August 17, 2004  ·  Tim Wu

Economists who study government (public choice theorists) have since the 1970s been interested in the “Loser’s Paradox.” Can it help explain the content of our copyright and telecommunications laws?

Economists have noted that a surprising amount of government support goes to ailing sectors instead of expanding sectors. Classically, agriculture, textiles, clothing, footwear, steel and shipbuilding are the examples of industries on perpetual life support. Each has been in decline for decades, yet get more help from Government than any other. Conversely, expanding industries, like the high-tech industry, rarely if ever receive government assistance. In short, economists conclude, Government picks losers.

There are several explanation for why this is. One, associated with economist Anne Kruger, is that governments have an “identity bias” — they care more about people who lose jobs than people who fail to get jobs. Another, from economists Richard E. Baldwin and Fr�d�ric Robert-Nicoud holds that losers don’t fear market entry and so lobby harder. As a consequence, “it is not that government policy picks losers, it is that losers pick government policy.”

That’s the theory. Can the Loser’s paradox help explain the content of the copyright and telecommunications laws? I’ve long thought so. A crucial thing to understand that its not entertainment or communications that are in decline. People are probably willing to spend as much as they ever were to be entertained. Rather, it is specific technlogies or channels of distribution that are threatened– most clearly, the model of the shiny disk. These declining industries that ceaselessly demand, and get, government protection.

So seeing things this way you can appreciate that there’s not much a conceptual difference between something like the Induce Act on the one hand, and the farm subsidies for corn corners on the other. Each case features an industry that desparately wants to slow the arrival of more competitive rivals. And each are in truth, slowly dying industries whose ongoing decay poisions our economy.

  • http://oknarb.web-log.nl Branko Collin

    It could be you’re right, but I don’t find your examples and arguments very convincing. Here’s why.

    Government sponsoring farmers seems like a logical thing. Government isn’t looking out for private or corporate interest, but for public interest. If you leave everything to the market, people will starve. This has nothing to do with greedy money, but with farmers who face a very real choice of how to allocate their limited resources. Without government support, many of them will undoubtedly quit farming altogether. It’s a very real property of capitalism.

    (Of course, you’re argument hinges on the assumption that government _does_ look out for private and corporate interest, I just don’t see how this would work for individual farmers, whom I don’t see as losers. Then again, real estate is very valuable over here in the Netherlands, and farmers usually own their smallish plots of land, so it’s hard to imagine them being losers–perhaps American farmers are much worse off.)

    The identity bias seems a stretch; modern copyright laws are against people, and for corporate interests. Sponsoring jobs in any other industry does not means that others will lose theirs; but in the world of copyright, taking a stance for the exploiters (Big Copyright) immediately means taking a stand against the creators and the readers.

  • Matt

    Price supports for farmers make food cost more for consumers. This does not benefit people who are in danger of starving.

  • William Allen Simpson

    “Conversely, expanding industries, like the high-tech industry, rarely if ever receive government assistance.”

    Somebody is ill-informed. The production of the Internet was government sponsored and publically financed from its inception. Most consumers of the Internet were government subsidized (and continued to be through the telephone tax).

    The inventions of the transistor, the integrated circuit, and most things we think of as “high-tech” were all the result of government funding and/or regulated monopolies (privatized government).

    And the high-tech industry has recently benefitted from the biggest and oldest government subsidy of all — bankruptcy protection….

  • Alexander Wehr

    While subsidies for farms do not necessarily come at the expense of other industries, INDUCE severely cripples innovation in nearly EVERY other industry to give a limited number of breaths to an industry which has alienated its consumer base and therefore must resort to regulating its its continued existance by dictating to every other sector what it is “allowed” to create.

  • Alexander Wehr

    Of course, the DMCA already partially does that by crippling the ability of CE and Tech industries to independently engineer consumer product compatibility with media.

