Rand in The Virtue of Selfishness states that a breach of contract is the use of force, like fraud is an indirect use of force.
A unilateral breach of contract involves an indirect use of physical force: it consists, in essence, of one man receiving the material values, goods or services of another, then refusing to pay for them and thus keeping them by force (by mere physical possession), not by right—i.e., keeping them without the consent of the owner. Fraud involves a similarly indirect use of force: it consists of obtaining material values without their owner’s consent, under false pretenses or false promises.
“The Nature of Government,” The Virtue of Selfishness, 111
This is incorrect and to the extent Objectivists accept this they hurt themselves and their psyche. A simple example will illustrate the flaw in the above statement. Assume a musician contracts to play at a venue a month from now. Then the day before the concert he is killed in a car accident. The musician certainly cannot fulfill the contract, so he is in breach of the contract and it was unilateral. The venue and promoter will certainly lose money because of this. Should the promoter be able to sue for breach of contract and recover damages?
A contract is a legally enforceable promise. In any immediate contract, such as buying food, contract law is boils down to fraud protection. It ensures that the purchaser does not take the goods and not pay for them or that the merchant does not take the money and not hand over the goods. For immediate contracts Rand’s statement above is true.
Long term contracts that are carried out over several days to several years can easily have extenuating circumstances that mean a breach is not an indirect use of force. Remember a contract is a legally enforceable promise. This promise cannot take every circumstance into account. One way lawyers try to account for unforeseeable circumstances in a contract is by inserting an “act of god clause”, also known as a force majeure clause. When these clauses are used in insurance contracts they lead to a contradiction. The whole purpose of insurance is to protect against unforeseen events. They are bad clauses in any contract because they are inherently vague and subject to widely varying interpretations.
When a contract is in dispute the role of the court is to discern what the parties intended. If the parties did not take something into account, such as the musician dying in a car accident, then the court has to decide what the parties would have done if they had thought about the issue. In the case of the musician, the “breach” was not intentional. I doubt that the intention of the parties was to hold the musician financially responsible if he dies in a car accident the day before the concert. Lawyers can try to anticipate every circumstance but this leads to long unread contracts, where the parties really did not agree to obscure clauses. It also leads to what is called the battle of the forms, where each party tries to get the other party to agree to their form just as the deal is closed. Clauses that are not discussed or agreed to explicitly defeat the real intention of contracts and should be viewed with skepticism by courts.
Government imposed clauses, such as the Uniform Commercial Codes’ (UCC) implied warranty of merchantability should never be allowed. The implied warrant of merchantability “is a warranty implied by law that if a seller knows or has reason to know of a particular purpose for which some item is being purchased by the buyer, the seller is guaranteeing that the item is fit for that particular purpose.” There is no need for the implied warrant of merchantability if that was intended by the parties and if it was not the intention then it should not be enforceable. This “implied warranty of merchantability is why software was licensed and not sold. Software could not meet the implied warrant to merchantability in its early days. This lead to a number of other problems that still afflict us in the software space and is an example of the unintended problems that occur when the law is stretch outside of its logical framework. Note that a contract to commit a tort (crime) is not and should not be enforceable.
Long term contracts, such as thirty of even forty year mortgages, are fraught with unforeseeable circumstances. We cannot know the future that well. In cases like these even intentional breaches are not necessarily the use of indirect force. Many long term contracts have termination clauses to account for this and to an extent invoking the termination clause is not a breach. However, most termination clauses have a part that covers a breach and how it is handled. For instance, a long term contract to supply say gas to a business on the first of the month, might be breached if the supplier’s truck(s) is broken down on the first of the month. Technically the supplier is in breach of the contract. Most termination clauses will allow the breaching party to cure the breach within a period of time.
What if the supplier’s wife is murder and he becomes depressed and chooses not to deliver gas anymore. The supplier is intentionally breaching the contract, but has he used indirect force against the customer? Most likely the customer has not paid for the gas yet or has only paid for one month in advance. A contract cannot be used to turn someone into a slave. Because of this, all long term contracts have an implied termination clause. It is also why we have bankruptcy laws. It is also important to note that you do not have right to a risk free life and law cannot and should not be used to remedy every small harm that happens to people.
Mortgages are an interesting long term contract and of course in the news after the financial crisis in the U.S. in 2008. People have the mistaken impression that a mortgage is like a personal loan between friends. The bank does not give the house buyer money out of its coffers, it creates the money. The bank collateralizes the house, much like a bond issuer creates the bonds “out of thin air”. The bank takes legal title to the house either directly or indirectly as security that the loan will be paid back. If the “home owner” cannot or does not pay the mortgage the bank asserts its legal ownership of the house and sells the house to extinguish the money created in the mortgage contract. Note I did not say pay back the mortgage. The money is literally destroyed, just like a bond that has been paid off no longer exists. If the home owner purposely breaches the mortgage, did they use indirect force? One answer is no because the mortgage contract implicitly includes a termination clause that the bank takes legal control of the house if the mortgage is not paid. In other words the bank made a deal that if you payoff the mortgage you get legal control of the house and if not the bank gets or keeps legal control of the house.
