The popularity of computers, spread of the Internet, and changing attitudes of some technologically minded individuals are together challenging ceremonial business practices. This challenge comes in the form of open source software which, contrary to hundreds of years of business practice, gives consumers the right to a good free of charge. (1) These technological advances are economically efficient but, by challenging the status quo, are nonetheless controversial and are engendering harsh responses from vested interests. This paper examines the challenges posed by this ongoing trend and the broader conflict between efficiency and profit-seeking behavior.
Copyright Law and Its Increasing Incongruity
Most economic analysis of copyright suggests that, from its inception, copyright law has represented an uneasy balance between monopoly power and economic efficiency. As William Landes and Richard Posner noted, "Copyright protection--the right of the copyright's owner to prevent others from making copies--trades off the costs of limiting access to a work against the benefits of providing incentives to create the work in the first place. Striking the correct balance between access and incentives is the central problem in copyright law" (1989, 326). Richard Watt echoed this conclusion: "It is a most difficult exercise to decide which of the two sides of the intellectual property market is more deserving, and hence to set a socially efficient level of protection" (2000, 11-12).
Copyright profits are often defended as a right or a necessary evil. Several theorists, however, attack copyright in part or in whole. Stephen Breyer summarized the "moral justifications for copyright protection" as resting on the belief that authors have a "natural right" (1970, 284) to profit from their works; he then skewered this belief on several fronts, primarily by arguing that authors have no greater right to be paid sums above their "persuasion cost" than do most other workers, who are routinely paid less than the total value of their output (284-291). (In the economist's terms, Breyer's argument is that copyright is merely a tool for creating economic rent.) And while some may suggest that creative works are qualitatively different from other goods and services and hence deserve greater rewards, Breyer countered that such high returns will disproportionately encourage production of popular (i.e., lowbrow) output over "serious and important works" and further that the resulting higher prices will reduce dissemination of the more worthy intellectual properties. Breyer's refutation of the moral arguments for copyright thus contains two strands: that copyright creates disparate and inequitable rewards in the labor market and that it creates inefficient and inferior outcomes in the markets for intellectual properties.
Breyer also attacked the "necessary evil" argument for copyright on several fronts. (2) He concluded that, in the book market, eliminating copyright would have varying impacts on publishers' (as opposed to authors') earnings depending on the copiers' cost advantages, the possibility of retaliation from initial publishers who may punish copiers by ultimately selling books at prices below copying costs, and the initial publisher's advantage in first bringing the book to market and hence earning revenues before copies become available (1970, 294-302). (3) Breyer's last point draws heavily from an article by Arnold Plant, who argued that copyright protection was an unnecessary entry barrier given that a work's creator would have adequate time to earn returns before other market entrants eroded the creator's advantage (1934).
With analysis dating from 1934 and focusing on the market for books, Plant's conclusion needs refining in this age of digitization and the Internet. Given the many recent high-profile cases of songs and motion pictures becoming available for illegal downloading before their commercial release dates, it seems clear current technology has, in many milieus, negated the first-mover's advantage. Nevertheless with software, proprietary restrictions on source code help secure this advantage. Software (the binary code) can be copied and distributed with great ease and negligible costs. However, without the source code, pirates and other competitors are substantially prevented from customizing the software or developing an improved future generation of the program.
For all digital information with marginal costs of dissemination approaching zero, free distribution is, in the short run, allocatively efficient even though it infuriates copyright holders and elicits claims that the production of such properties will eventually cease as profit-making opportunities whither. If this were definitely the case, then one could reasonably argue such distribution schemes are truly against the public interest, defined as...