The Competitiveness of Nations in a Global Knowledge-Based Economy
Robert M. Hurt and Robert M. Schuchman *
The Economic Rationale of Copyright **
American Economic Review,56 (1/2)
Mar., 1966, 421-432.
4. Necessary Supplement to the Free Market
HHC: Titles and Index added
This session is In part a memorial to Robert M. Hurt who
died in the spring of 1965. His
death is a tragic loss to many of us personally, and also to the profession of
economics. Robert Hurt was a brilliant young man widely trained in economics and
the law who combined his training with a sense of judgment, perspective, and
unusual insight. He had a rare
personal courage in following ideas where they led him and in standing up for
what he believed to be true. His
professional career had just begun, its promise foreshadowed by his early work,
and reinforced for those of us who were fortunate enough to know him by his
personal qualities. The paper
presented today was left incomplete. It has been completed and edited by his
close personal friend Robert M. Schuchman, also a lawyer, and also with interest
in economics who is currently a Fellow in the Law and Economics Program at the
— Milton Friedman.
The most spectacular and at the same time traditional forms of government encouragement of innovation are certain limited monopoly grants to private individuals. A copyright is a grant of the aid of state coercion to the creators of certain “intellectual products” to prevent for a period of years the “copying” of these products. My comments on the philosophy and economics of copyright will be limited to the early objects of copyright: books and periodicals. This unfortunately precludes a discussion of copyrights in musical compositions - the only category in which compulsory licensing has been widely required and the area in which intelligent economic analysis has been most successfully pursued. Such an investigation would, in all probability, require a separate paper.
We may group thevarious justifications offered in favor of copyrights under two headings: (1) those which are based on the rights of the creator of the protected object or on the obligation of society toward him and (2) those which are based on the promotion of the general well-being of society.
Under the first classification we should discuss two important theories in some detail and one more in passing: (1) the natural property right of a person to the fruits of his creation, (2)the moral right to
* By Robert M. Hurt,
completed and edited
** The editor of this article is much indebted to Reuben A. Kessel, J. Randolph Norsworthy, Edmund W. Kitch, Burton C. Gray, and E. G. West for their suggestions and criticisms.
have his creation protected as an extension of his personality, and (3) his right to a reward for his contribution to society.
1. The claim that an author has an inherent property right in his writings, which right is merely recognized by the statute, has such wide acceptance that it seems at times to brook no opposition. Jurists, political philosophers, and economists have developed two divergent views of property which illustrate the conflict among supporters of the copyright system.
First, property rights can be viewed as a device whereby scarce resources will be subject to exclusive control rather than exploitation at will by all corners, with the result that they will be used in an economically efficient manner. This theory was latent in the Roman law development of the rights of property, with its emphasis on dominium, or exclusive control over tangible objects. The origin of the claim to a property right - working of the soil, gathering of the objects, gratuitous grant by the government, plunder, or theft - is not necessarily relevant; rather it is important that someone has control.
Second, property rights can be viewed as the right of each person to the exclusive control of the products of his creation. If a man brings a given commodity into existence, one who appropriates this commodity without the consent of the creator is guilty of theft, a proposition which becomes self-evident with the use of right reason. This later theory of property has its roots in scholastic jurisprudence and finds its most famous expression in John Locke’s Second Treatise. It is inextricably tangled with the first theory in Blackstone and finds its strongest refuge today in justifications for the expansion of patents and copyrights.
If one finds some credence in this line of argument, copyright is an ideal application. Locke derived a property right in the toiler from his cultivation of a small plot of land. However, most of the value was “found,” not created, and the toiler’s monopoly over the plot restricts all others from using the plot, a use to which everyone has a right in common in the absence of the toiler’s activity and resultant exclusive legal right. On the other hand, a copyright truly deprives others of nothing which they would have had in the absence of the owner’s creative activity. This line of reasoning was conclusive to Herbert Spencer: “… [A] production of mental labour may be regarded as property in a fuller sense than may a product of bodily labour; since that which constitutes its value is exclusively created by the worker.” [2
Following this approach, it becomes apparent that an argument
1. 2 Blackstone, Commentaries (Ehrlich ed., 1959), pp. 115, 116.
2. Spencer, The Principles of Ethics (1908), pp. 108-09.
which negates the property basis of patents does not
apply to copyrights. As was pointed
out over a century ago, 
the patent monopoly does deprive
others of a right which they would have had in the absence of the patentee’s
activity: the right to make the invention independently or to derive benefits
from its application as a result of its discovery by a third person. Henry George, among others, used this
distinction to justify support for copyrights and rejection of patents.