So how should we think about long term contracts? First of all we should understand that all long term contracts have an implied termination clause. Second, we need to remember that contracts cannot be used to turn people into slaves. Third, we should remember that contracts are an agreement between two parties. As long as the parties are getting along there is no reason for the government to be involved even if the parties are not following the contract. The main reason for most long term contracts is to provide a roadmap of how the two parties are going to do business together. As a result, courts should be skeptical of clauses in contracts that were not discussed. Not doing so turns contracts into a lawyers game of gotcha and does not fulfill the purpose of contracts. Most long term contracts are used by the parties to show their intention at the time the deal was made. This usually comes up when one of the parties is unhappy. A good contract should help resolve these issues. In fact, that is the most important purpose of a long term contract. However, sometimes the issues between the two parties are too great to be resolved. In that case the termination clause, whether implicit or explicit, should kick in. If the termination is too burdensome then bankruptcy laws should kick in. Both parties should be aware of this possibility.
Except for immediate contracts Rand’s statement that unilateral breach of a contract is an indirect use of force is incorrect. This just proves that Rand was human and not an expert in law.
Libertarians make the mistake of trying to base property law on contracts, when it is the other way around. Contract law presumes that both parties own themselves (have legal control over their actions) and often presumes that one or both of the parties have property rights in something. But libertarians like Rothbard try to turn things around and create property rights out of contracts. Reversing cause and effect leads to all sorts of problems. However this mistake by libertarians is based in the fact that they do not understand property rights. In fact, libertarians do not “believe” in property RIGHTS they believe in property privileges that solve the economic problem of scarcity.
A proper understanding of property rights and contracts is essential for a free society to exist. Contracts presume property rights and ownership of one’s self. Long term contracts cannot be used to turn people into slaves or to commit a tort. Objectivists hurt themselves when they treat contracts like Christians treat the Ten Commandments.
 This is related to the legal saying that “hard cases make bad law”. https://en.wikipedia.org/wiki/Hard_cases_make_bad_law
In the United States, we tend to study the Constitution to secure and understand our freedoms. This is a bit strange as our freedom throughout history has been secured mainly by property rights. This was understood by the founders and many others.
There is a “diversity in the faculties of men, from which the rights of property originate…. The protection of these faculties is the first object of government.”
James Madison’s Federalist 10
“The reason why men enter into society is the preservation of their property.” John Locke
“No other rights are safe where property is not safe.”
“Ultimately property rights and personal rights are the same thing.”
Without property rights, no other rights are possible.
Ayn Rand “Man’s Rights,” The Virtue of Selfishness, 94, http://aynrandlexicon.com/lexicon/property_rights.html
“Property rights … are the most basic of human rights and an essential foundation for other human rights.”
Property rights in the United States were a matter of state law for most of its history, with the minor exception of the Fifth Amendment. Thus to gain a better understanding of how our freedom is secured, we need to study property rights. This is a big subject and this post will focus on the historical development and the philosophical foundations of property rights.
The concept of property rights started with some sense of ownership of food and personal possessions among nomadic people. People had the idea of a superior moral claim to the apple they picked or the deer they killed or the clothes they made and wore compared to other people. With the advent of the Agricultural Revolution people began to think they had a superior moral claim to the land they cultivated and the crops grown on this land, which was the beginning of the idea of property rights in land. However, these were not real property rights, because the King or other political body almost always reserved the power to trample peoples’ property rights when it was politically expedient. In the Middle Ages “property rights” were thought to reside ultimately in the King or the sovereign. Legal realists still hold onto this idea. During the Renaissance legal theorist worked on a rational basis for property rights, starting with Hugo Grotius in the early 1600s. Adam Mossoff has written an excellent paper explaining the historical development of property rights theory including the major theories today, called What is Property? Putting the Pieces Back Together.
After Grotiuss, John Locke continued the work of developing a rational theory of property rights. Locke’s formulation is that anything in a state of nature (unowned) that someone makes useful, results in them having a property right in the item they made useful. So if you shoot a deer you have property rights in the deer or if you plant olive trees on some ownerless land you have a property right in the land and the trees. This is true according to Locke because you have an exclusive moral claim over yourself (body and mind) and anything you create value in gives you property rights in the item. This is commonly summarized as having property rights in one’s self.
It is important to understand that all of law is based on property rights logically (and historically). Some libertarians have tried to postulate systems where property rights are some sort of contract. You cannot have a contract unless you have an exchange and you cannot exchange something you do not own. You also need to have property rights over yourself to enter a contract. Contract law presupposes property rights law and to reverse the process results in nonsense. Tort law makes no sense without property rights. If you do not own yourself or some property how can you claim to have been harmed. This is true of all other areas of law also.
Property rights law was developed in common law countries and in the United States along Locke’s theoretical formulation for at least a century or more. For instance, in the United States the Homestead Act (of 1862) provided that any adult who had not taken up arms against the U.S. could acquire 160 acres of land by farming and living on the land for five years. The Act made the implicit assumption that the land was in a “state of nature” and that people could obtain property rights by making it more valuable. This is almost an exact formulation of Locke’s theory of property rights, except that the land had to be surveyed first and the acquirer had to put in an application.
There are several interesting things about the Homestead Acts. One is that they were first proposed before the U.S. Constitution was ratified and many other homestead acts were passed after the one in 1862. The Homestead Act of 1862 was clearly passed as part of the politics of the Civil War in the U.S. Another interesting point is the Homestead Act implies that land grants by Kings did not result in valid property rights. For instance, the land grants to George Washington for his military service from the British Crown did not confer valid property rights in the land. Washington had problems with squatters on this land, who seemed to understand that Washington’s property rights in this land were invalid since he did nothing to create value in the land.
