In March, a paper entitled “Social Well-Being and IP Theft: A Dynamic Economic Analysis” by the Phoenix Center was released. Recently, I had a chance to take a look at this paper and thought I’d share some thoughts on this study.
The study on copyright (PDF) touts the credentials of four people, three of which have PHD’s. The abstract says, “In this paper, using a very conventional dynamic general equilibrium framework, we show that the theft of IP reduces social well-being, even if we count the benefits to the thief and assume theft requires no resources. In effect, theft acts as a distortionary tax on sellers, and this distortion is not remedied by merely returning the proceeds of the theft as a lump sum transfer to consumers.”
In essence, the paper sets out to attempt to prove that non-commercial copyright infringement is a hidden tax on consumers. Right in the abstract, we are not off to a good start because the abstract confuses theft with copyright infringement. Theft is the act of physically stealing physical property. Copyright infringement is entirely different in that rights have been infringed on another person. So, the authors want to boast about being experts on copyright and copyright policy, you’d think that they would get basic terminology correct. Clearly, this is not the case here.
A Dodgy Introduction
The paper starts in the introduction with these comments, “By most accounts, the Internet is revolutionary. And while this revolution appears to provide significant economic and social benefits, it also imposes costs. One such cost is the rampant theft of intellectual property. For the most part, there is not a single musical work, book, film, or software program that cannot be downloaded illegally on the Internet.”
This is quite a wild claim. In fact, this is factually untrue. For this to be true, there needs to be the eradication of the public domain as well as all open source and Creative Commons licenses and a law that says all intellectual property must adhere to the strictest of terms of copyright in order for it to exist in the first place. Thankfully, that is simply not the case. One can, for instance, legally download a musical work under Creative Commons for free. If a musical work was posted online for free and exclusively under Creative Commons (such as a vast majority of my own musical works), then it is actually impossible to illegally download that work illegally. Since there is no citations to say otherwise in this part of the paper, it is safe to conclude that the papers statement is simply a presumptuous falsehood.
Moving on to this comment:
Most agree that something needs to be done to improve the enforcement of intellectual property rights, not only in the United States but across the globe.3 Given the growing culture of the Internet that everything on-line should be “free”, however, finding an effective enforcement mechanism that is politically palatable is difficult.4
The third citation refers to the following quotation from WIPO:
“There is no point in establishing a detailed and comprehensive system for protecting intellectual property rights and disseminating information concerning them, if it is not possible for the right-owners to enforce their rights effectively in a world where expanding technologies have facilitated infringement of protected rights to a hitherto unprecedented extent. They must be able to take action against infringers in order to prevent further infringement and recover the losses incurred from any actual infringement. They must also be able to call on the state authorities to deal with counterfeits.”
An additional source simply points to the same side of the debate. Given the sources and quotes specifically mentioned, it’s safe to conclude that the authors either intentionally or unintentionally omitted the fact that what policy is needed going forward differs widely such as the policies recommended by the Pirate Party of Canada for instance which recommends the shortening of copyright terms to enhance access to our own culture. Another example of an alternative perspective is the EFF’s whitepaper on monetizing file-sharing to ensure that artists get paid.
The fourth citation in the paper points to an article on Politico which discusses the political battle that saw SOPA fall due to major concerns including free speech and the integrity of the Internet should laws such as SOPA pass. Of course, those facts are conveniently glossed over in the paper to make it sound like a one-sided approach that would make everything rainbows and kittens is being stopped on a political level. The comment that there is merely a culture of expecting everything to be free is looking at the copyright debate from an overly narrow perspective. The nature of the internet goes way beyond issues of copyright infringement and to suggest that it’s all about the infringement of a few record labels music is, at best, incredibly narcissistic and untrue. The reality is that the Internet is also a vehicle for free speech and open discussion. This blog post in and of itself is a good example of this. I personally don’t have to go to a mega corporate news agency just to get these thoughts to the public at large. Instead, I am posting it here on ZeroPaid. If I absolutely have to, I can freely post it to a personal blog. I have that choice as an individual. The point is, I can use the power of the internet to provide an alternative perspective and I’m not infringing on Metallica’s intellectual property to do so. It can be about challenging governments as was the case when the Internet assisted revolution in Egypt or even building one’s own Internet stardom as seen with people like Furious Pete, DeadMau5, Jonathan Coulton or Tay Zonday to name a few. It can help launch major companies such as Google, Amazon or Yahoo!. The real question is, can one really simplify Internet culture as a bunch of people who want everything for free? You could almost talk endlessly of the examples that point to “no”.
