Invitations and Becomings

"Aussie musos plundered by pirates: ARIA award winners on Sunday night could lose more of their revenue to illegal downloaders"

So screamed the SMH this afternoon. The article reports on a survey claiming that 40% of internet users illegally download music costing the industry over $100 million a year. Those poor musos - we give them awards, but then steal their very source of income.
But read closely, and you'll discover that it isn't the musos who lost out, as the paper reluctantly admitted.
"The losses mainly flowed to the record labels, said IBISWorld general manager Jason Baker, as artists made most of their money from touring and selling merchandise rather than CD sales."
What's that? The record companies can lose $100 million per annum without affecting artists incomes - because the artists don't actually make money from selling records? Hmmm.
There is an element of intellectual serendipity for me here, since I'd just been re-reading Yochai Benkler's 2006 tome The Wealth of Networks (NY: Yale). Benkler does a good job of explaining the curious economics of information, and of refuting the traditional argument in favour of copyright, which I'll call the "innovation argument". Let me try to lay out the basics, and we'll try to apply it to the music industry.
Before I do, though, it's worth pointing out that I'll be slipping between talking about information and talking about the products of creative work, like CDs. I hope it's fairly obvious that our technology is making it harder and harder to see music as a thing (e.g. a CD) rather than as information (the contents of the CD, or simply an MP3). It's also worth pointing out that copyright itself is based on distinguishing between the material product and its informational content. After all, when I buy a CD, I own that CD, but I don't own the information on it. At best, I've licensed that information from the copyright holder.
The first thing to note about information is that, as a good, it has a peculiar character. Information is what economists call a non-rival good, i.e. on its own, my consuming it doesn't preclude you consuming it. In this way, information is different from apples. While you and I can't both consume the same apple, we can consume the very same information. If you like, it's a non-rival good because two or more people aspiring to consume it doesn't make them rivals.
Now, this non-rival character of information is important because it has the consequence that the appropriate price of information in an efficient market is zero. This is because an efficient market will set the price to match the marginal cost. The marginal cost is, in our material example, the cost of supplying another hungry person with an apple. In the case of information, however, it costs the supplier of information nothing to satisfy another consumer. The marginal cost to the supplier is zero, so the price to the consumer should be zero.
Think of it this way: information is only ever produced once. Once you've discovered an algorithm, for example, you don't need to rediscover it each time someone (a consumer of the algorithm) wants to become acquainted with it.
Why isn't information free? Information isn't free because we set up institutions like copyright and patents which artificially keep the price of information well above zero. These institutions don't directly affect the non-rival character of information - it still doesn't cost the supplier to make another copy of the information (perhaps it cost a little at some stage, but that cost has disappeared with the development of file-sharing technologies). What copyright does affect is the conditions of access to a certain piece of information.
Information has a non-zero price because the institution of copyright stops it being "non-excludable". The difference between rivalry and excludability in economics is the difference between ought and is. As the World Bank puts it: "While its non-rivalrous property says that no one should be excluded from the enjoyment of a public good (since the marginal cost of benefiting from it is zero), non-excludability implies that no one can be excluded." (source) Copyright stands in the way of information being a genuine public good in an economic sense, because it inhibits the consumption something that would not cost the producer of the information anything more to supply.
If it imposes an artificial price on information, i.e. it creates a market inefficiency, how does anyone justify imposing copyright on economic grounds? This is where we get to the innovation argument.

The Innovation Argument

The innovation argument in its simplest form is a very familiar tune: copyright is justified because it pays for innovation (R&D or the discovery, cultivation and promotion of new acts). That is, prices may be inflated above marginal cost (i.e. zero), but this doesn't take into account the costs of discovery or development of new information/music. That is, copyright is of economic benefit to the market as a whole, ensuring that there is adequate incentive for people to develop new creative products (like musical works) and for corporations to be adequately renumerated for their investment in innovation (i.e. R&D).
There are theoretical and empirical objections to the innovation argument. The theoretical objection comes from a group of eminent economists, including Nobel Prize winners George Akerlof and Milton Friedman.
This group of economists published a submission to the US Senate opposing the extension of the term of Copyright, otherwise known as the Sonny Bono or Mickey Mouse Act of 1998. They argued that extending copyright (in this case, from 50 to 70 years)

• a) provides no real incentive to create new works;
• b) that it unnecessarily extends the inefficiency we mentioned above;
• c) that it actually raises the cost of producing new works; and
• d) that it undermines consumer welfare by transferring resources from consumers to copyright holders.

