November 17, 2009

Like good poetry, "capitalism [means] different things to different thinkers and economic players". As he reviews the recent crop of books about its fall from grace a year ago (*), Paul M. Barrett is right to a point. Presidents Hu Jintao and Barak Obama may both promote its virtues, yet to say the versions they practice are slightly divergent is hard to refute. Still, voiding words of their meaning to solve apparent contradictions is to refuse the opportunity to gain a better understanding.

Pragmatists content themselves with examples. While this approach has many benefits, its results perforce depend on the chosen example. The problem with capitalism is to take the United States as its pinnacle. So popular a view. So wrong! John Kay's latest column (**) does not offer to characterize capitalism either, but minces no words in clearing the ground. Capitalism has no worse enemy than "rent-seeking", defined as "the [legal] appropriation of the wealth of others" and "America has a new generation of rent-seekers", making it a case of what capitalism is not.

I urge my readers to look up John Kay's own words and judge for themselves. Isn't he describing what I have called a pronaocracy, the government of the people by the lobbyists for the corporate interests? When he warns us "a stance which is pro-business must be distinguished from a stance which is pro-market", isn't he unmasking the self-serving ideology of a certain anglo-saxon elite?

Is China then a better example? Perhaps not, despite its remarkable economic success based on thrift and enterprise. Has indeed capitalism ever been more than a utopia? Shouldn't one instead define capitalism as an ideal combination of three dogmatic principles?

• the "decentralization of economic power", the visible benefit of functioning market mechanisms and democratic constitutions
• the ability to limit one's financial risk to one's own freely chosen stake
• the rule of the law, made known in advance to all participants and equally enforced upon them

Hence the paradox. Whenever possible, the goal of the competitors is to suppress competition, distort markets, defraud unwitting suppliers and abuse customers. The more successful capitalists become, owing to capitalism, the harder they try to pervert it. Using modern finance, bankers and their paid promoters no longer need to limit their risks. They socialize them while keeping their rewards. In a pronaocracy, the role of the law promotes the rents of the rulers, those with the money to buy elected positions for themselves or, more often, for their stooges.

Nowhere on earth has one ever been exempt from these distortions. But capitalism is not just a rod with which to punish the wicked. Why not also take the opportunity, in our Information Age, to use its principles as a guide to meet the challenges of how to create, distribute and find information.

Take for instance the Bilski case currently in the US Supreme Court. Do abstract ideas deserve patent protection? John Schwartz tells us how "the justices peppered [...] a lawyer for Mr. Bilski [...] with hypothetical patents that they clearly found ludicrous" (***). Fair enough. Inventors invite levity as hindsight make all inventions either obvious or ridiculous. But why would a business idea be less worthy of protection than a mechanical device? As information displaces energy and food as the font of economic value, should inventors thus lose the ability to capitalize on their ideas?

Why is it then that copyrights receive such extraordinary legal backing? Are inventors less useful to society than artists? Of course not. More pragmatically some large corporations live by overcharging for the reproduction of music and video creations and fall victims of individual acts of piracy. And on the contrary independent inventors are a nuisance to large corporations forced to compete against unbridled imagination (1).

Suppose the forces of pronaocracy were held in check. Would we get capitalism? Hardly. Whether inventions are concrete or abstract (2), the patent system has three defects. Useful applications tend to mix more than one patent, relevant ones are difficult to find and there is no liquid market for them. Hence extortion by patent trolls (3). Shouldn't whoever finds new ways to make this outcome moot deserve protection? Must we rely on chance or altruism, such as my past suggestion on how to reward reluctant cooperative creation? Effective decentralization should be the goal.

Ideas on how to ease patent searches are valuable. But a new light on search costs is cast by John Schwartz's report about "two German killers" "suing to force Wikipedia to forget them" (****) (4). Assuming Wikipedia did not assert its First Amendment rights, this demand seems absurb. Either secret or public, information cannot be made secret again once made public. If anything, their plea for privacy has raised their exposure.

Internet and digitization have driven reproduction costs to almost nothing. Scholars however have shown search costs have not disappeared and thus remain an important lever. Glenn and Sarah Ellison have studied how sellers can raise them to decrease the buyers' ability to compare prices. Paul Ohm has proposed to increase re-identification costs rather than rely on the fiction of health-related data privacy. By asking Wikipedia to drop their name, now they have served their sentences, the Germans criminals are reasonably hoping to increase future search costs on their past (5)

Search costs are thus within the scope of the law and new duties may fall on factors like service scale, a fact implicitly acknowledged by Wikipedia itself. What about Google? Google "recommend[s] greater restrictions on business method patents". Naturally. As documented by Jenna Wortham and Miguel Helft, its latest initiative is a "navigation service for mobile phones" (*****). In the footsteps of Microsoft, Google believes fair competition is to offer for free services subsidized by its search business. Unlike Microsoft, Google has been quick to embrace pronaocracy.

Born from success, for profit scale fights all restraints on its power. To check its corruption, capitalism needs a Theodore Roosevelt for our Age.

As he is wont to embrace the culture of his foreign hosts to establish a common ground and thus better communicate his own priorities, perhaps President Obama will suggest to President Hu Jintao they check the economic excesses of Ximen Qing, the Jin Ping Mei protocapitalist hero (6)?

Philippe Coueignoux

• (*) ......... Rational Irrationality, by Paul M. Barrett (New York Times) - November 15, 2009
• (**) ....... Powerful interests are trying to control the market, by John Kay (Financial Times) - November 11, 2009
• (***) ..... Justices Hear Patent Case On Protecting The Abstract, by John Schwartz (New York Times) - November 10, 2009
• (****) ... Two German Killers Demanding Anonymity Sue Wikipedia's Parent, by John Schwartz (New York Times) - November 13, 2009
• (*****) . Google's Free GPS for Phones Undercuts Rivals, by Jenna Wortham and Miguel Helft (New York Times) - October 29, 2009
• (1) for the sake of disclosure, the author admits to be an independent inventor
• (2) "what is abstract is that which I cannot grasp", Laurent Schwartz, a talented mathematician, is reported to have said
• (3) see patent troll in the wikipedia
• (4) see the article about Walter Sedlmayr, the victim, in the wikipedia
• (5) to what extent criminals can hope to be effectively forgotten if recruiters are held responsible for overlooking their employees' past is not the point here
• (6) see Jin Ping Mei in the wikipedia