Another interesting thing about the Homestead Act is that the surveyed plats were separated by roads. There were no taxes to create or maintain these roads, so they were un-owned land or land in which no one could have property rights in. It is important to note that property rights in land that cannot be accessed make those rights meaningless. An essential element of all property rights in land includes access to and from the land and the rest of the world. This does not mean that the owner of the land cannot exclude people from their land, but it does mean that property rights in land cannot interfere with reasonable travel. This is one of those questions in law where the philosophy lays out the general theory, but the law has to work out some practical realities in which there is no exact answer. In the Homestead Act, they decided that roads had to exist around every square mile block of privately owned land (one mile grid). This obviously would have to be modified sometimes for terrain and another distance or pattern for the roads could have been selected without violating the general principles.
It would also be an abridgement of people’s right to travel if property rights in land could imprison people. People exercised the right to travel over land before there were any property rights in land. Thus property rights in land that unduly impinge on the ability of travel violate other people’s rights.
It appears the Romans understood this. In the twelve ancient Roman tablets that set out the law, tablet seven appears to require land owners to maintain the roads. “1. Let them keep the road in order. If they have not paved it, a man may drive his team where he likes.” Table eight requires “Where a road runs in a straight line, it shall be eight feet, and where it curves, it shall be sixteen feet in width.” Tablet nine requires “When a man’s land lies adjacent to the highway, he can enclose it in any way that he chooses; but if he neglects to do so, any other person can drive an animal over the land wherever he pleases.” The Roman tablet eight also require space between buildings, “A space of two feet and a half must be left between neighboring buildings.” This last law could have been for travel or to keep fires from spreading through the city. Unfortunately, there does not appear any commentary to let us know.
Some people have suggested that this ownerless land for roads in the Homesteading Act is inconsistent with Ayn Rand’s Objectivism: “Capitalism is a social system based on the recognition of individual rights, including property rights, in which all property is privately owned.” This mistake is based on a misunderstanding. There is no such thing as property. There are property rights and things in which people may have property rights. In informal language we often use the shorthand property to refer to something in which we or other people have property rights. Unfortunately, this shorthand results in confusion. Correctly interpreted what Rand’s statement is saying is that governments cannot have property rights in land or anything else only people can. What the government has is a custodial duty. The government cannot have a moral claim to have made something useful, only individuals can do this. Rand explained it this way with respect to the Homestead Act of 1862:
Thus, the government, in this case, was acting not as an owner but as the custodian of ownerless resources who defines objectively impartial rules by which potential owners may acquire them.
Rand did not directly address the concept of property rights, however she laid out many of her ideas in two articles in Capitalism: The Unknown Ideal: 1) The Property Status of Airwaves, and 2) Patents and Copyrights. Rand echoes Locke when she explains the origin of property rights, “Any material element or resource which, in order to become of use or value to men, requires the application of human knowledge and effort, should be private property—by the right of those who apply the knowledge and effort.” Rand is stating that because you made/created something valuable you have a moral claim to the item that is greater than other peoples’. Rand’s main refinement over Locke is to make it clear that this includes mental effort (in a way Locke leaves more ambiguous), “thus the law establishes the property right of a mind to that which it has brought into existence.”
One important point that should be clear from this discussion is that dead people cannot have property rights. Property rights are a moral and legal relationship between a person and an item (tangible or intangible). A related point is that when someone abandons their property rights by no longer making something useful, then it is ownerless again and therefore in a state of nature. This means that someone else can come in and make the item productive again and therefore acquire property rights in the item. This is a very complicated subject and covering it in even a cursory way could be a whole book, however I will point to some examples. In common law there is something called adverse possession, which “is a situation when a person who does not have legal title to land (or real property) occupies the land without the permission of the legal owner” and gains legal title to the land. Another complicated situation where these principles come into play is when a person dies or estates law. A dead person cannot have property rights in anything, so suddenly those items they had property rights in are ownerless. Property rights in land do not go on forever as many people assume. A detailed- discussion of this issue is beyond the scope of this article.
We have talked about how property rights arise, but not what they are. Many people think that their property rights in their land are unlimited that they go up infinitely into the sky and down to the center of the Earth and they can do anything they want on their land. Why do they think this? Did they create value 500 feet below the surface of their land? Did they create value 500 feet into the air above their land? Of course not. The property rights you obtain are related to the value you created. The most common form of property rights is called “fee simple” in the law. Fee simple allows you (ignoring building codes) to farm/ranch and have a house (building), run a business, etc. on your land. It does not allow you to put a commercial hog sty on your farm next to your neighbor’s house. This would violate nuisance laws, which ensure that you have reasonable enjoyment and use of your land. On the other hand, you cannot buy a farm and then build a house next to your neighbor’s pig sty and then sue them for nuisance.
In addition, there are other groups of property rights such as mining rights, which come in two varieties, lode and placer. Lode mineral rights are designed to ensure that the person who discovers a vein of say gold is the owner of the whole vein. Otherwise it would be easy for other people to say they discovered the obvious other end of the vein and profit at the expense of the true discoverer of the vein. These rights may not include any rights to the surface land above them, while a place type of mineral rights does. There are also grazing rights, water rights, easements, trademark rights, property rights in chattel, copyrights, patent rights (inventions), trade secrets, etc. All of these property rights are different and come with different rights of action and rules, based on the value that was created.