  • http://www.zenatode.org.uk/ian/ Ian Gregory

    On farm “subsidies”. The demand for corn is pretty constant regardless of price, so if there is a bumper harvest one year the price collapses and some farmers go bust while corn is left to rot. If there is a poor harvest the next year then the price shoots up and some farmers make a lot of money while people go without corn. The inability to predict next year’s harvest makes it difficult for farmers to decide how much to plant. This is the reason why governments intervene with guaranteed prices.

    The theory is that in a bumper year the government buys up excess production and stores it – thus keeping the price up and allowing farmers to make money. In a bad year the government sells the previous year’s excess, keeping the price *down* and preventing shortages. On average they are not giving farmers anything – just smoothing out fluctuations.

    In theory there is no difference between theory and practice, but in practice….

  • Anonymous

    It’s a simple “have” who are becoming “have nots” equation.

    Industries that were huge and profitable, but became threatened by technological innovation or cheap labor elsewhere are the ones to get government support. Think shipping, ag, textiles, etc. They were all huge industries at one time, but time is changing their business model.

    Industries which are huge but lack cohesion, will find that conglomeration (cohesiveness) will help prop up their industry when something new comes along to threaten their status quo. The next natural progression after failing to protect their industry through guilds, trade groups, and associations will be to seek government aid.

    Industries that fail to find any cohesion will quickly be replaced by the new business model.

  • http://vja2.net/ V

    The production of the Internet was government sponsored and publically financed from its inception.

    That may be true, but the industries that have since built upon the internet were not. Look at the Internet as a a highway system: it’s government sponsored, but the trucks that transport materials on it are not. While, indeed, the Internet was financed with public money, Google, Yahoo!, eBay, Amazon, and a host of other companies that make extensive use of the Internet are not.

  • Raoul

    “it is specific technlogies [sic] or channels of distribution that are threatened”

    Distribution adds zero value to the equation. It is gone. Poof! Records companies used to add value by making it possible for one to purchase the recordings of i.e., Robert Johnson in a record store in Los Angeles. An amazing feat for the time and one that was worth rewarding. However, that value is gone. There is no need for (1) record company people to track down musicians and record them; (2) there is no need to manufacture the media; (3) there is no need to package the media; (4) there is no need to ship the media; (5) there is no need to have salesmen sell the media to retailers or wholesalers.

    90% of the value added by record companies is gone. It no longer exists. This is where their profit margins came form and it no longer exists. CDs should cost around a dollar. However, the investors (speculators) in record companies want their investment to grow. Too bad! They invested in pork futures and the bottom fell out; welcome to the free market and get a real job.

    The only value left for record companies to offer is to weed through the selections and come up with playlists. Other than that they have no purpose. Banks can give loans, on much better terms, and file sharing should suffice as promotion. The songs should be their own promotion anyway. The record companies want to engage in the old paradigm of allocating huge dollar amounts compatible with the old business model where they had 10 times more added value to accumulate profits from.

    Let them die. Otherwise they become the undead who roam the world seeking to feed off of the living.

  • Erica G.

    To Branko, re farming:

    One of the complexities in the US (and i assume elsewhere as well) is that while few would argue against helping the small family farmers, much of farming is now owned by consolidated big agribusiness, who have bought up and driven out most struggling small farmers. When there are subsidies to the farm industry these days, more often than not they aid large multinational corporations rather than the descendents of homesteaders. While it may in some cases be long-time family farmers who actually till the land, they often no longer have control over the farms or the profits, and quite often the actual laborers are migrant workers, poorly paid and poorly treated.

    Yes, an off-topic tangent, but it’s useful to remember *who* in any industry is actually receiving the subsidy, in considering whether the subsidy is fair. I for one would have little against direct subsidization of music artists and authors, for example, but hate the idea of government aid to RIAA.

  • http://www.regimechange04.org Chuck

    Great summary of the issue, Raoul. Great post!

  • http://www.regimechange04.org Chuck

    Erica G., check out the site below to find out how much the farmers you know, or those in your area, get in subsidies.

    http://www.ewg.org/farm/

  • Anonymous

    Branko:

    If you leave everything to the market, people will starve.

