosure agreements, or licensing fees. This new solution would end all legal battles over intellectual property, make all music, software, and books free to download and copy while reducing the cost of physical books to the cost to manufacture them (almost 0). The price of almost every good and service you consume on a daily basis would be dramatically reduced because there would be no licensing fees or artificial barriers to entry. Every product you use would automatically include the best technology rather than inferior alternatives that are only used to avoid licenses. But before I share this revolutionary solution, I would like to review some of the arguments for and against patents and intellectual property.
The challenge with being a libertarian, anarcho-capitalist, or voluntarist is that we are always asked to provide an alternative to all of the goods and services which people believe are necessary and can only be provided by governments. Simply stating the market will ‘invent’ the solutions in the absence of government is usually not an acceptable answer because it is viewed as a religious belief in the power of the market and critics lack the faith required to accept that answer.
Many people have already addressed how the market could provide alternatives to roads, schools, healthcare, retirement, and courts. But when it comes to intellectual property the only answer provided by the Libertarians and Austrian Economists is that intellectual property does not legitimately exist. Patents and copyrights are a government grant of Intellectual Monopoly that allows the use of force to exclude others from exercising their own physical property rights. In other words, intellectual property cannot exist without governments and this incompatibility simultaneously proves to libertarians that intellectual property is invalid and to statists that governments are necessary.
Without a legitimate free-market alternative to intellectual property, the statists can claim that without patents innovation would stop and new life-saving drugs would never be invented because the cost of research exceeds the cost to replicate the results. The argument that trade secrets, non-disclosure agreements, and first-mover advantage is enough to reward inventors for their effort is seen as insufficient. Unfortunately, there is little one can do to convince someone that this reward is sufficient and this leaves libertarians with the non-aggression principle pitted against the principle of utilitarianism and the greatest good for the most people.
The other argument used to defend patents is that big corporations can easily ‘steal’ ideas from the little guy and keep all of the profits. The claim is that the government is protecting the little guy (isn’t that always the claim?). This mindset means that new ideas and inventions are kept ‘secret’, as little information is shared as possible, and when patents are filed they are done so in a way that attempts to hide the secret in plain sight in such a way that most people are not able to replicate the patent.
In the end, patents are so expensive to acquire and enforce that they do little to protect the little guy from large corporations. In the mean time they create an environment that discourages the sharing of ideas and ultimately undermine the innovation they claim to enable.
There mere existence of patents introduces a whole new category of risk that entrepreneurs must face. Often times new inventions are not possible because they depend upon other inventions for which the license is either too expensive (due to monopolistic pricing) or not available for license at all. Almost every study ever performed that does a cost-benefit analysis of patents has shown they do more harm than good, but this is of little concern to the rent seeker who wants to make make money by getting a government granted monopoly on his idea. Rewarding Inventors and Content Creators
Despite the flawed approach toward rewarding inventors via grants of government monopoly, patents do attempt to recognize the value of an idea and reward people for disclosing the idea publicly. These are goals that are worthy to pursue. So I would like to introduce an alternative to patents that would handsomely reward inventors, eliminate all intellectual property lawsuits, vastly reduce the price of manufactured goods, and allow inventors, artists, writers, and musicians to make money from their ideas without ever having to charge customers for the right to copy the song or operate a business that manufactures and sells their invention.
How much is an idea worth? This is the question that we must answer because if you cannot answer it then how can you justify using government force to grant someone a monopoly on it?
“The value of an idea lies in the using of it." - Thomas A. Edison
In other words, to maximize value to society an idea must be used to the maximum extent and any limitation on the use of an idea ultimately hurts society. Generating new ideas is easy, recognizing the good ideas and then implementing them is the hard part. In fact, an idea without recognition or implementation is effectively worthless.
So the challenge is to provide a means for the ‘little guy’ to make big money on his idea simply for sharing it freely and teaching as many people how to use the idea as possible without any restrictions.
What is the ‘value’ of the idea for rectangular touch-screen cellphone with rounded corners? Should Apple have a monopoly on this and be able to exclude all competitors from creating rectangular touch-screen phones via threat of violence?
What about the ‘value’ of slight variations on Apple’s design? If you are rational you will recognize that there must exist some ‘price’ that would express the value these ideas have to society. The trick is to find a way to discover this price.
The other insight one must gather is that the value of an idea changes over time. The invention of the telegraph in the 1800’s was worth a lot more then than that same idea would be worth today. In other words, patents also suffer most of the defects of ‘price fixing’ to the extent that they provide a constant benefit (monopoly) to a few at a fixed cost (exclusion) to the many for a fixed period of time regardless of the idea. All ideas are effectively equal under the patent system.
Under the patent system there is some price discovery through monopolistic pricing of a single company or via fiat of a judge awarding damages for patent infringement. Most sane economists would recognize that both of these methods are very inaccurate and inefficient for price discovery. These methods are also ex post facto and is almost impossible to price prior to implementation and success of an idea.
The natural market response to such an environment is the phenomena of submarine patents who’s issuance and publication are intentionally delayed by the applicate for a long time, such as several years. These patent holders take no market risk, allow others to prove the idea and increase its value, and then attempt to use patent law to collect handsomely on the ideas that they played no part in implementing.
One last critique of the patent system is that it fails to recognize that many people can independently come up with an almost identical idea at about the same time. The existing system is not flexible enough to handle this scenario and ultimately a judge must pick a winner and looser. A Decentralized Market for Ideas
I propose the creation of a decentralized prediction market to estimate the value of any invention, song or other work that is traditionally considered ‘intellectual property’. A prediction market (also known as predictive markets, information markets, decision markets, idea futures, event derivatives, or virtual markets) are speculative markets created for the purpose of making predictions. Assets are created who’s value tracks market consensus on the answer to a question or probability of an outcome.