The property rights you obtain are related to the value you created
Property rights are not monolithic as many people seem to believe. As Adam Mossoff explains in his paper, Why Intellectual Property Rights? A Lockean Justification:
As Locke first explained, property is fundamentally justified and defined by the nature of the value created and secured to its owner … To wit, different types of property rights are defined and secured differently under the law.
Some property rights come with the right to exclude, however grazing rights do not include a right to exclude unless the person is interfering unreasonably with the grazing rights owner’s ability to graze the land. Even with “fee simple” ownership of land your right to exclude is limited to using reasonable means to exclude people who are interfering with you enjoyment and use of your land. This means you cannot shoot someone for crossing your land.
Property rights are a vast and complex area of law of which this article just touches on. Property rights are the most important area to securing our freedoms and all law starts with and builds on property rights. The key philosophical foundations of property rights are:
Property rights is the foundation of all law
Property rights are a moral and legal claim to take action with respect to an object
Property rights arise when a person creates value
The rights obtained with property rights depend on the value created
– they are not monolithic.
Property rights are the foundation of all our freedoms and
much more important than the Constitution in securing our freedoms.
 The Economic Principles of America’s Founders: Property Rights, Free Markets, and Sound Money, Paul Ermine Potter and Dawn Tibbetts Potter, accessed 4/15/17, http://www.heritage.org/political-process/report/the-economic-principles-americas-founders-property-rights-free-markets-and#_ftnref3
 Milton Friedman’s Property Rights Legacy, Forbes, Ken Blackwell, accessed 4/15/17 https://www.forbes.com/sites/realspin/2014/07/31/milton-friedmans-property-rights-legacy/#238d1416635d
 Mossoff, Adam, What is Property? Putting the Pieces Back Together. Arizona Law Review, Vol. 45, p. 371, 2003. Available at SSRN: https://ssrn.com/abstract=438780 or http://dx.doi.org/10.2139/ssrn.438780
 George Washington, Covenanter squatters, http://explorepahistory.com/hmarker.php?markerId=1-A-28F accessed April 30, 2017.
 “What Is Capitalism?”Capitalism: The Unknown Ideal, 19 Ayn Rand Lexicon, http://aynrandlexicon.com/lexicon/capitalism.html accessed May 7, 2017.
 Ayn Rand, Capitalism: The unknown Ideal, The Property Status of Airways, p. 132.
 Ayn Rand Lexicon, “The Property Status of the Airwaves,” Capitalism: The Unknown Ideal, 122
 Ayn Rand, Capitalism: The Unknown Ideal, Patents and Copyrights, p. 141.
The Depclaration of Independence and Individual Rights are generally assumed to be based on the concept of self-ownership. For instance, the article Who are the Real Liberals? in the American Thinker states “self-ownership entails an inviolable right to our lives, liberty, and property, which at the same time entails a prohibition from violating the rights of others.” According to the Article Jefferson was even accused of plagiarizing John Locke in writing the Declaration of independence. According to Nathaniel Branden in an article entitled Reflections on Self-Responsibility and Libertarianism argues that the United States stood “Freedom. Individualism. Private property. The right to the pursuit of happiness. Self-ownership.” And Walter Williams, the conservative economist states “That Americans have joyfully given up self-ownership is both tragic and sad” in an article entitle AMERICANS HAVE GIVEN UP SELF-OWNERSHIP. But now Leonard Peikoff, of the Ayn Rand Institute, says we got it all wrong and the idea of self-ownership is dangerous. This issue goes to the source of all property rights.
Leonard Piekoff, the founder of the Ayn Rand Institute and a philosopher, in a podcast asks if there a difference between the principle of self-ownership and the principle of individual rights? He first restates the questions as is there a difference between someone being the owner of their life and that he has a right to life? His answer is yes there is definitely a difference. Peikoff argues that ownership is a relationship between you and some external object. As a result it makes no sense to say you own yourself. Next he suggests that ownership is about possession. Finally, he says this whole idea of self-ownership is some sort of Conservative conspiracy and a bad idea. Others have argued against self-ownership because if you can own yourself then it implies that you can be owned by others.
The conservative that Peikoff seems to be arguing with is John Locke, the 18th century philosopher responsible for the idea of Natural Rights that underpinned the US Declaration of Independence. Locke stated “every man has a property in his own person: this no body has any right to but himself. The labour of his body, and the work of his hands, we may say, are properly his.” (Second Treatise on Government, Ch. 2, Sect.27.) Now some people have argued the preposition ‘in’ here does not imply self-ownership. This is based on a misunderstanding of property rights. A property right is a moral and/or legal claim to a right of action. Or as Ayn Rand, the philosopher and author of Atlas Shugged, states it “Bear in mind that the right to property is a right to action, like all the others: it is not the right to an object.” Self-ownership then is the right to action with respect to oneself. Peifoff has used the wrong definition of property and variously confused property with possession and only applying to external objects. Possession may be one right that comes with property rights, but you may own a house and then lease it to someone else. If you do that you have traded your right to possession. Property is often confused with the object itself or with possession of the object, but as Rand’s definition makes clear this is conflating different concepts.