Just to focus on (a) and (c) for a moment. In their submission, the group points out that extending copyright from 50 to 70 years makes very little difference to someone creating a new work. After all, who writes a song or a book on the assumption that it will still be sung or read in 60 or 70 years time?
What's more, it's ridiculous to justify extending copyright for existing works on the grounds of providing incentives. You don't need an incentive to produce something that's already been created!
Extending copyright raises the cost of producing new works because, despite our fantasies of creation ex nihilo, most creative works are in some way derivative of past works. As Benkler points out, this is the other quirkiness of information products, which economists call the "on the shoulders of giants" effect (after Isaac Newton).

"If we pass a law that regulates information production too strictly, allowing its beneficiaries to impose prices that are too high on today's innovators, then we will have not only too little consumption of information today, but also too little production of new information for tomorrow." (Benkler 2006, 38)

This turns out to be verified empirically. Benkler directs us to Josh Lerner's oft-cited review of "PATENT PROTECTION AND INNOVATION OVER 150 YEARS". Examining over 170 policy changes in 60 countries, Lerner found that increases in patent protection generally led to decreases in the number of new patents registered, indicating a decrease in investment in innovation.
Copyright protection is not a stimulus to innovation, and we can understand why: because the increased cost to potential new innovators vastly outweighs the increased ability to cash in on their innovations.
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Just over fifty years ago, Elizabeth Penrose summed up the economic view on copyright when she wrote that:

If national patent laws did not exist, it would be difficult to make a conclusive case for introducing them; but the fact that they do exist shifts the burden of proof and it is equally difficult to make a really conclusive case for abolishing them. (Penrose 1951)

There are two factors that lead us to think that perhaps it's getting easier to make that case, or at least to challenge the binary character of the debate (either we have copyright or we don't). The first factor is the development of more sophisticated economic understanding of the theory and practice of copyright that I've just outlined.
The second is the widespread popularity of so-called copyleft or creative commons licenses. These licenses allow the creator to reserve fewer rights than the default, allowing for example sampling or non-commercial reproduction without permission or royalties.
The significance of these licenses is that they embody a kind of "retail" copyright policy, as opposed to the "wholesale" policy that is often the topic of government policy discussions. This is copyright as desired by the ordinary consumer and producer of information.
The popularity of these policies puts the lie to the claim that lobbyists for Disney and Sonny Bono represent ordinary creatiors in their attempts to secure more draconian protections of their copyrights.
It also allows us to make an important distinction between rewarding innovation, i.e. the creation of new information products, and rewarding the creation of new markets for those products.
Copyleft is the kind of thing creators demand in recompense for the creation of new ideas/content/music etc - copyright is the kind of thing that publishers demand in recompense for the promotion of those innovations, i.e. the creation of a market for them.
Of course, creating new markets is part and parcel of every capitalist economy. It's worthwhile trying to do so, because if you succeed, the rewards are disproportionate compared with participating in an existing market. This is for the simple reason that, at least initially, you have a monopoly. After all, when you create a new market, by definition, no-one else is providing a comparable product.
When you look at it like this, the question of copyright, which is usually put in terms of theft by large copyright holders, starts to look more like a question about the conditions under which it's worthwhile extending the duration of that monopoly beyond its natural length - i.e. beyond the length of time it takes for competitors to come up with a functionally identical product.
It's true that technology has shortened that amount of time in certain industries. In fact, it's shortened it so much, that in some cases it's (technically) even less than zero - for example, when it's possible to download a movie before it's even been released at the box office.
So the question is perhaps: What do we do in a world in which the creation of markets offers no economic advantage to the corporation doing the creating? But this is where things really get interesting, because it reveals the implicit and possibly erroneous premise that only corporations can create markets.
Why can't consumers drive the creation of markets?
I'm reminded on Michel de Certeau's call for a sociology (and a fortiori an economics) that no longer sees consumption as merely the end-point of production, and which recognes the agency and creativity of consumers. (The Practice of Everyday Life)
A world in which consumers drive the creation of markets is one which is no longer dominated by an advertising industry which seeks to create new desires for existing products. It is instead characterised by the innovation of desires by consumers themselves, creating a demand for a product that doesn't yet exist. Creative expression on the part of consumers replaces creative manipulation on the part of producers.
But perhaps that is too stark - after all, the distinction between producer and consumer is precisely what breaks down when copyright is relaxed, since the barriers to entry into production collapse. What we have instead is a world in which every "product" is in fact a draft, to be remixed and multiplied through its very consumption.
This process might become even more effective if we could provide ourselves, as consumers, with better means of expressing the kind of derivative or transformation we want, even if it doesn't yet exist, so that as producers, we can be influenced by more than just our own sense of where the scene is headed. That is, we want tools that facilitate and encourage not just the classification of existing works, but articulate desires for future works. In short, we need to complement distributed, participatory modes of classification (tagging, for example) with distributed, participatory modes of imagination.
Until we do that, new markets will continue to be created passively (from a consumers point of view), and large producers with big advertising budgets will retain a monopoly on market creation, with all the profits and power that entails.