Failure of Enforcement

DrugsMany libertarians claim that intellectual property rights abrogate traditional property rights, by prohibiting individuals from doing want they want with their own possessions. They claim that private contracts could supplant state intervention.

In fact, intellectual property rights arose in response to the impossibility of properly enforcing property rights and contracts. There are also benefits in preserving the profit motive. They are the solution, not the problem.

There is no single means of transferring ownership of a asset. Land-lords rent out apartments, and pure-bred puppies are often sold with conditions attached. If individuals so desire, they should be able to contract into any arrangement they want.

Meanwhile if an individual sells a CD to a consumer, they implicitly sign a contract that states that the consumer will not copy and distribute the music therein for profit. Of course, this is very difficult to enforce.

Indeed, the music may find its way into the hands of someone else, who has signed no contract and who then sells pirated copies. The original creator can no longer profit from his work. At the very least, the possibility creates uncertainty that deters it.

Since the individual bears all the costs, but is unable to monopolise the benefits of their research/years of musical study, in the absence of intellectual property rights the market would fail to provide the optimal quantity of the good. This constitutes deadweight loss.

The economist Jeffrey Sachs attributes the absence of a cure for Malaria to the erosion of profits in this manner. Pharmaceutical firms know that they will not reap the requisite reward from their research to make it worth the investment, because their cure will be immediately ripped off.

Of course, there are ways of creating incentives to prevent certain kinds of work from falling into the wrong hands – for example, by writing into the contract that the consumer liable for any copies made of the particular work he is buying. This is impossible to enforce, except in special cases.

Recall that all distortions arise when either an individual breaks their contract (but could not be prosecuted because of the offense’s nature) or the asset falls into the hands of a third party not bounded by a contract (through theft, or otherwise).

These conditions only arise because property rights and contracts cannot be properly enforced. When they are broken, the whole system falls apart. Thus, if intellectual property conflicts with the freedom of individuals, it is only because the idealised vision of a free society cannot possibly be realised.

Laws are only prescriptive, and contracts only as good as they are enforced. So in the absence of perfect enforceability in contracts, intellectual property rights are the next best thing to ensure that the market provides the goods and services people want.

© The Free Marketeer 2009

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