Peikoff also provides no justification for his idea that property only relates to external objects. This inconsistent with Ayn Rand’s definition and is inconsistent with how we use ownership in normal language. For instance Rand variously states:
Money rests on the axiom that every man is the owner of his mind and his effort. (For the New Intellectual, p. 89.
“What greater wealth is there than to own your life and spend it on growing?”
–Ellis Wyatt, Atlas Shrugged, Pt. 3 of book.
“For centuries, the battle of morality was fought between those who claimed that your life belongs to God and those who claimed that it belongs to your neighbors — between those who preached that the good is self-sacrifice for the sake of ghosts in heaven and those who preached that the good is self-sacrifice for the sake of incompetents on earth. And no one came to say that your life belongs to you and that the good is to live it.”
–John Galt, Atlas Shrugged, http://aynrandlexicon.com/lexicon/good,_the.html
“There is only one fundamental right (all the others are its consequences or corollaries): a man’s right to his own life.”
Ayn Rand Lexicon, Man’s Rights, The Virtue of Selfishness, 93
Without property rights, no other rights are possible.
Ayn Rand Lexicon, Man’s Rights, The Virtue of Selfishness, 94
Now it is true that Rand also said that “The right to life is the source of all rights.” (The Virtue of Selfishness, 93), but given all her other statements I think it is clear that she is talking about the right to one’s own life, not a disembodied right to life.
Neither Rand nor Locke argued that self-ownership was an axiom. Some people say Locke based self-ownership on god, but then why did he spend so much time explaining what rights we had a in a state of nature. As explained in Wikipedia, State of Nature:
For Locke, in the state of nature all men are free “to order their actions, and dispose of their possessions and persons, as they think fit, within the bounds of the law of nature.” (2nd Tr., §4). “The state of Nature has a law of Nature to govern it”, and that law is Reason. Locke believes that reason teaches that “no one ought to harm another in his life, liberty, and or property”
Clearly, Locke was not relying just on a deity for his support of self-ownership.
Rand’s genius in ethics was to show that self-ownership was the result of the unique nature of man, namely that he is a rational animal. His survival requires his ability to exercise his own reason and when others attempt to limit his ability to use his mind, they are acting in a way that is inconsistent with his survival.
Peikoff argues that being the owner of your life is different than the right to life and I agree. If you are the owner of your life you not only have the right to life, but you have the right to create property, the right to free association, the right to travel freely, and on and on. A naked right to life does not provide any of these things. Peikoff might argue that the right to life includes those things necessary to sustain that life. But if you are being provided food and shelter enough to be alive, your right to life is being observed even if you are a slave or in a prison.
Ownership of oneself is absolutely vital to Rand’s and Locke’s idea of the origin of property rights. If you own yourself then you own those things your produce, but if you do not own yourself then there is no reason why the things you produce would be your property. Image an unowned robot that produces furniture or cakes. Without self-ownership, there is no reason for the robot to own those things he produces.
Self-ownership is not the axiom on which individual rights are built, it is a derived intermediate concept. However, it is a common starting point in a conversation about individual rights because it is easy to comprehend and is familiar to people who grew up in the United States or most common law countries. The idea of self-ownership is incorporated into the Declaration of Independence and in common law. Sir William Blackstone’s Commentaries was the most important treatise on common law in the 19th century. Locke’s idea of self-ownership permeates Blackstone’s Commentaries. Starting with the idea of self-ownership one can build a logical system that is almost as exact as Euclidean geometry. That system explains why we have property rights, how they arise, and who is the rightful owner of the property. It also explains why murder is illegal, why slavery is illegal, why theft is illegal, in fact most of our common law criminal law. It also explains contract law, why we have a right to free association, right to self defense (including the right to bear arms), right to free speech and on and on. It is an extremely powerful tool.
Does self-ownership open up the possibility of you being owned by someone else? If so this would be a powerful reason to avoid the concept of self-ownership. The default position is that you own yourself (morally) under self-ownership, so to be owned by someone else you would have to sell yourself. This means you would have to enter into a contract. But a contract requires two people who are able to enter into and fulfill it. Someone who does not own themself is not competent to enter into or fulfill a contract. The second you enter into a contract to sell yourself to someone else you no longer have the capacity to contract so the contract is invalid. In addition, for a contract to be valid it is necessary that both parties provide consideration. When you sell yourself into slavery you are not receiving any consideration, since you have no right to anything as a slave. Attempting to sell yourself into slavery is a logical contradiction. Self-ownership does not lead to the idea that you can be owned by others, but the exact opposite.
Some might complain that this argument is too legalistic. But we are talking about property rights and contracts and therefore the philosophy of law applies. Property rights and contracts have definitions and logical conclusions and one of those logical conclusions is that you cannot sell yourself into slavery because it is an invalid contract.
Self-ownership is not the axiom on which individual rights are built, but it is an intermediate concept that is consistent with individual rights. When starting from an intermediate conclusion it is always important to be aware of the underlying fundamentals to avoid making a mistake. Self-ownership means that you have a property right in your life and property rights are a right to action. This means that self-ownership encompasses the right to life, but it encompasses so much more.