The paper then makes the following comments:
This redistribution idea points to an interesting feature of intellectual property. Unlike the theft of ordinary “physical” property, the theft of intellectual property does not preclude its enjoyment by other consumers. In economic jargon, we say that IP is “non-rivalrous” in consumption, meaning, for example, that the consumption of a musical work by one person does not imply someone else cannot listen to it.7 Contrast this circumstance with the familiar case of a cheese sandwich: if Tom eats it for lunch, then Jimmy is precluded from doing so. This implies, inter alia, that the opportunity cost of someone “stealing” a bit of intellectual property is zero.
If the redistribution argument outlined above seems “fishy,” that is because it is fishy. Ignored in this simple calculus is the incentiveâ€”or lack thereofâ€”of those persons who create, produce, and distribute the intellectual property being stolen. With widespread theft of intellectual property, one would expect less intellectual property to be produced, with a consequent potential reduction in social welfare.
This is quite a statement. With what evidence does the authors base their conclusions in this instance? None. There is no evidence here to suggest that because copyright infringement (not “theft”as incorrectly placed so many times throughout the “study”) exists, there will be less work being produced. If this were true, then no one would be producing work and releasing it for free under Creative Commons. Yet, by some estimates, over 400 million Creative Commons licenses have been issued. By the papers own assumptions, this should never have happened. If a number of people who release a work under Creative Commons license aren’t receiving any monetary advantage, why do these works exist at all? The answers most certainly lie far beyond any monetary advantage potentially gained by the sale of their works under a strict copyright regime. One possible reason would most certainly be the exposure of the creators works to a wider audience. So, to suggest that the creator gains nothing by having their works distributed for free is factually incorrect.
So, in the introduction alone, we can clearly see that this study is has little to know evidence to back up a large number of their claims and is riddled with badly used terminology and intellectually dishonest statements. At most, one could say that the credibility of this study is on life support.
The Dubious Economic Model
In an effort to try and quantify alleged losses, the authors suggest that they will generously assume that copyright infringement is costless. This comment is odd, but what was particularly interesting is the following comment:
On the other hand, when some of what is produced is stolen, it seems reasonable to assume that this stolen output displaces output that would otherwise be purchased legitimately. The evidence points in that direction.12 Moreover, if this were not so, then the owners of the content in question would not care about its theft, whereas they clearly do care.
This is what the 12th citation states:
Econometrically quantifying the substitution effect between music theft and record sales has proven difficult, in part due to the fact that the quantity of theft is difficult to measure and in part due to identification problems.
In other words, the evidence that points to unauthorized downloading displacing legitimate sales is based on… something the authors don’t know. Nevertheless, they do rely on guesswork of others to try and fill in the gaps. Not exactly inspiring.
Also within the footnote is a number of papers discussing this issue. One of which is the paper entitled “The Effect of File Sharing on Record Sales: An Empirical Analysis” which still available (PDF). That paper explicitly states, “Downloads have an effect on sales which is statistically indistinguishable from zero, despite rather precise estimates. Moreover, these estimates are of moderate economic significance and are inconsistent with claims that file sharing is the primary reason for the recent decline in music sales.”
