Copyhype

“No one would create without monetary incentives.”

Surprisingly, many opponents of copyright firmly believe that the above statement accurately reflects the views of creators and the creative industries—that they think but for copyright, creativity would not exist.

It provides an easy target to knock down: “Clearly, people have created for thousands of years before copyright existed.” The conclusion seems to be that if copyright is not necessary, then it isn’t justified.

Law professor Eric E. Johnson is currently writing a series of posts on “the great fallacy of intellectual property“. He describes this fallacy this way: “The long understood theory for why IP rights are necessary has been that people won’t invent useful technologies or create worthwhile art and literature without having the right to profit from their labors.”

We can call this the “fallacy of intellectual property” fallacy.

It’s a fallacy because it doesn’t accurately state the theory behind copyright. The economic justification for copyright is that it is an incentive to create—not a necessary condition. True, there exists a base level of drive to create knowledge and culture. But, as knowledge and culture are fundamentally important to a democratic society, an incentive to create above and beyond this base level provides significant benefits to that society.

In addition, the “fallacy of intellectual property” fallacy fails to account for an arguably more important function of copyright. Copyright provides an incentive to invest in creation.

“In a private market economy, individuals will not invest in invention or creation unless the expected return from doing so exceeds the cost of doing so — that is, unless they can reasonably expect to make a profit from the endeavor.”¹Mark Lemley, The Economics of Improvement in Intellectual Property Law, 75 Texas Law Review 989 (1996). Creative works require financial investment. Some, like movies, require more than others, but all works require some level of investment. The inherent risks of investing in creative works makes copyright protection more important. Creative works also require investment in time—not only the time spent creating, but the time a creator spends honing her skills.

How Piracy Harms Investment

First, let’s talk about how online piracy has harmed investment in creative works. I’m focusing mostly on creative intermediaries—book publishers, record labels, film studios, etc. Individuals certainly invest in their own works, but the bulk of investment comes from intermediaries.

Insufficient enforcement of online piracy has led to a reduction in investment of creating new works. The following chart shows how employment in the music industry and new releases both fell at the same time online piracy has grown.

Additional evidence shows how weak copyright protection reduces investment in new works — harming new and local artists particularly. According to the IFPI’s Digital Music Report 2010:

• “In Spain, which has one of the highest rates of illegal file-sharing in Europe, sales by local artists in the top 50 have fallen by an estimated 65% between 2004 and 2009;
• France, where a quarter of the internet population downloads illegally, has seen local artist album releases fall by 60% between 2003 and 2009;
• In Brazil, full priced major label local album releases from the five largest music companies in 2008 were down 80% from their 2005 level.”

Leveraging Investment

Intermediaries provide much-needed resources and expertise for producing high-quality works. But they perform another function that is just as important: aggregating the risk of producing creative works.

Economists sometimes refer to creative works as “experience goods“. The value of a book, movie, or song is difficult to judge beforehand, unlike other consumer goods. Consumers cannot determine if a particular work will be satisfactory until after they experience it.

Experience goods are thus risky to produce. How risky?

History suggests the risk is quite high. Remarks from several participants in the 1876 Royal Commission on Copyright in the UK cast light on the situation over 130 years ago. One William Smith said that “only one book in four” recoups its expenses, with one Anthony Trollope following up that he had heard from two separate publishers that “not one book in nine has paid its expenses.”²Minutes of the Evidence Taken Before the Royal Commission on Copyright.

These percentages hold true today. In the music industry, only about one in ten record albums sell enough copies to break even on expenses.³“Most RIAA members report that less than 10% of their releases are profitable”, David Baskerville, Music Business Handbook and Career Guide, pg. 339 (Sage, 2006); “A 1980 Cambridge study showed … approximately 84 percent of record albums failed to sell the allotted amount in order to break even”, Patrice L. Johnson, Are Black Entertainers More Likely to Receive Unfair Contract Agreements Than Their White Counterparts? Independent study, 1998. Film is similar—perhaps even worse. One economist has calculated that less than 3% of independent films produced break even.

Yet, creative industries can thrive under these conditions with appropriate copyright protections. And those intermediaries that do build sustainable businesses continue to invest in the next generation of creative works.

According to the IFPI, record labels reinvest around 30% of revenues into developing and marketing artists—$5 billion a year globally:

Recording contracts typically commit artists and labels to work together to produce a series of albums. Artists benefit from heavy upfront investment that would be difficult to secure elsewhere and record labels have the opportunity to recoup their outlay over a period of time.

Achieving commercial hits is the basis of the “circle of investment”, by which music companies plough back the revenues generated by successful campaigns to develop new talent and help fund the next generation of artists.

Continually investing in new talent is a hugely risky business, as only a minority of the artists developed by music companies will be commercially successful in a highly competitive market. Estimates on the commercial success ratio of artists vary between one in five and one in ten.

By aggregating risks, intermediaries—record labels, book publishers, film studios—can leverage their profits on hits toward the creation of a wider variety of new works. The 10 or 20 per cent of projects that break even help fund the creation of the 80 to 90 per cent of projects which don’t. This benefits niche works, works without mainstream appeal, and new creators who have not yet gained an audience.

Cultivating Genius

The expenses of creation include not just money but time too. Writing a book—especially fiction—doesn’t involve much of a financial burden. But it does take a good deal of time—time that is in short supply for many.