An academic paper claims that the cost for royalties ($120 per phone) is about the same as the cost of the components in a smartphone. This was accompanied by a number of articles suggesting this was outrageous and unsustainable. For example see:
* The $120 Smartphone Patent Tax: Patent Royalties Cost More Than The Actual Hardware In Your Phone: This one from my favorite patent Luddite site, Techdirt.
The logical flaw underlying all these articles is that the value of products is determined by the amount of physical labor and/or the cost of the underlying materials. On this basis, the actual material costs of a cell phone are probably less than $5 and the labor (unskilled labor in the US is worth perhaps $10/hr) involved in making the phone might be worth $5, let’s throw in $10 for distribution and the hard costs of a smartphone are about $20.[i] The rest of the costs are the result of intellectual property, much of which is in the form of patents, but some is in the skilled labor, copyrights and trademarks. The actual cost of the intellectual property in a smartphone is closer to $380.00. Much of these costs are hidden. For instance, when Intel sells a microprocessor they charge you $50, for example, but the labor cost and material cost of the microprocessor is pennies. The reason they can charge $50 is because of the intellectual property, which means patents. From an economic point of view you are paying a dollar or so for the manufacturing and $49 in patent royalties.
Another logical flaw in these articles is that this is an unsustainable business model. First of all the underlying paper points out that sales of smartphones and tablets is now bigger than all the rest of the consumer electronics space, with over a billion smartphones sold in 2013. Clearly the business model is not falling apart. Second of all, the cost of Microsoft Office Home and Business 2013 is $219.00 and none of that is manufacturing cost. The cost of Microsoft Office is essentially all IP (Patents, Copyrights, etc.). Solidworks, which is 3D CAD software, cost $4000.00 and also has essentially no manufacturing costs, which means you are paying the equivalent of $4000 in royalties. The argument that the model is unsustainable is absurd.
The paper that started this economic stupidity is The Smartphone Royalty Stack: Surveying Royalty Demands for the Components Within Modern Smartphones. The paper is clearly designed to sway public and Judicial opinion in a manner that will be beneficial for Intel. Namely, Intel wants a patent system that emphasizes manufacturing, not inventing. Another goal of the paper is to get courts to reduce the amount of royalties that inventors receive.
“In particular, there has been significant recent focus on “royalty stacking,” in which the cumulative demands of patent holders across the relevant technology or the device threaten to make it economically unviable to offer the product.”
This statement is absurd on its face, as the paper itself points out.
“The market for smartphones has exploded. Smartphones sales for 2013 topped one billion units globally for the first time ever. In addition, global revenues for smartphone and tablet sales in 2013 are estimated to have surpassed for the first time revenues for the entire consumer electronics markets (e.g., televisions, audio equipment, cameras, and home appliances).”
Here is the real point that this paper is pushing:
“Further, the available data demonstrate a need for licensees to advocate and courts to rigorously apply methodologies for calculating royalties that focus on the actual value of a claimed invention put in context of the myriad other technologies in a smartphone and the components in which the technologies are implemented.”
I will admit that having courts set royalty rates is not ideal and the results can be squirrelly, which is why eBay should be reversed. The courts used to just prohibit the infringer from using the patented technology and then the parties had to work out a deal. But the Supreme Court decided that enforcing the only right you get with your patent is an injunction – actually it is not an injunction it is an exclusion order requiring the infringer to not trespass on (use) the patent owner’s property.
The paper admits that its methodology is limited and the actual cash cost going to pay royalties could be higher or lower. For instance, the paper does not track cross licensing, pass through, or patent exhaustion, all of which could significantly reduce the actual royalties paid. They clearly made an error if they did not account for patent exhaustion. If patent exhaustion was part of the royalty costs, then almost every high value component’s price is mainly due to patents. Correctly accounting for patent exhaustion would show a royalty per smartphone closer to the $380.00 per phone as explained above.
The paper is just dishonest when discussing the growth in the number of patents issued and the number of patent lawsuits. It shows in 20 years the number of patents issued in the US has increased from 100,000 per year to 250,000 per year. The implication is that this is an absurd increase in the number of issued patents, but if you do the math this turns out to be a 4.75% annual increase, about the same as the increase in worldwide GDP over the same time period. The paper also shows a graph depicting the number of patent lawsuits exploding around 2011. This increase is due to the America Invents Act, which limited the joinder of defendants in patent lawsuits. This has been well documented, as in the article The America Invents Act at Work – The Major Cause for the Recent Rise in Patent Litigation. The paper’s failure to point this out is just outright fraud. The fraud is perpetrated again when the paper points to the increase in the number of NPE lawsuits. These authors seem to have gotten their training from Al Gore and French economist Thomas Piketty.
[i] In fact you can buy cell phones for less $30.00 on the Internet. The cost of materials in a smartphone and a $30 cell phone is essentially the same. The material costs in a cell phone include the plastic which costs several cents, the metal for the conductors which might be worth a dollar, the silicon which in its raw form is worth almost nothing.
The authors (Sven Bostyn and Nicolas Petit) of this paper, PATENT=MONOPOLY – A LEGAL FICTION, argue that patents are not a monopoly based on standard antitrust analysis. It is very unusual for an academic paper to take such an unpopular position. They must have not got the memo that the goal of all academics is to vilify inventors, patents, and property rights. Below are some the lines I thought were interesting and my comments are below.
No other property right is so expensive, time consuming and expensive to obtain title to.