In other words, by the papers own footnotes, any displacement is so insignificantly negligible, that other factors for any decline should be given higher priority. In spite of this, the authors say that copyright owners care about copyright infringement and that should be the undeniable evidence to point to the displacement of sales. This raises a number of uncomfortable questions for the authors of this study like, “Did the authors bother to read the very papers they are citing or did they hope that no one would notice?” (Sorry, you guys were busted here) or “Why is potentially imagined threats to the industry taken as scientific proof of a loss of sales due to infringement?” (in which case, I think that the record labels should hit up a unicorn for whatever losses were incurred to make up for the difference).
To use the authors own terminology, let’s be generous here and presume that all of these studies cited prove that copyright infringement displaces legitimate sales to the point of being a big enough concern to write up a whole study in the first place. How does that account for evidence that points to the contrary? For instance, the Canadian government (specifically Industry Canada) commissioned a study that found that copyright infringement online had on music sales and found that “P2P file-sharing tends to increase rather than decrease music purchasing.”. Another study found that artists revenues have gone up in an environment where file-sharing is prevalent or the study by the Norwegian School of Management that people who download unauthorized versions tend to buy ten times more music? How does the Phoenix study account for the large body of evidence that contradicts the suggestion that unauthorized downloading displaces legitimate music sales? Simple answer, it doesn’t.
Regardless of all of this, the Phoenix study goes on to create a number of mathematical calculations that look like they require someone with post secondary education in math to decipher. While I do not have the expertise to decipher the math directly, the premises the paper has put forth indicate that the math involved proves exactly nothing other than what is imagined by the authors which has little to no basis on reality (as we have pointed out above).
A Strange Summary
The summary of the paper contains the following:
This model shows that the existence of theft of some output introduces a distortion, similar to that created by a distortionary tax, into the optimal growth path/competitive equilibrium of the economy.
This was ultimately debunked after reviewing the premises in which this paper bases its statistics on.
This distortion is not eliminated by the fact that the consumers enjoy the full benefits of the stolen output. Because the set of all feasible (i.e., technically possible) consumption paths for the economy is the same regardless of whether stealing occurs or not, one immediately obtains the conclusion that theft of output unambiguously reduces social welfare, resulting in reduced levels of social well-being and output.
Clearly, the use of “unambiguously” is very premature as we have seen earlier in the paper, but what really caught my eye was the idea of the reduction of social welfare. How did the “study” come to that conclusion? We found this note on page 4:
the extent of theft will in effect act as a sort of tax on the production of the
good being stolen, and this tax, in turn, will lead to distortions in resource allocation that reduce the welfare of society.
reductions in the level of theft will increase welfare, and such reductions are desirable in an economic sense. As such, theft of intellectual property by rogue websites is not just a question of redistribution.
After reviewing the footnotes and all mentions of this, I was unable to determine what evidence there was to suggest that there were ties between copyright infringement and the welfare of society. The closest I could find was that households work on a limited budget and that labor is used to create income, but that’s as far as presented evidence gets (that I could tell anyway). As far as I’m concerned, this comment was based on something pulled from thin air and critically shallow evidence.
The Summary also states:
We note that the model does not imply simply that the copyright owners are harmed by IP theft. Indeed, it is consumers that are hurt by theft in the long run, as the incentive to invest in IP is diminished. The desire to curtail IP theft should not be viewed as a war between consumers and producers, but as a policy that reduces the general well-being of society. IP theft reduces investment, wages, and household utility.
Finally, something that I can agree with here. I agree that this whole debate is not a war between consumers and producers. However, I think that this is a war between major legacy corporate entities and the rest of society including consumers, producers, technology and innovators. As a music producer, I don’t personally like being lumped in with positions expressed by entities like the Recording Industry Association of America as I find it insulting that people would automatically assume I would have such an insane position on copyright.
As for the last line in this excerpt, I cannot find any solid enough evidence to even come close to such a conclusion. I’ve reviewed the paper for where it suggests that copyright infringement reduces wages and this was the only line I was able to find:
Lower capital also implies lower wages.