    I hear this statement, or something logically equivalent, all the time and cannot believe people can believe such a patently silly notion.

    Three things:

    1) Millions of people already starve every year — who additionally are you claiming would starve? Everyone in the world?

    2) No one starves because of a free market — in fact, most starvation is caused by market controls, political reasons for distribution of food, and subsidies.

    3) Food is the BEST “product” to put under a “free” market system because of two factors: a) Anyone with land can make it, and b) Everyone in the world who does not make your product themselves MUST buy it.

    If there were nowhere else to buy food, would you not pay $50 for a tomato or a good steak? If you could sell a decent tomato for $50 a pop, wouldn’t you be trying to figure out a way to grow, beg, borrow, steal, or otherwise acquire such a thing? Do rabbits starve because they have no government to institute a system of controls over their food supply?

    That’s how the free market works; as supply goes down and demand goes up, prices skyrocket, and interest in the production of the thing so affected increases accordingly. It’s actually a pretty good system, especially for things like food, if those that “represent” us in Washington could just get their hands out of the control of the thing and let it alone.

    Now, if we had a TRULY free market for food, it is likely that the next 50-100 years there would indeed be large upheavals in the system of food production and distribution, most likely with a resulting system of far greater efficiency in terms of locality of food eaten, and in the percentage of people who eat locally-grown foods.

    You might convince me a FEW more people would starve in those 50 – 100 years than would have otherwise as the population distribution realigned itself so that less people lived in areas where it is ecologically infeasible for such a large population to live, but I’ll lay all of my next year’s paychecks against anyone else’s that at the end of the 50 – 100 year period there would be less starvation in the world than under our current system of governmental control of food supply and distribution.

  • http://www.zenatode.org.uk/ian/ Ian Gregory

    To the anonymous poster who asked the question “Do rabbits starve because they have no government to institute a system of controls over their food supply?”

    Interesting you pick rabbits as an example. Have you heard of the Lotka-Volterra equations? Are you aware of how they are applied to population dynamics – and of the canonical example of the lynx and snowshoe hare? Well it turns out that although there is an equilibrium point where the population of each remains constant, this can be disrupted by climatic anomalies, causing the onset of a regular “boom-bust” cycle, where the bust is characterised by mass starvation. it may take many cycles (or a lucky climatic anomoly) for the system to get back close to eqilibrium.

    So yes, nature’s ultimate “free market” does work, but only if you accept that perhaps 90% of a population may starve to death in a given year. As human beings we should be able to do better by understanding the dynamics of a “free market” agricultural system and implementing some sort of stabilisation mechanism if required. Only the most bigoted of free market zealots would argue that no such mechanism can ever be beneficial, but on the other hand I would be the first to agree that in practice the systems that are implemented are usually badly broken or open to abuse.

  • Keong Lim

    Perhaps the Japanese government has a good model in the
    way it subsidises rice farming. As I understand it, every year,
    the government decides exactly how much rice is needed to
    supply the country. Then it decides which farmers are actually
    needed to produce rice and which should be idle (they are on
    some kind of rotation system, which might also be derived
    from good farming techniques).

    The most important part is that it pays all farmers to exactly
    meet their target, so if they are designated to be idle, then
    they are paid to be idle and should not be producing rice, since
    this would be in excess of requirements and if they are
    designated to produce a certain amount should not produce
    more or less than their quota.

    Of course, this technique assumes accurate knowledge of the
    capacity of each farmer and the demand across the country
    and you still need to deal with emergency situations if the
    crops should fail, e.g. due to bad weather.

    The upside is that all the farmers keep their jobs, the country
    keeps its food production capability, the price of rice is
    relatively stable and the supply of rice is reasonably assured.

    To me, this seems much more effective than simply controlling
    the price of rice, since that doesn’t prevent boom/bust cycles
    and there’s no cost in stock piling the excess product (perhaps
    stock piling doesn’t work in this case anyway, because the
    market wants fresh product).

    This technique might not work in other countries; I can see
    people wanting to ‘trim the fat’, ‘find synergies’ and ‘remove
    redundancies’ in ways that would probably cripple the long-term
    viability of the system.