“In 2011, approximately 1,000,000 patents were granted across the globe. This would mean that 1,000,000 monopolies would have been created worldwide. This clearly, cannot be true.”
“Competition is very valuable, but innovation is probably equally, if not more, valuable.”
My main critique is that they did not explain how patents are a property right or the history of property rights and patents. Under Locke’s theory of property rights, patents and copyrights are property rights – they are granted because of the creative effort (labor) of the inventor/author. This was picked up by Sir William Blackstone in his Commentaries, where he affirms that patents and copyrights are property and therefore natural rights. This was enshrined in the constitution as “securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”
I have often pointed out that patents are a natural right under Locke’s theory of property rights. Locke stated, in modern language, that you own yourself so you have the right to those things you create. Many detractors have suggested that this absurd. According to Locke the three chief natural rights are life, liberty, and property. Locke states that protecting property rights is the main reason for forming governments.
Sec. 124. The great and chief end, therefore, of men’s uniting into commonwealths, and putting themselves under government, is the preservation of their property.
Inventions are the result the inventor’s labor and therefore property under Locke. Property is a natural right, so patents are natural rights. Despite this logical connection, many people have continued to deny that patents (property rights in inventions) are a natural right.
Locke’s ideas were incorporated in the law of the United States by William Blackstone’s Commentaries on the Laws of England. This treatise became the basis of common law in the US. Here is what Blackstone said about patents and copyrights (intellectual property). Note that he cites Locke’s ideas on property rights for his explanation for why intellectual property is Property.
There is still another species of property, which (if it subsists by the common law) being grounded on labour and invention is more properly reducible to the head of occupancy than any other; since the right of occupancy itself is supposed by Mr. Locke, and many others, to be founded on the personal labour of the occupant. And this is the right, which an author may be supposed to have in his own original literary compositions; so that no other person without his leave may publish or make profit of the copies. When a man by the exertion of his rational powers has produced an original work, he seems to have clearly a right to dispose of that identical work as he pleases, and any attempt to vary the disposition he has made of it, appears to be an invasion of that right.
Now the identity of a literary composition consists entirely in the sentiment and the language: the same conceptions, clothed in the same words, must necessarily be the same composition: and whatever method be taken of exhibiting that composition to the ear or the eye of another, by recital, by writing, or by printing, in any number of copies, or at any period of time, it is always the identical work of the author which is so exhibited; and no other man (it hath been thought) can have a right to exhibit it, especially for profit, without the author’s consent.
This consent may perhaps be tacitly given to all mankind, when, an author suffers his work to be published by another hand, without any claim or reserve of right, and without stamping on it any marks of ownership; it being then a present to the public, like building a church or bridge, or laying out a new highway: but, in case the author sells a single book, or totally grants the copyright, it hath been supposed, in the one case, that the buyer hath no more right to multiply copies of that book for sale, than he hath to imitate for the like purpose the ticket which is bought for admission to an opera or a concert, and that, in the other, the whole property, with all it’s exclusive rights, is perpetually transferred to the grantee.
On the other hand it is urged, that though the exclusive property of the manuscript, and all which it contains, undoubtedly belongs to the author, before it is printed or published; yet from the instant of publication, the exclusive right of an author or his assigns to the sole communication of his ideas immediately vanishes and evaporates; as being a right of too subtile and unsubstantial a nature to become the subject of property at the common law, and only capable of being guarded by positive statutes and special provisions of the magistrate.
The Roman law adjudged, that if one man wrote any thing on the paper or parchment of another, the writing should belong to the owner of the blank materials meaning thereby the mechanical operation of writing, for which it directed the scribe to receive a satisfaction; for in works of genius and invention, as in painting on another man’s canvas, the same law gave the canvas to the painter. As to any other property in the works of the understanding, the law is silent; though the sale of literary copies, for the purposes of recital or multiplication, is certainly as antient as the times of Terence, Martial, and Statius. Neither with us in England hath there been (till very lately) any final determination upon the right of authors at the common law.
But whatever inherent copyright might have been supposed to subsist by the common law, the statute 8 Ann. c. 19 hath now declared that the author and his assigns shall have the sole liberty of printing and reprinting his works for the term of fourteen years, and no longer; and hath also protected that property by additional penalties and forfeitures: directing farther, that if, at the end of that term, the author himself be living, the right shall then return to him for another term of the same duration: and a similar privilege is extended to the inventors of prints and engravings, for the term of eight and twenty years, by the statute 8 Geo. II. c. 13, and 7 Geo. III. c. 38, besides an action for damages, with double costs, by statute 17 Geo. III. c. 57. All which parliamentary protections appear to have been suggested by the exception in the statute of monopolies, 21 Jac., I. c. 3, which allows a royal patent of privilege to be granted for fourteen years to any inventor of a new manufacture, for the sole working or making of the same; by virtue whereof it is held, that a temporary property therein becomes vested in the king’s patentee. (emphasis added)
The idea that patents are a natural right is incorporated in early American law as the quote below shows.
“we protect intellectual property, the labors of the mind, productions and interests as much a man’s own, and as much the fruit of his honest industry, as the wheat he cultivates, or the flocks he rears.” (Davoll v. Brown, 7 F. Cas. 197, 199 [C.C.D. Mass. 1845].)
It is just obstinance or disingenuousness to suggest that patents are not part of natural rights.