The natural property right theory in its traditional form asserts a preexisting and perpetual absolute right of control over the benefits from a created work, to be parceled out at the discretion of the author. The main difficulty with this argument stems from an attempt to apply generally the principle upon which it is based. I can find no theoretical basis for isolating writings of authors from those benefits conferred for which the actor has no present means of collecting.  Others do benefit without paying when one buys and clears swampland, develops new mathematical techniques, or new methods of inventory management. When a large manufacturing firm builds a plant in a new area, many small businesses may as a result find it profitable to locate there, and we might be able to devise a legal mechanism which would allow the manufacturer to collect for his services, similar to the reduced rent enjoyed by a department store when it attracts other businesses to a new shopping center. The question raised here is not whether any satisfactory method of collecting for these “externalities” can be found, but whether government assistance should be extended to enforce the collection. As Sir Arnold Plant has said, “a special case for a monopoly for publishers cannot rest on the general proposition that if business men are enabled to make monopoly profits, some of them will be devoted to good works.” 
2. Immanuel Kant defended copyrights by treating an author’s works not as objects the benefits of which should accrue to the author, but rather as extensions of the personality of the author and subject to protection as such. This theory plays an important role in both the theoretical justification and actual content of the French, German, and Swiss copyright systems. Article 6 of the French Act of 1957 represents a practical application of the doctrine of moral rights: “The au-
3. Phillips, The Law of Patents (1837), pp. 4-5; see also Finkelstein, Antitrust Laws and the Arts, in 10 Conference on the Arts, Publishing, and the Law 55, 66 (Univ. of Chicago Law School, 1952).
4. George, Progress and Poverty (Schalkenbach ed., 1955), p. 411 n.
5. The French approach is more consistent than the Anglo-American rationale. French legal protection is extended to authors for emotional, rather than strictly “economic” reasons, and their courts have been much more reticent to extent copyright protection to nonintellectual creations than their Anglo-American counterparts.
6. Plant, The New Commerce in Ideas and Intellectual Property (1953), p. 15.
thor shall enjoy the right to the respect for his name, his authorship and his work. This right shall be attached to his person. It shall be perpetual, inalienable, and imprescriptable.”
The emphasis of this conception of copyright is on the author’s privacy and reputation rather than his commercial interests, and as a consequence under French law the rights granted are virtually inalienable and in some cases perpetual. The three most important are: (1) the paternity right - the right to be identified as the creator of his works and be protected from plagiarism; (2) the integrity right - the right to protection against alteration or deformation of one’s work, and the right to make changes in it; (3) the publication right - the right not to publish at all.
A lengthy discussion of these asserted rights is unnecessary here, because they could be substantially protected without resort to a copyright system. The enforcement of tort law protection of the paternity right would be rather simple, and the integrity right, although it would raise administrative problems, could also be enforced through the grant of a private cause of action. The right to withhold from publication, which is protected perpetually in
3. Finally, as with patents, it is often argued that a temporary monopoly grant is a convenient way of fulfilling society’s obligation to reward writers for their contributions to the general welfare.  This approach was adopted and a property justification rejected in the report by the Register of Copyrights in support of the pending
7. Law of Mar. 11, 1957, art. 6 (France); see commentary in Bonnefoy, La nouvelle législation sur la propriété litteraire et artistique (1959), pp. 79-80.
8. See e.g., Phillips, op. cit. supra, n. 3, at p. 12.
9. 1 U. S. Copyright Office, Copyright Law Revision, c. 1 (1961).
4. Necessary Supplement to the Free Market
For those who reject the approaches outlined above, the copyright system will almost inevitably be judged by its effect upon some notion of the general welfare: it is held to be a necessary supplement to the free market in promoting the best allocation of scarce resources according to the priorities of human wants.
It is often argued that potential publishers must incur technological and risk costs which may be avoided by competitors who can copy a first edition, with the result that the price will be driven below the first publisher’s costs; hence, there will be no incentive to publish in the first instance. The private return to publishers and authors, in the absence of copyright protection, is held to be smaller than the economic value of their literary products to society. The general welfare will therefore be enhanced by enacting copyright legislation which encourages the creation and publication of manuscripts that otherwise would not have come into existence. This argument will be examined here by raising three questions:
1. Does the copyright system induce the creation of new goods which would not have been created in the absence of copyrights?
2. Assuming that new goods are produced, are these goods valued higher by consumers than the goods which would have been produced if resources had not been diverted to literary production by the copyright system? In other words, is social welfare enhanced?
3. If there is a benefit from the copyright system, is it offset, at least in part, by various administrative costs and frictions inherent in the system?