Prediction markets work by having two people take opposite sides of a ‘bet’ on a future event. This event could be the outcome of an election, or it could be the future price of a gallon of gasoline. Value is redistributed from the loser to the winner of every bet based upon the eventual outcome.
There are many kinds of prediction markets, but in this case it would be a continuous market with no trigger event. You enter and exit via voluntary trades with market participants who both invest equal capital into their position. The effectiveness of a prediction market depends upon many factors such as:
The depth of the market (amount of money and users)
The distribution of useful knowledge among market participants.
The clarity of the wording used to seed the market.
In our case we would like to structure the prediction market to tell us the value of an idea to society. How valuable is the idea for a Pet Rock vs the iPod vs a specific cure to cancer? By what standard could you hope to estimate the value of the idea? The best standard I have come up with so far is to estimate the amount of money that someone would pay to acquire an enforceable monopoly on a concept. In effect, the prediction market should estimate the value of the patent without actually granting said monopoly to anyone.
So I propose that a new prediction market be created for every invention that is phrased something similar to:
“How much would a savvy investor pay to buy a monopoly on the use of this idea or any derivation from it?”
This market could be created at any time and would allow speculators to bet on the future market consensus on the answer to the question. Early in the life of a new idea, the estimated value of owning a monopoly on the idea would be low because few people would understand it and no one will have taken the risk to try the idea in the market. Furthermore almost no one would be able to imagine all of the potential derivative ideas that others would generate. This means that the inventor has the opportunity to buy a position in the prediction market long before its full value is fully recognized by the masses.
Of course, every prediction market requires two parties taking opposite bets, therefore, before you can buy an idea, you must find someone who is willing to bet against an idea. Fortunately, every inventor encounters more nay-sayers than supporters early on. The greater the nay-saying the better deals the inventor can get because the idea is ‘non-obvious’ and thus ‘innovative’. If everyone immediately estimates that owning a monopoly on a given idea would be worth trillions, then they would probably conclude that people would pay a lot to own a monopoly on a given idea and your ‘obvious idea’ would start out at a very high price point. In a way, your rewards under this system are directly proportional to how innovative the idea is where innovative is measured by how few recognize the value of the idea early on.
A important nuance of this prediction market is that it must be a price someone would actually pay to acquire said monopoly. If asked how much you would pay to acquire a monopoly on flux-capacitors that make time travel possible, most rational people would not pay anything because the idea is infeasible and thus they could make no profit by owning a monopoly in a non-viable idea.
On the other hand, if you asked how much you would pay to acquire a monopoly on something as general as ‘flying cars‘ without any specific reference to how such a flying car is made, then many people would bid very high and be hesitant to bet against the valuation of this patent. The idea is just so obvious, clearly possible, and of such high value when it is possible that there would be little opportunity to profit from naysayers. The prediction market would make bets in the billions even with no cars on the market.
As you can see there is a natural selection of innovative ideas from non-innovative ideas that is directly proportional the how obvious the idea is to people upon hearing about it. Implications for Venture Capital Firms
Most venture capital firms face a significant challenge of identifying the good ideas from the bad because they are not experts in every domain. As a result, venture capital firms tend to bet on people rather than ideas. Unfortunately, this approach does not work well when the success of the company depends more upon the validity of an idea than the people attempting to implement it. For example, investing in a company of great people who have an idea that violates a law of physics will fail regardless of how good the team is.
A given mid-sized VC firm is presented 10,000 ideas each year of which 1000 may be invited to an interview and 10 may be funded. The time available for evaluating these ideas is very small and many good ideas never get funding because the screeners at the VC firm never look close enough at the idea. However, if a VC firm was able to observe trends in the prediction markets they would be able to quickly identify which ideas appear to have merit with crowds of people betting on them. Instead of a team of 300 generalists reviewing proposals, the entire market of millions of specialists would be aggregating their knowledge via the prediction market.
VC firms also face another challenge, how can they hedge their bets? Suppose a particular theoretical energy device requires a $1 billion upfront investment and has a 5% chance of some unforeseen law of physics making the entire concept unfeasible. Well, if the idea was big enough, popular enough, and had enough people betting it would work then the VC firm could hedge their bets by taking out options or short positions in the prediction market that offset their investment into the idea.
The VC can then fund the idea while having their position hedged in the event that it doesn’t work out as expected. This has huge implications for the investing community and is something that patents are unable to provide.Music, Movies, and Books
Copyright is the other form of intellectual monopoly that people simultaneously want and systematically violate the law every single day. We want artists to be rewarded for their work, but few actually want to pay for it if they can get a copy from a friend for free. Fortunately, prediction markets offer a far more useful tool for rewarding artists than copyright ever could.
Imagine an iTunes like music store where every song was ‘free to download’, but users could speculate on whether the song would become more or less popular. An artist releasing a new song would bet heavily on its eventually hitting the #1 spot. Their fans who hear the song and agree would also bet money on the rising popularity of the song. Meanwhile those who think the song is ‘no good’ would bet against it rising in popularity. This gives the fans financial incentive to share their music with their friends because they make money when the popularity goes up.
Observers of the market could then ‘discover’ new songs simply by watching the trends and seeing which songs are rising in value, downloading them, and see what they think!
Here the artist makes money, users can support the artist by sharing the song, and observers can discover new music in a far more accurate method than letting the music labels and radio shows filter it for them.
Decentralized idea markets can provide a non-violent alternative to reward inventors and creators for their ideas while simultaneously encouraging the ideas to be adopted and spread wide and far. They accomplish all of the claimed benefits of patents while creating an atmosphere of cooperation and openness and avoiding the use of force to shutdown innovation and production.