The Thing We Don’t Talk About in Piracy Estimates

by Matt Schruers on July 25, 2013

Today the House Judiciary committee is holding a hearing on the impact of copyright on the economy [webcast here]; I have already weighed in on it here.  One of the important elements of the hearing should be to address empirical deficiencies in what we know about the effect of infringement.  A recent report by the National Academies summed it up: not much.

The problem with research in this area is that it is hard to conduct reasoned analysis when some subjects are off-limits.  There are certain assumptions which simply cannot be questioned in economic loss analyses involving IP.  It is not unlike the fact that the early study of geology suffered because for generations, it was socially unacceptable for geologists to even discuss evidence undermining the previously unchallenged notion that earth had sprung swiftly into being at the decent hour of 9 AM on a crisp Monday in October.  When we cannot even acknowledge the ramifications of certain empirical issues — at least, not in polite company — academic progress is unlikely.

So what is The Issue of Which One May Not Speak?  The fact that money not spent on pirated content is, in many cases, still spent.

The U.S. Government Accountability Office pointed this out in a widely discussed report in 2010, observing that “effects of piracy within the United States are mainly redistributions within the economy for other purposes and that they should not be considered as a loss to the overall economy.”  Money does not “just vanish.”  A Swiss Government commission made a similar observation the following year.

Nevertheless, critics excoriated the GAO report and others like it for simply observing that intra-economy transfers are often redistributive, instead of destructive.  Polite people just don’t say things like that.

An old humorous “Adult Swim” commercial pokes fun at this.

Citing a then-recent estimate of the costs of film piracy to the economy, the ad observes that it is false to claim that this money is “lost” to the economy – rather, those are lost to the industry.*  When infringement occurs, the infringer loses money.  Money saved by those infringing content is still spent on other things, however, such as baby formula.  Thus, the commercial arrives at the tongue-in-cheek observation that instead of costing the economy, “film piracy feeds babies.”  However, television piracy, it concludes with facetious gravitas, “is destroying this great nation of ours.  Naughty pirates.”

Several years old now, the ad is nevertheless surprising because it acknowledges the taboo subject: some degree of infringement is not wealth destruction but rather wealth redistribution.

The fact that infringement may be redistributive instead of destructive does not make it acceptable, of course.  A violation of a government-granted right is normatively undesirable, because it flouts an entitlement that – at least in theory – reflects the will of the public.  This is bad.  Even if infringement is “only” redistributive, we still make strong normative societal judgments against involuntary wealth redistribution.  This happens regardless of whether it results from law (e.g., by tax policy), or contrary to law (e.g., infringement).

Normatively bad isn’t the same as an economically bad, however.  Not all normative transgressions necessarily have macroeconomic consequences.  And yet those two items are invariably linked when studies consider infringement.  Infringement is bad, therefore we must assign an economic cost to its badness.  Hence, study after study makes the repeatedly discredited assumption that every infringement is a lost sale, usually calculated at the highest retail price for which the good was offered, and every lost sale represents a commensurate economic loss.

None of this should diminish the opprobrium we assign to infringement: a reduced return means decreased incentive and may translate to reduced creative output.  There must be some truth to this incentive theory, or centuries of IP law are based on a flawed premise.  In this sense, redistribution is destruction if it deters future investment.  That’s a slightly more complex model – one which has yet to be built.

Clearly, intellectual property is important to our economy — as is open competition, and the free exchange of ideas.  These three forces are each valuable tools in the “innovation toolbox”, and allowing any one of them to be undermined – including intellectual property – may impair innovation, along with other important social goals.  But as long as the empirical evidence around the policy conversation is so impoverished, we won’t be making well-informed decisions.

* This observation is only true with respect to the U.S. economy.  Some amount of piracy occurs abroad, and the “savings” accruing to consumers are invested in foreign economies; this is certainly a loss to the U.S. economy.

  • kanasuke

    It is also socially unacceptable to challenge the notion that “intellectual property” is actually an indispensable item in the “innovation toolbox”.

    perhaps we should challenge that.

    Perhaps state-granted monopoly rights actually do not incentivize innovation? they lock the privileged party into a position where they think they do not have to innovate their business models, and they are locked at the top for life of artist + 50 years.

    so perhaps they decrease it?

