Monday, June 17, 2013

Economic Ecology

Mankind is rather unique in the animal and plant kingdom in one, somewhat startling respect: he doesn't recycle everything. Not even close.

Every ecosystem that has ever been studied by mankind finds that all waste is recycled one way or another. Trees give up leaves that later become soil. Vultures and ants eat dead animals. Bacteria and fungus eat everything. Water washes away anything refused by animals.

Mankind? We put our waste in landfills. We burn it. We let it float in a collection of garbage the size of Texas in the South Pacific.

Today, we are not going to discuss the ecological impact of man. Mankind's impact on nature is already well documented and the investigation continues. Rather, today we will explore how American economic policy ignores rather than acknowledges nature for its wisdom.

Let us turn now to the industry known as "Big Content". This includes movies, books and music, to name a few parts of it. Big Content loves copyright law and is always pushing for more. Longer terms, harsher penalties, and a greater reach.

Copyright laws assume that creators will have an incentive to create works if creators of such works have exclusive rights to their works for limited times. Ostensibly, this permits the creator to get his works to market before someone else copies it, a sort of artificial first mover advantage, and permits the creator to earn a living from those works.

This was fine for copyright terms of 14 or 28 years. But, during the 20th century, the length of the term of copyrights were increased incrementally. Then, starting around 1976, the trend accelerated, to the point that now, copyright is 70 years plus life. This could amount to more than a century of protection for copyrighted work. While in Congress, Sonny Bono pushed legislation that would make copyright last forever, but didn't get the support he needed to pass it.

This expansion of copyrights has had two observed effects. First, it has noticeably decreased the sphere of the public domain over time. Second, it has lengthened the time it takes for new creative works to enter the public domain, and that provides inspiration for new works. The public domain is a big part of what is known as "culture", a fact that Big Content conveniently ignores.

Finally, the length of the copyright term is so long that works created today will not enter the public domain until several generations have passed, creating a massive pile of orphaned works. Orphaned works cannot be reproduced without the consent of the copyright holder. If the copyright holder is unavailable, incapacitated, or cannot be located, the work is orphaned and excluded from "culture" until the copyright expires.

The excessively long term of copyrights has created a condition where only 2% of recorded works between 55 and 75 years old retain any commercial value, leaving the other 98% to obscurity. Many of those 98% are orphaned works. The case could be made here that copyright is killing American culture.

Patents have provided similar results, although in a different way, since they protect inventions rather than expression. The life of a patent is usually 20 years. They require renewals, so that at least they can expire in a reasonable amount of time.

But the term is not the worst problem. It is the scope of patents. Patents are often written in broad, vague language, making it difficult to determine the limits of the claims in a patent. Patents for software began to issue in the early 1990s in small amounts, with the number of patents for software mushrooming in the first decade of this century.

In the last 3 years, more than 200,000 patents were issued each year, with well over 100,000 issuing every year before that since 1989. A significant fraction of those patents were software patents, business method and process patents. Of those, most of them consisted of functional claiming.

Functional claiming reads something like, "pushing email to a phone", rather than providing a precise description of the code used to make the function possible. There are thousands if not millions of ways write a program that will send emails to a phone, but the patent forecloses them all, creating a giant land grab for the patentee.

Software is about the exchange of ideas and information, but the patents on software have made software development risky and expensive. Businesses that have been the target of patent suits have complained loudly that vague patents have gotten out of hand.

The Obama Administration has been listening and has issued an executive order to reign in functional claiming so as to require patents read on a precise method of reaching the claims in a patent. The order will also attempt to deal with patentees that try to hide behind shell companies to avoid legal or market retribution for their action.

Software patents have also given rise to patent trolls that hide behind thousands of shell companies to hide the real party in interest behind the patent. This permits the real party in interest to sue competitors without fear of backlash from customers or competitors. The same executive order mentioned above will require the real party in interest to be disclosed, and that no damages may be collected for infringements prior to the time that the real party in interest is reported when applying for renewal, or during litigation. This is a step in the right direction, but until a court definitely rules software unpatentable, there is much work to do. Luckily, Obama's action can be taken without waiting for Congress to figure it out.

When we read the news, we don't often find a connection between intellectual property policy and economic policy. Looking at the costs of patent trolls alone, it has been estimated that direct costs of their litigation tactics has cost a minimum of $30 billion in one year, $500 billion overall. Indirect costs could reach much farther and exact a deeper toll on the economy.

When patents are vague, they create uncertainty in the marketplace, they create risk in the use, exchange, and recycling of ideas. This is damage to our economy in no uncertain terms, killing jobs and sending innovators overseas.

Let's turn to examples that are more familiar. Most of us know what we've read about the bank bailouts of 2008 after the credit freeze. More than $700 billion has been allocated to the banks to keep them from failing. The housing bubble that lead to the collapse in stock prices for the biggest banks was merrily fomented by the banks themselves. AIG bet on the homeowners and Goldman Sachs bet against them and won. The true size of the bailout is estimated to be some $180 billion for AIG alone.

While the details are interesting, one aspect of the bailout is often missing from the press: ecology. Seeking Alpha ran a great piece on how the bailout prevented a natural cycle in capitalism from completing. Numerous articles at Seeking Alpha maintains that if the banks were allowed to fail, someone else would come in and buy what remains to start new businesses. This is exactly what happens when any other business fails. The bailouts are contrary to the cycle of life as in nature and demonstrates the folly of granting any entity immortality.

Starting in the 1980s, we saw the rise of the Reagan Revolution. Since that time, we have seen unprecedented consolidation of wealth and power in the hands of a tiny minority. I'm not talking about your garden variety millionaire, I'm talking about the billionaires - that minority. We have also seen the rise of monolithic monopolies that have taken advantage of tax laws to squirrel away billions offshore, placing that capital out of reach here.

As we have seen, the wealthiest individuals and corporations have spent more effort on accumulation of wealth and capital than on creating jobs. Rather than passing on the wealth created by innovations to employees who use them, corporations have sought to suppress wages and have colluded to do so. Rather than hiring college graduates here, they are importing them from abroad or sending operations overseas.

We have also seen the rise of interlocking directorates that provide a network for collusion in business while fronting the illusion of competition. There has also been an almost hyperbolic rise in executive compensation at the highest levels. CEOs regularly pull down tens of millions each year, often despite the poor performance of the companies they work for. Members of the boards of directors pull down an average of $250k a year for attending 3-4 meetings a year, also quite often despite the poor performance of their companies.

Such accumulations of wealth into the hands of an apparently idle class have done little to create the jobs our economy needs, belying their self-anointed title of "job creator". The accumulated lucre falls into bonds, and other long term investments. It also finds a way to tax shelters around world, unavailable to create jobs here.

This is just a sample of the mechanisms in place to demonstrate the ways in which the cycle of nature is not respected in American economic policy. In a free market, the wisdom of nature is respected. In a market controlled by private monopolies, bent on immortality, nature is ignored.
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