The most important, although at times unstated, premise of copyright apologetics is that literary effort and production will decrease or virtually disappear if copyright protection is removed. In any discussion of this assertion, the incentives or motives of authors and publishers should be distinguished. Both are beneficiaries of the copyright system, but their degree of dependence upon it is quite different. We shall discuss the position of the author first, and then that of the publisher.
The massive literary and dramatic production during the centuries before copyright protection was enacted demonstrate that there are other motives for the creation of intellectual property than the expectation of monopoly profits. Many authors commit ideas to paper without any intention of having them published. Some, like Franz Kafka, express a wish that their creations be destroyed upon their death. Other authors actually pay for all or part of the costs of publication of their creations, in order to satisfy other desires than direct economic remuneration. These desires include the propagation of partisan ideas; notions of altruism, as in the case of religious and moral tracts; desire
for recognition; and enhancement of one’s reputation. There are also cases where authors pay for the costs of publication in order to promote some other pecuniary interest than sale of the writing itself, such as advertising copy and scholarly publication induced by the “publish-or-perish” rule of most universities. Finally, there are authors who submit manuscripts without any hope of receiving financial remuneration.
While the productions of the authors described above may include the most unreadable and esoteric, it is more likely that they contain a large part of the very contributions to cultural and scientific progress which the proponents of copyright deem to be in need of monopoly protection. Moreover, most articles in the scholarly journals are submitted without pecuniary compensation. But there are types of creative effort which require pecuniary reimbursement for the author before the work will even be conceived; this occurs when the costs of creation, as opposed to publication and distribution, constitute a significant proportion of total costs, and these costs need not be incurred by copiers. Prime examples of this kind of product are encyclopedias, almanacs, mass circulation periodicals, technical subscription services for professions (such as citators and digests for lawyers), and motion pictures. Finally, we have those works which are created primarily, if not exclusively, for the purpose of providing an income for their authors.
It seems fairly clear that without some device to assist authors in receiving compensation for their services, some works with high costs of creation, as well as literary creation induced by the expectation of incremental income from subsidiary and reprint rights, may not be produced at all. However, it does not necessarily follow that the grant of a copyright monopoly is the only such device possible, nor that it is the most desirable device. If we wish to encourage works which require long periods of research or high costs of creation before they reach the publishing stage, it may be preferable to support authors during the period of production rather than during the moment of potential income protected by the copyright laws. This can be done through private patronage by tax-exempt foundations, universities, and the like, or even by government support for desired literary creation.
The role of the publisher in the realm of intellectual property is substantially different than that of the author. Although there are religious and partisan publishing houses whose function is to subsidize certain types of literary products, most publishing enterprises are engaged in business for profit. The function of the publisher is almost exclusively entrepreneurial: he contracts with an author for the right to issue a book, then contracts with others to have the book printed
and bound, and finally contracts with bookstores or book clubs to have the book sold to the reading public. A publisher need not invest in physical equipment, such as paper, printing presses, or bookbinding machinery. Consequently, capital requirements for establishing a publishing house are low (estimated at $100,000 for a moderate-sized company), the industry is highly competitive, the number of firms is large, and entry is so free that publishing has been called “Adam Smith’s kind of industry.” 
The very ease of entry into the publishing business is the major factor cited in favor of the necessity for copyright protection. A copying competitor can avoid the costs of royalties and editing, and, with the aid of new methods of electronic copy making, he can seriously reduce the cost of composition as well. Most important, a copier avoids the cost of risk: he can wait on the sidelines until a literary venture is accepted by the consumers, and then proceed to market reprint editions at a price below the costs of the initial publisher, compelling the latter to undergo a loss. The publishers argue that even with copyright protection, they produce most books at a loss. These are allegedly pubished because they are subsidized by the profits from the few successful ventures and by returns from subsidiary rights, such as book club distribution, paperbound reprints, and dramatization, film, broadcast, serialization and translation rights.
This gloomy description to the contrary, there are
methods of avoiding bankruptcy available to publishers, even without a monopoly
grant. The most important factor is
the advantage of being first on the market with a new book. This advantage is somewhat analogous to
that of the fashion leaders in the ladies garment industry in the
10. Lacy, “The Economics of Publishing,” Daedalus, Winter, 1963, p. 45.
11. Ibid., at p. 46.
12. Ibid., at pp. 49-50.
13. “Plant, “The Economic Aspects of Copyright in Books,” Economica, 1934, p. 172.
supply to the demand, as to avoid the risk of ruinous competition, and secure ample remuneration both to the author and himself.” 