More importantly, time is needed for developing creative skills. While people may have some level of natural talent, few if any are born fully-realized artists. Pop economist Malcolm Gladwell famously said it takes 10,000 hours to master a skill.⁴Check out Ericsson, Roring & Nandagopal, Giftedness and Evidence for Reproducibly Superior Performance: An Account Based on the Expert Performance Framework, 18 High Ability Studies 3 (2007), for some of the research behind Gladwell’s claim.

In Wealth of Nations, Adam Smith writes:

And thus the certainty of being able to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he may have occasion for, encourages every man to apply himself to a particular occupation, and to cultivate and bring to perfection whatever talent or genius he may possess for that particular species of business.

Copyright provides that certainty that encourages the investment of time to cultivating creative talents.

The alternative—relying only on innate motivation to drive development of creative talents—is not as attractive to a society that values creativity and culture. British historian Thomas Babington Macaulay recognized this as long back as 1841.

You cannot depend for literary instruction and amusement on the leisure of men occupied in the pursuits of active life. Such men may occasionally produce compositions of great merit. But you must not look to such men for works which require deep meditation and long research. Works of that kind you can expect only from persons who make literature the business of their lives. Of these persons few will be found among the rich and the noble. The rich and the noble are not impelled to intellectual exertion by necessity. They may be impelled to intellectual exertion by the desire of distinguishing themselves, or by the desire of benefiting the community. But it is generally within these walls that they seek to signalise themselves and to serve their fellow-creatures. Both their ambition and their public spirit, in a country like this, naturally take a political turn. It is then on men whose profession is literature, and whose private means are not ample, that you must rely for a supply of valuable books.

And this idea continues to be recognized today:

It has been said that people would create entertainment without being paid to do so, and I have no doubt some would. But everyone has to buy groceries and pay the rent. So the universe of those who would create for free would be limited to amateurs and the independently wealthy. Unless we’d be satisfied with their meager output, we need some way to provide financial incentives that permit people to create entertainment professionally, for a living.⁵Lionel Sobel, Why the Digital Piracy War has to be Fought, November, 2002, DGA Magazine.

Again, notice no one is saying that without copyright, no one would invest in developing their talents in creative fields. What’s being said is that because of the “public goods” nature of expressive works, the amount of people able to make that investment is limited without copyright.

The copyright incentive increases the ability of creators to invest time in perfecting their skills, allowing a wider range of voices to be heard and a higher quality of works created.

Journeyman Hierarchy

Now consider all the ancillary skills that go into producing creative works: the skills of book editors, recording engineers, film crews. Copyright industries in the US employ millions of people beyond what we would consider “primary” creators. Yet their skills, and their mastery of those skills, are just as vital to creating high-quality works.

The idea that innate motivations to create are sufficient to ensure an optimal level of high-quality creative works fails to take into account these ancillary roles. They require even more of an incentive to invest in their development.

A system that protects the rights of creators also supports the ability of those outside the limelight to perfect and master their skills.

In an interview with Chris Castle at Music Technology Policy, Songwriters Guild of America president Rick Carnes calls this a “journeyman hierarchy”, and talks about how it results in higher quality works. He uses the example of Spike Lee, who began with a student film. Based on that success, he was able to get funding for his next film and begin a career as a filmmaker. Along the way, actors such as Denzel Washington got their start and behind-the-scenes workers developed their skills. This continual cycle is what creates the “next generation of art.”

Carnes notes that great films and great music delve into ideas that inspire and challenge. Professionals create these types of works better than anyone else because it’s their job; they do it day in and day out, giving up a great deal of their lives to do so. But if copyright is not properly enforced, than people cannot get a return on their investment; if people cannot get a return on their investment, they’re less likely to invest in the next generation of art.

Bad Literature Drives Out Good

Creators have a variety of incentives to create besides those provided by copyright. The “fallacy of intellectual property” assumes that, in the absence of copyright, these other incentives would ensure a sufficient supply of high caliber works of knowledge and culture. This assumption, however, is doubtful.

“Without copyright protection,” write William Landes and Richard Posner, “there would be increased incentives to create faddish, ephemeral, and otherwise transitory works because the gains from being first in the market for such works would be likely to exceed the losses from absence of copyright protection.”⁶An Economic Analysis of Copyright Law, 18 Journal of Legal Studies 325, 332 (1989). Think more “Reality TV”, less Mad Men. More remakes and sequels, less original works.

History shows this principle in action. In Piracy: The Intellectual Property Wars from Gutenberg to Gates, Adrian Johns describes the experience in France during the French Revolution:

Briefly, after 1789 the revolutionaries wanted to see enlightenment spread from Paris by its own natural force. They therefore abolished literary property … What ensued was an experiment in whether print without literary property would help or hinder enlightenment … This was a revolutionary utopianism of the commons … But as utopias do, it turned rotten. The craft of printing did expand rapidly—the number of printers quadrupled—but what it produced changed radically too. The folio and the quarto were dead. Reprints became legitimate, then dominant … [Printers] employed whatever secondhand tools they could lay their hands on, worked at breakneck speed with whatever journeymen they could get, and ensured a rapid turnover by issuing newspapers and tracts with an immediate sale. What books were still published were largely compilations of old, prerevolutionary material. In other words, a literary counterpart to Gresham’s Law took hold, and the triumph of the presses grises led to disaster.⁷Pg. 53, University of Chicago Press, 2009.

Investment of time and money in creators and their works leads to a wider variety and higher quality of expression that enriches all our lives. Copyright, when it is properly enforced, provides an incentive to make that investment.