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How should we think about the theft of intellectual property?

Summary:
Tyler Cowen always has insightful arguments, so I’m open to having my mind changed on this issue. But right now I’m having trouble seeing things Tyler’s way on intellectual property (IP) theft: Actions from the Chinese side have led to what is arguably, in the aggregate, the greatest peacetime theft of property in all of history. So what should be done about that? Maybe not very much? That’s my gut reaction, but how can I defend it? I’d like to reframe this issue by first considering a bunch of hypotheticals: 1. Let’s suppose China stole trillion in stuff like cars, TVs, jewelry, cell phones and computers from America. How would we feel about that? 2. Let’s suppose that, in aggregate, America’s college students pirated trillion in free stuff off the internet,

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Tyler Cowen always has insightful arguments, so I’m open to having my mind changed on this issue. But right now I’m having trouble seeing things Tyler’s way on intellectual property (IP) theft:

Actions from the Chinese side have led to what is arguably, in the aggregate, the greatest peacetime theft of property in all of history. So what should be done about that?

Maybe not very much? That’s my gut reaction, but how can I defend it? I’d like to reframe this issue by first considering a bunch of hypotheticals:

1. Let’s suppose China stole $1 trillion in stuff like cars, TVs, jewelry, cell phones and computers from America. How would we feel about that?

2. Let’s suppose that, in aggregate, America’s college students pirated $1 trillion in free stuff off the internet, (movies, music, etc.) How would we feel about that?

3. Let’s suppose that the market value of the IP stolen by China is $1 trillion, and it’s all valid IP.

4. Let’s suppose that the market value of the IP stolen by China is $1 trillion, and it’s mostly stuff where IP protection is not economically efficient (say 75 year old Disney films.)

I think we all agree that #1 would be really bad, and worth resisting strongly. I’m less sure about #2. It’s probably bad in some sense, but I’m not sure it’s worth doing much about.

In one respect, #3 and #4 are clearly different from #1. In case #1, Americans who had goods stolen would be better off if China did not exist, or more realistically if it existed but was a Maoist closed society with no contact with the rest of the world. But what about cases #3 and #4? Is this really the same sort of “theft”? In those cases, US firms would be no worse off than if China did not exist. That’s VERY different from case #1. In a legal sense they may all be “theft”, but legal definitions are not very helpful. We all know of things like smoking pot and jaywalking that are technically illegal, but not actually very serious crimes.

As an analogy, some people argue that “taxation is theft”. My response is “so what”? That doesn’t make taxation bad; you’d want to evaluate taxes on a case-by-case basis, on utilitarian grounds. Is it good theft or bad theft?  Don’t let words do the thinking; look past them to the underlying concepts.

Here’s what I’d want to know in order to form an intelligent opinion on #3 and #4:

How much IP has China stolen? What is the market value? What fraction is stuff that never deserved IP protection, because (in utilitarian terms) the costs of the protection exceeded the benefits? How does the amount stolen compare to the amount stolen by American college students? How much was stolen by the Chinese government to boost their military power, and how much by private firms for selfish reasons? How much would it cost the US to stop Chinese firms from stealing IP? I’m not seeing any data from the proponents of cracking down on China. I don’t expect precise numbers, but one can’t argue that it’s clearly a massive problem without at least some numbers.

But that’s just the beginning. Then I’d want to know how much of that stolen IP would have been purchased by China if theft were not possible. That’s likely a vastly smaller number, but arguably the better estimate of losses to US firms. Then I’d want to know how much innovation did not occur because China did not pay for the IP it stole. And how much the stolen IP helped the Chinese people. Tyler’s recent book emphasizes the importance of the long run, which might help to explain why he puts more weight on this issue than I do. You can argue that IP protection promotes growth, but others have argued the exact opposite, at least when the protections are too strong. I’d want to know how much the Chinese theft of IP increases the chance of China going to war against another country.  Or by making China richer does it make them less likely to go to war? And by making China richer, does it make China less authoritarian in the long run? Without answers to these questions, how can I possible evaluate how much effort the US should put into stopping the Chinese theft of US IP? I need data.

Just to be clear, I think it probably makes sense for Americans to put some effort into IP protection. I recall that recently the US almost destroyed a major Chinese firm that had violated US sanctions policies (before President Trump gave them a reprieve). We are quite capable of punishing individual Chinese firms that violate the rules that we set up. (In this case it was a rule that almost all other developed countries reject—but we don’t care about that.)  I have more trouble seeing the value of a blunt instrument like a trade war. I doubt the benefits will end up outweighing the costs.  And by the way, wouldn’t it be helpful if the US government also started obeying the laws, and adhering to international agreements that it signed, such as NAFTA? (And no, I’m not denying that the US does better than China on rule of law, free markets, etc.)

Here’s a question for those who think American industry is being devastated by Chinese IP theft. How would the US stock market react to a sudden agreement that ended the threat of trade war, at the cost of Trump achieving only minor concessions from the Chinese? Would stocks plunge in disappointment about us not doing anything about IP theft? I doubt it; I think stocks would rise on the news. Admittedly, the market test is not the only one that matters; there may be military considerations as well. But it’s worth thinking about when trying to evaluate plausible estimates of economic damage from IP theft.

PS. Trump recently tweeted that it was “crazy” for the US to be spending so much on the military. I agree, and I hope this is a change of heart on his part. Our military is vastly superior to any other.

PPS. The $1 trillion figure was pulled out of the air. I have no idea how big a problem this is, but suspect the actual numbers are smaller.

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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