Mallet’s argument should be analyzed further. The publisher’s fixed costs of production on each title are very high relative to total cost, and the combination of high fixed costs and declining marginal costs means a rapid decrease in average costs. The entrepreneurial function of the publisher includes the ability to gauge demand conditions correctly and publish a first edition that will saturate demand at the projected price. Should a copying competitor publish a rival edition? The copier’s fixed costs would be lower, but with marginal costs for both publishers relatively low and declining, it would probably be necessary for the copier to publish an edition in the same size range as the first edition in order to bring his average costs significantly below those of the first publisher. The result obviously would be a doubling of the copies offered for sale. If the first publisher had estimated the demand correctly, there will be a large volume of unsold books until the price is lowered sufficiently to reach a new market, since demand will not clear the market at the traditional price. Marginal costs for both publishers being about the same, the first publisher is equally capable of slashing prices to dispose of his stock.
The mere threat of retributive behavior by the first publisher should be sufficient to deter the copier until the first edition is sold out and the first publisher has made his profit. As a matter of fact, this was precisely the method used by American publishers in the nineteenth century to protect their uncopyrighted works by British authors from the copiers. If a pirated edition appeared, the first publisher responded with “fighter” or “killer editions”- extremely cheap editions designed to drive prices below even the copier’s costs, in the hope of establishing a reputation for retributive conduct which, while self-defeating in the short run, was highly effective in curbing the pirates in the long run.
In addition to being first on the market, there are other means available to a publisher to secure his position without copyright protection. The contract with the author may reserve exclusive rights to new introductions, additions and revisions by the author to subsequent editions issued by the first publisher. Moreover, the first publisher can obtain prepublication orders from interested groups and individuals, a business method which is used today. Finally, the authorization of the first edition by the author may be a marketable asset, at least among those readers who strongly believe in the right of an author to the fruits of his creation. This device is currently being used to promote an authorized soft cover edition of the Lord of the Rings trilogy of J. R.
15. Ibid, p. 193.
16. Ibid, p. 173.
R. Tolkien, which is in competition with a copied edition that pays no royalties to Mr. Tolkien. 
We return once again to the question whether certain works are published solely because of copyright protection. It seems clear that not all publication is dependent upon such protection. But copyright protection does lead to the creation of new goods by encouraging the assumption of greater risks. Publishing ventures in which the possibility of profits from reprints and subsidiary rights offsets the fear of probable loss on a first edition are very likely the creatures of copyright.
Having tentatively concluded that copyright protection encourages the creation and publication of some literature, we may inquire whether the reallocation of resources induced thereby is conducive to the general welfare. Two important theoretical assumptions support the welfare argument for copyright. First, without copyright protection, the private economic return from literary creation (to author and publisher) will necessarily be smaller than the economic benefit of this activity to society. As a result, it is argued, the quantity of literary creation will be insufficient to maximize welfare. Second, literary production, like education, should be encouraged because it has greater intrinsic merit than its alternative product, perhaps because of its long-run neighborhood effects.
The second of these assumptions is the more difficult to assess. It is in the nature of a primitive value judgment and is not amenable to analytical treatment. We can intuitively discern books which are less meritorious than given alternative products under any conventional value standard. Even if literature is an intrinsically superior product, it still does not follow that copyright protection is the best device for inducing the optimal number of books. We are compelled to return to the first assumption, that copyrights are necessary to close the gap between private return and public benefit.
As an initial step towards measuring the welfare effects of literary creation, we should try to distinguish the categories of books which are encouraged and the returns which are enhanced by copyright protection. A convenient method of accomplishing this is to isolate the different kinds of risks taken in the book industry. They may be divided analytically into three categories:
1. Those ventures which are expected to and do cover costs even in the absence of copyright protection. Copyrights are not necessary for the encouragement of these risks. Rather, copyright protection
17. Mr. Tolkien’s authorization states that “this paperback edition, and no other, has been published with my consent and co-operation. Those who approve of courtesy (at least) to living authors will purchase it, and no other.”
artificially enhances the private returns on these ventures and leads to the distortions of monopoly pricing. We can justify the existence of copyrights here only if the enhancement of private returns tends to equate them with the public benefit from the ventures involved.
2. Submarginal ventures which cannot cover costs despite the assistance of copyright protection. If the author and publisher correctly anticipate the returns on these ventures, they will not be undertaken regardless of the existence of copyrights. But if copyright protection exists, average returns for literary production will be enhanced as a result of the monopoly gains enjoyed by the successful ventures in our first category. This will encourage the production of some submarginal literature, insofar as it engenders a fallacious expectation of returns. Unless we are prepared to quantify the assumption that literary production is more meritorious than its alternative product, it would seem that a misallocation of resources occurs when literary creation is encouraged by this fallacious expectation.
