Satan v. IP

An interesting news item this week was about the decision of a European court against Microsoft. The judges ruled that Microsoft's refusal to divulge the source code of its operating system is anti-competitive. They have ordered Microsoft to release the code so that other companies can build software that works on the MS operating system.

MS can, of course, argue that their operating system is their Intellectual Property (IP). Hello there! The judges have said that IP is anti-competitive! So, what is it that makes IP different from other forms of property? Is there such a difference? Or should we go along with Veblen and argue that property is nothing more than a legal claim to a monopoly over what is actually the social capital of the community. Is all property 'anti-competitive'?

Veblen's discussion of social capital in fact specifically referred to what is known these days as IP. He talked about a tribe of indigenous Americans and their manufacture of equipment. Apparently the knowledge about how to manufacture this equipment was passed down by tradition through the women of the tribe. Nobody in the tribe placed any value at all on the things themselves. They were manufactured quickly out of materials available at any location, but if the women were lost the knowledge went with them and no more of this necessary equipment could be made. Anthropologists have made similar observations about Australian Aborigines. If these observations are so common place in anthropology, one wonders why the majority of economists have so steadfastly ignored them. Instead, the economists not only argue that it is the things themselves that have value, but that markets and competition are only possible when these things are somebody's private property.

About 100 years after Veblen, economics has come again close to the view that capital is knowledge rather than things - although it has not entirely given up the idea of capital as 'things'. The 'new' discovery of economics is that something known as 'human capital' contributes a lot more to economic growth than we hitherto thought. Well, to be fair, tests of Solow's growth model, which was developed way back in the '50s, tended to show that 'technical progress' contributed about half of all growth in the US economy, but 'technical progress' could not be quantified in the same way as labour and capital inputs could be (don't let me start here on how 'capital' can possibly be quantified). Technical progress comes out of people's imaginations and that isn't economics. OK, so some half century after Solow we have got around to acknowledging that what people know is the most important contributor to economic growth and we have named it 'human capital'.

Human capital is not to be confused with Marx's concept of labour power (which is a person's capacity to work - and naturally includes the person's skills and intelligence). Modern economics requires the division of labour's contribution into two parts - that contributed by 'basic' labour and that contributed by 'human capital'. Each unit of 'basic labour' receives its marginal product in wages as does each unit of 'human capital'. This 'explains' why a manual labourer receives less than a computer engineer.*

'Human capital' is what we or our parents have invested in improving our knowledge and capabilities. It is a commodity that has been paid for and is therefore our private property. Whatever we come up with, by applying our human capital, that nobody else has come up with is our IP. Unless, that is, we have been hired by Microsoft in which case the product of our brains is owned by the company. The problem, as with any manufactured thing, is where we draw the line between our dependence on the knowledge and work of others (past and present) and what is really, truly our own.

It is true that markets and competition cannot exist without private property. It is private property that makes resources scarce so that people have to compete for them. This existence of property has such momentous implications for society that governments have had to expand tremendously over the past couple of centuries in order to regulate the acquisition and use of property. Anti-trust laws came into existence, not in order to promote competition, but in order to ameliorate the effects of competition. Bill Gates, for example, is a highly successful competitor. He has managed to privatise one slab of social capital (knowledge) that we all need to use. He has established what any competitor would try to do in order to succeed in their chosen field - barriers to entry.

While private property originally arose through gift (inheritance) and seizure, I'm not suggesting that's how Gates has done it. He got lucky because IBM used his software to run their computers and at the time they dominated the market. Other people adopted his operating system and other programs because of compatibility issues (need for computers to talk to each other).

He has been supported by a governmental and legal framework that protects property. But property has never been absolute. States have always limited property rights in order to maintain their legitimacy and prevent a descent into chaos. (Want examples? I can give plenty.)

IP is an interesting category of property, however. Compelling Microsoft to release its source code doesn't mean that there will be 2 operating systems or twenty (as would be the case if a manufacturing monopoly was broken up). In theory, once the knowledge is out, anybody at all can get hold of it - all they need is to understand programming (so count me out!). Same thing with atom bombs and other WMD. Which, by the way, is why we had to invade Iraq so that the knowledge would stop leaking. Somebody may have convinced George W. Bush that Satan was hiding in Fallujah, but the preservation of or access gained to certain kinds of IP are what the capitalist economy is really all about these days.


* If we are trying to explain the wages of David Beckham, on the other hand, we need a far more robust theory than this!