  • Jennifer

    I’m an artist, and oh how I wish copyright lasted only five years. I would be making a lot more money than I am now…

  • David Lowery

    I’m sorry. This is ridiculous. You could make this exact same argument about shoplifting. The money the consumers save will stay in the US economy. No harm. Redistribution of Wealth bad but good? BLAH BLAH BLAH. You clearly don’t understand this is an “efficiency of capital” disaster. You should run this by an actual economist they will explain what this means and why this is always bad.

    Also since you work for CCIA (Google) is this an official CCIA and Google position on piracy? Cause we artists would like you to be very clear on this. If this is the case maybe I think we artists should consider pulling our tracks from Google Play, YouTube etc etc. You see how pissed everyone is getting about spotify. What will they think when they realize that one of their digital distributors is basically arguing for paying them less than Spotify? ZERO.

    • Matt Schruers

      There are reasons why one cannot make the same argument about shoplifting, including because a shoplifted good is consumed rivalrously, and upon being shoplifted, is not at its highest valued use. An economist would tell you that intangible IP is non-rivalrous. That the economic loss calculus is different doesn’t make infringement “good,” however. I agree it is still bad. I think I was clear on that, around that part where I wrote, “this is bad.”

      • David Lowery

        Sorry Matt no serious economist believes that bullshit non-rivalrous argument. That’s a copyleft law school invention. Efficiency of capital still wins. When the “invisible hand” get’s mugged It’s always bad. whether it industrial scale infringement or looting. Whether it’s IP or Bricks.

        Also how can you claim that their is no evidence of less investment in the music business? Are you saying that recorded music revenues fell 64% but investment in recorded music stayed the same? If it’s the same or more this would require a mechanism like Leprechauns with pots of gold funding albums. Do you have any evidence of that?

        I’m gonna do you a favor Matt. I gonna pass on your article to as many public policy congressional staffers as I can. You know why? Cause it’s shows you Google- oops I mean CCIA folks for what you are, corporate shills and crypto-socialists.

        Let’s face it there is one company that mostly profits from mass scale infringement. It’s Google. They make money by serving advertising on these sites. Just look right here plenty of screenshots and code:

        http://thetrichordist.com/2013/07/15/despite-state-attorney-general-action-google-still-advertising-on-specific-pirate-site-in-complaint/

        They also happen to be the company that funds CCIA.

        • Rick

          Wow David, let the poor guy up. I think he’s had enough. *grins*

        • ccia

          Note: This post was edited by the moderator to remove offensive language.

  • jonathan segel

    Oh awesome. Redistributive means the money flows upwards, e.g. all money that may have been spent on media instead is spent on the hardware that that media is viewed or listened on. Great! So the biggest companies get the content providers’ potential income too! Cool!

  • Michael Fricklas

    Matt – this argument is silly. First most serious studies do, in fact, take into account that demand for something that costs zero is greater than demand at a price. Your criticism of the studies is simply repeating a canard so oft repeated people think its true. Unfortunately the best data available is survey data on this issue, but the good studies are quite careful on this.

    Second, under your “money doesn’t get lost” theory, there is no reason for anyone to create new content. that is, your argument MIGHT work (except for the “normative” argument that others might call “ethics”) if you assume that all the content there is in the world already exists. But unlike, say, land, content doesn’t exist until it’s created. So the books and papers that talk about “locking up” the existing rights of way (propertizing) in old england don’t really apply. For a thoughtful treatment of the subject, read Cass,

    http://surprisinglyfree.com/2013/02/19/ronald-cass/

    and his book Laws of Creation:
    http://www.hup.harvard.edu/catalog.php?isbn=9780674066458

    • Matt Schruers

      I take no issue with a study that assumes that demand for content changes with price, on that point. And I agree that survey data may be more reliable here. However, I wonder whether your first paragraph is not directed more at the ‘lost sale’ question — a subject worthy of another post — than at the question of whether the loss is to the industry or to the economy at large?