3. Literary ventures which are able to cover costs only if copyright protection is available. Even if we assume that a first publisher successfully protects his first edition by the threat of retributive conduct, in the absence of copyrights he will be compelled to share his return on subsequent editions with competing copiers. If he cannot cover costs in this situation, he will not publish at all. With copyright protection, the risk taker will be able to take full advantage of the secondary markets. Through the use of rational price discrimination, what otherwise would have been a submarginal venture will be able to command an average price which covers average costs. The ventures in this category constitute the only literary production which is economically feasible solely because of copyright protection. The encouragement of these ventures will add new commodities to the market. The welfare effect of these products of the copyright monopoly will be a function of this increase in the alternatives available to consumers, discounted by the loss of the alternative product of the authors and publishers induced to engage in literary production.
We may now summarize our welfare analysis of the copyright system. The encouragement of ventures which require discriminatory pricing to cover costs may be accounted on the positive side of the welfare equation, either on the ground of the intrinsic relative merit of literary creation, or because the market is held to be an inadequate mechanism for equalizing private return and public benefit. On the other hand, copyright protection will cause scarcity pricing of those ventures which can cover costs even in the absence of such protection; this will presumably lead to the production of less than the optimal number of copies of each title in this category, thereby decreasing con-
As a postscript to this analysis, we shall make a brief examination of some costs and frictions inherent in the copyright system. The serious legal problem of “extension of monopoly” which plagues the field of patents is not too important in the copyright area. The only serious cases in this country involving the use of copyrights as a tie-in device concern the motion picture industry. In Alden-Rochelle v. ASCAP, the court held that a combination between the American Society of Composers, Authors and Publishers, the agent for most American composers of popular music, and motion picture producers was an illegal restraint of trade and an attempt unlawfully to extend the monopoly of copyrights in motion pictures and musical compositions; more specifically, ASCAP was declared to have achieved monopolistic domination of the music integrated in sound films, in violation of Section 2 of the Sherman Act. [19
The United States Supreme Court ruled in the case of United States v. Paramount Pictures, Inc., that the practice of “blockbooking,” i.e., the tie-in sale of a group of motion pictures by producers, was illegal since it “‘adds to the monopoly of a single copyrighted picture that of another copyrighted picture which must be taken and exhibited in order to secure the first.  That enlargement of the monopoly of the copyright was condemned below in reliance on the principle which forbids the owner of a patent to condition its use on the purchase or use of patented or unpatented materials.
It has also been held, in Interstate Circuit, Inc. v.
Beyond these few instances, the copyright system does not seem to have raised many antitrust problems. Governmental expenditures for court and administrative costs are minor as compared with those for the patent system. Copyright law is relatively simple and certain and does not require the technical expertise needed in patent infringement actions. Lay ignorance concerning copyright laws will result in some wasted resources, and some people may prefer to forego literary activity rather than obtain written permission from copyright owners when com-
18. 30 F. Supp. 900 (S.D.N.Y. 1948).
19. See also N. Witmark and Sons v. Jensen, 80 F. Supp. 843 (D. Minn. 1948).
pelled to do so by law. However, we may conclude that the inherent costs and frictions of copyright administration are too insignificant to have a serious effect upon our welfare analysis of the system.
In so preliminary an inquiry as this, we can do little more than try to find the direction in which further investigation would be useful. It is clear, however, that any judgment concerning the desirability of a copyright system will be a function of our criterion of justification for it. If we agree with the French revolutionaries that natural rights in literary property do exist, then we would likely support a copyright law as a codification of preexisting rights. If we believe in the theory that an author is entitled to certain moral rights as an extension of his personality, then traditional tort law protection could satisfy our objectives short of a copyright monopoly grant. If we are attracted by the analysis of the Register of Copyrights,  that society has an obligation to support the creators of literary products, our goal could be achieved by other methods of reward than copyright, such as tax exemptions for royalties or payment of cash bounties for literary creation.
Finally, we must consider the view that copyright protection should be judged by its effect upon economic welfare. Here we enter an inconclusive area of speculation. However, we can say that the traditional assumption that copyrights enhance the general welfare is at least subject to attack on theoretical grounds; the subject certainly deserves more investigation and less self-righteous moral defense.
23. The French revolutionary, Le Chapelier, defended the concept of the droit d’auteur with the statement that “La plus sacrée, la plus personnelle de toutes les propriétés, est l’ouvrage fruit de la pensée d’un écrivain.” Quoted from “Le Moniteur Universel” in Dock, etude sur le Droit d’Auteur (1963), p. 152.
24. Op. cit. supra, n. 9.