    It’s an interesting idea nonetheless.

    Keong

  • robert young

    Just one observation… the output of farming is physical and motivated by scarcity, whereas digital goods are not. Any economic or public policy directed at either “commodity” is an issue of apples vs. oranges. I would suggest that we all consider the fundamental differences in the “products”, as the answer is likely to reside within such perspective.

  • http://lawlegislationandlunacy.blogspot.com/ David

    Lots of things to talk about but farming was touched on and I have to comment on that. First, most farming isn’t done by families. The family farm is virtually dead. Second, more importantly, that doesn’t matter. Just because people do it doesn’t mean they always should. In fact, when people stop farming, its a good sign because they start doing other things. 200 years ago, 99% of this country were farmers and we were dirt poor. 100 years ago, 90% of the country worked the land and we were a little richer, but still poverished. Now, less than 1% of the country farms and we are richer than any civilization has ever been. It’s no coinidence. When farmers can’t get enough for their crop, that’s the world telling them that they should do something else.

    But the farmer is romantic to the American people (which allwo them to get away with a lot) and indiviual farmers are well organized. Farmers also don’t want to do something else. They may like it, not want to learn something new, not want to move, whatever. Politicians aren’t looking out for the common people, they are looking to get donations from these farming interests groups centered around commodities (such as soy beans, corn, cattle, grapes, oranges, pigs, chickens, wheat and on and on). Corporations as well as family farms belong to these lobbying groups. Farmers are screwing us.

  • Tim Wu

    I like Japanese rice as much as the next guy. But Japanese rice policy is in my view indefensible.

    - First, the Japanese market it protected by tariffs as high as 490%, and quotas that limit annual rice imports.

    - Second, Japan gives out an astonishing SEVEN times the total value of production in subsidies to rice farmers. In other words, they pay $7 to farmers for every $1 of rice produced.

    - Third, Japanese consumers pay on average, six times the world price for their rice.

    The main victims of Japanese rice farmers are Japanese consumers (who may accept this), and Southeast Asian and U.S. rice farmers who are shut out of the Japanese rice market.

    In other words, Japanese rice is in my opinion no model.

  • Paul Gowder

    As much as I hate the recent laws propping up copyright holders, it sort of makes my teeth ache to hear “it’s anti-capitalistic” being raised as an argument against them.

    The goal should be to correct the priorities of the current power-holders, who seem to think that economic values are more important than democratic ones. The goal should not be to buy into their perspective by arguing from their terms.

  • Greg Buchholz

    I don’t think that Jack Kilby (of Texas Instruments), or Robert Noyce (Fairchild Semiconductor) would agree that government and/or regulated monopolies created/invented the integrated circuit. And although the first transistor was made at Bell Labs by Shokley, et al., the idea for Field-Effect Transistor was Julius Lilienfeld who got a patent for it in 1926.

  • http://stereo.lu Guillaume Rischard

    I’ve always thought that helping losers helped prevent or slow down change. Governments do not like change, they are big slow bureaucracies that take years to adjust. Slowing a crash down could encourage people to move on, sell their inefficient farms, find new jobs without the unemployment a fast crash would cause. Compare the quick mining industry crash under Thatcher in the UK to the farming in the US right now.

    Of course, slowing down or preventing change also removes the incentive to evolve.

  • http://blogjack.org Glen Raphael

    Government doesn’t need to “stabilize” the farming industry. The fact that there are good years and bad years is a straightforward risk management problem, solved privately by futures markets, insurance markets, savings, and diversification. Farmers can sell a big chunk of their crop in advance before growing them so when the price collapses it’s the speculators who lose. Farmers can save money during good years to ride out the bad years. Farmers can consolidate and diversify – the corn farm over here did badly this year but the beet farm over there did well, so on the whole you had an average year.

    In short, all the necessary tools are present. Government support is only needed on top of that to keep in business the farms that really OUGHT to go bust and be taken over by people with more business sense.