      Regarding, ‘my’ theory that ‘money doesn’t get lost': there may actually be some agreement between us, insofar as the post states “a reduced return means decreased incentive and may translate to reduced creative output.” I don’t disagree that there will be some expected loss resulting from decreased incentive to create, if I understand your point. But a probability of diminished productivity tomorrow is not fungible with a certain loss today. It is an expected cost, not a certain one, which must be discounted to present value. I do not take credit for any theory here, of course: this was all articulated by a number of scholars (and also GAO) before I mentioned it.

      • Michael Fricklas

        Matt – with all due respect, your post attributes to the GAO a single comment, late in the report, attributed not to the GAO but to an unnamed expert who claimed “that effects of piracy within the United States are mainly redistributions within the economy for other purposes and that they should not be considered as a loss to the overall economy. He stated that “the money does not just vanish; it is used for other purposes.”

        But the GAO does not adopt that report (or to be fair any others). But they give much more prominence (citing in the introduction) to a comment attributed to “a prominent economist” that “IP protection appears to be one of the factors that has helped to generate the enormous growth in the world economy and in the standard of living that has occurred in the last 150 years. This economist pointed out that the last two centuries have created an unprecedented surge in growth compared to prior periods. Among the factors attributed to creating the conditions for this explosion in economic growth are the rule of law, including property rights and the enforceability of contracts.”

        The GAO gives equal prominence (to the expert you cite as the GAOs statement) to an expert who “stated that he did not believe there were any positive effects on the economy due to counterfeiting and piracy”

        It is completely misleading and inaccurate to repeat the shibboleth that it’s the GAO who “observed” this bizarre claim and make the follow on claim that the redistribution of money theory is something that “cannot be discussed”. Indeed, the GAO report discussed it but didn’t adopt it or observe it. It’s report says that IP theft is a serious problem and cites numerous ways in which it causes net economic harm. In fact, money DOES just vanish at least in the sense that economic welfare is reduced, fewer people work and produce and there is less overall to consume. Most serious economists do not believe you can remove the incentive to create without serious effect on GDP, tax revenues, innovation and the relative strength of the United States.

  • AmateurMusicianWithABrain

    This is one of the most stupid, idiotic, technocratic, head-right-up-the-backside argument from a technologist (even one being paid to write nonsense) that I have ever come across. Seriously. Google must be paying you guys really well to keep coming up with such self evident nonsense, such obvious idiocy. Don’t you ever get embarrassed?

    (at a party) What do you do? Oh, I’m paid to write lies by google…

    Investment in music is collapsing because investors can’t get their investment back. Venture capitalists don’t invest in music (or content in general). They invest in platforms that give music – films, or whatever – away. Right now, because of the propaganda of paid proxies like you, funded by the deep pockets of self-serving profiteers like Google and Pirate Bay, it is much more profitable for them to invest in ‘free content’ platforms rather than making content.

    But it’s a lie, it’s unsustainable, and it is going to have to stop.

    Lord Of The Rings could not have been funded by selling t-shirts. It was funded by selling and licensing copies of the movie. Game Of Thrones – same thing.

    Yet people like you still blab on that musicians should do more gigs and sell t-shirts and not sell the actual main product that they create.

  • Joeseph Green

    Ha, and this is a perfect argument for the
    plantation system and sharecropping, it’s not “…wealth destruction but
    rather wealth redistribution.” But oh darn, there’s this little thing
    called human rights that interferes with this Wall Street defender’s “wealth
    redistribution.”

    “Everyone has the right to the protection of the moral and material
    interests resulting from any scientific, literary or artistic production of
    which he is the author.”

    Article 27 (2) of the Universal Declaration of Human Rights as adopted in Paris
    on December 10, 1948

    http://www.un.org/en/documents/udhr/index.shtml#a27

    • Matt Schruers

      I think most constitutional scholars would agree that — for better or worse — the UDHR is not self-executing in the United States. That detail is largely overlooked when Art 27 is mentioned. Here, that turns out to be irrelevant in any event because the infringement is prohibited by 17 USC 106, for which — unlike UDHR Art 27 — a cause of action is supplied in 17 USC 501. Meaning, you can sue for copyright infringement. You can’t sue for UDHR violations. That’s not a value judgment — merely a statement of existing law.

      I rather think you may have missed the part of the post which notes that, economic consequences aside, U.S. policy still wisely views infringement as “bad.” I know it was a long read.

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