No citations, no implied sources, no evidence, nothing other than the authors opinion that there is implied lower wages. We then, naturally, looked for any shred of evidence on the reduction of capital and found two citations. The first being “Measuring the Effect of File Sharing on Music Purchases” This study currently available (PDF)
That study recorded general revenue from 1990 from 2003 and sourced that figures to the IFPI – meaning it’s only measuring the revenue of the major record labels, not the entire industry. Additionally, that particular paper makes the following statement:
However, using my estimate for the reduction in the probability of buying music, back-of-the envelope calculations indicate thatâ€”without file sharingâ€”sales in 2002 would have been around 7.8 percent higher in the countries considered.
In other words, it uses the widely discredited “one download equals one lost sale”.
The only other paper cited for this is a paper entitled “Testing File Sharing’s Impact on Music Album Sales in Cities” which is not available for the general public. However, an abstract is available which contains the following:
The conclusion from this analysis is that file sharing appears to have caused the entire decline in record sales and appears to have vitiated what otherwise would have been growth in the industry.
We should point out that this paper was released in 2008, so it is presumed that this was done before the economic collapse. Still, I find it highly unlikely that any study or paper could legitimately conclude that the entire decline of the industry is exclusively due to file sharing. The reason for this is because by 2008, there is competition for the same pool of money available to consumers is being fought for between the music industry, the movie industry and the massive video game industry. If I had the choice between purchasing an album and purchasing a video game (and not both), is there an automatic presumption that the choice I don’t mind can be attributed to downloading an unauthorized copy? I sincerely doubt that one can form an absolute assumption.
Furthermore, the second part of this abstract excerpt implies, once again, that one download means one lost sale. Again, this belief has been widely discredited.
So, in conclusion, both sources cited for the loss capital thanks to file sharing are not reliable due to false assumptions.
A Questionable Conclusion
The paper makes the following conclusion:
We observe lower equilibrium levels of capital investment and output. Wages are reduced. These harms occur because theft deprives producers of sales, reducing the apparent returns to capital investments.
The claim that piracy involves mainly redistributions within the economy and thus is not a loss to the overall economy is demonstrably false. Theft is not merely a transfer, even when the stolen goods are non-rivalrous in consumption.
Again, as we’ve discussed, the presumptions that this paper makes is practically guesswork and not based on a whole lot of reliable evidence. As a result, this “study” completely fails to disprove that file-sharing represents a loss to the economy on virtually every count.
The studies conclusion also makes the following point:
As such, as the debate moves forward on how to develop an effective mechanism to
prevent IP theft, we should at least immediately discount the argument that on-line theft of IP causes no harm and therefore no foul.
This conclusion, of course, is not supported by any solid evidence. This conclusion also completely ignores the risk that policies that impair free speech would also be a loss to society. I am personally a living example of this. I produce music and I want people to listen to it for free. So, I posted it to sites like MegaUpload and WUpload. As a result of major industry efforts, I have been censored by American prosecutors in the MegaUpload case and I have been censored thanks to pressure by the MPAA on WUpload. Unlike imaginary losses alleged by the industry, both of these cases represent a real loss of distribution potential for me as well as represents a violation of free speech.
Policies such as SOPA and PIPA that have been put on the back-burner due to well founded concerns of censorship would exacerbate the problem where I have to be concerned that major legacy corporate entities feel that avenues of distribution do not conform to their monopolistic tendencies and compels ISPs to censor them, thus blocking my ability to distribute my music to an American audience. It is straight up anti-competitive behavior as far as I’m concerned and possibly a violation of free trade agreements.
This study is long on wild claims and short on fact. When held up to any degree of scrutiny, the evidence falls on its own face and can be chalked up to merely propaganda and unfounded claims with little basis on reality. As such, the study should considered highly unreliable and should be discredited when even mentioned since you cannot treat it seriously.