 The Second Treatise of Civil Government; 1690; John Locke; CHAP. IX., Of the Ends of Political Society and Government.
The en banc rehearing of this case is considering whether the presumption of validity applies to under 35 USC 101. The statute involved in this question is 35 USC § 282 which states:
(a) In General.— A patent shall be presumed valid. Each claim of a patent (whether in independent, dependent, or multiple dependent form) shall be presumed valid independently of the validity of other claims; dependent or multiple dependent claims shall be presumed valid even though dependent upon an invalid claim. The burden of establishing invalidity of a patent or any claim thereof shall rest on the party asserting such invalidity. (Emphasis added)
CLS Bank argued in their brief that validity and eligibility are different and 35 USC 101 is directed to the latter. Nothing in the statute suggestions that there is a distinction between eligibility and validity. How can a patent be valid and not meet the requirements of 35 USC 101? It can’t. When you turn the question around you see the absurdity of this position. In addition, the reason for a Patent Office is to review inventions to determine if they are eligible for a patent. If the courts are going to ignore the determinations of the Patent Office, then we should just have a registration system. In every other area of law the courts are extremely deferential to administrative agency decisions, but not with patents. Ask yourself why this is. I would suggest the reason is that every other administrative agency increases the power of government, but the Patent Office increases the power of the people. It is patently unfair that an inventor has to defend their patent, two, three or more times and on multiple issues. If the EPA or the FCC or the FTC, etc. had to survive this scrutiny or legislation in general, almost none of the laws or regulations passed in the last decade would stand. It is time to end the double standard that gives a pass for every regulation that increases government power, while forcing private people to jump through hoops. In fact it is time to reverse the process, as the Founders intended.
NO RATIONAL person would buy CLS argument that there is a difference between validity and eligibility. But that does not mean the Judges on the CAFC or Supreme Court will not buy into CLS argument.
For more on the earlier decision CLICK HERE.
At first glance the Koontz v. St. Johns River Water Management District case does not appear relevant to patent law. It is a Fifth Amendment regulatory takings case revolving around wetlands and private property. But as I will explain in more detail below the underlying problem in both these cases is a lack of understanding of property rights. The facts of the Koontz case according to Fox News are
Coy Koontz in the 1970s bought a parcel of land, the majority of which later was classified a wetland. When he sought a permit to develop a portion of it in the 1990s, the Florida agency in charge of the area said Koontz would need to take steps to remediate the damage he would cause.
Koontz offered to give the agency 11 of the 15 acres, in exchange for a permit to develop the remaining land. In addition, the state government said he would need to undertake other improvements. Options ranged from numerous changes to the original plot to paying for enhancement of 50 government-owned acres miles away from the Koontz plot.
Though Koontz continued to offer the 11 acres, he refused to go along with the government’s other requirements and decided to sue.
Antonin Scalia’s comments at oral argument illustrate this lack of understanding of property rights. “I can’t see where there’s a taking here,” Scalia said, adding, “Nothing’s been taken.” Ronald Reagan must be rolling over in his grave – he appointed Scalia (For more of Scalia’s outrageous thoughts see The Soviet Union’s Constitution Was ‘Much Better Than Ours’). Scalia’s thought process, as best I can understand it, is that Koontz still has legal title to his land and his land is still there – it was not taken. Judge Scalia seems to not understand the difference between property rights, possession, and the object. (For more information click here) Property rights define a relationship between a person and an object or thing. When Mr. Koontz acquired title to the land, it did not have lien or an easement that required him to give up a part of land or pay for the enhancement of government land. The government changed his rights in the land. The Fifth Amendment states “nor shall private property be taken for public use, without just compensation.” Mr. Koontz right to develop his property and his right to enjoyment of his property have clearly been altered without compensation. The government has taken these rights in his land for public use, so it is clearly a taking.
Scalia has also shown an appalling lack of understanding of patent law and it is because he does not understand property rights. Property rights derive from the fact that a person owns their self and therefore they own those things they create. Patents are property rights that the inventor gets because they created a new invention.
Mr. Koontz attorneys work for the Pacific Legal Foundation. This group does good work protecting economic freedom, but they also do not understand property rights either. At least one of their lead attorneys believes intellectual property should not exist – see Another Confused Libertarian on Intellectual Property . These people believe that property rights exist or should exist only because they result in more optimum economic outcomes. Really, they should call they them ‘property privileges’ or ‘property expediencies.’ Their commitment to so-called property rights only lasts until they are convinced they know what better to do with your property.
So what we have is a case in which the supposed defenders of property rights do not understand them. What do you think the likely outcome will be?
Patent and Property Rights
When the so-called defenders of property rights, believe they are just a political expediency that produces the best outcome for the collective, you can bet they will never support patents, which are property rights in an invention. I have seen patent attorneys attempt to use this line of reasoning with patents. They are happy to have people characterize patents as a monopoly, but think this is irrelevant because they can show patents are good for the economy. These people do not understand the philosophical battle over patents or the definition of a monopoly. They believe that because the anti-property rights crowd believe in monopolies for electrical and water systems, they will be in favor of monopolies for inventions. However, they forget that in the electrical and water systems case the anti-property rights crowd supports this because it increases government power, not for the bogus efficiency argument. But patents increase the power of the individual, not the state. So it does not matter how well you can show that patents are important for economic growth and improve everyone’s life, they will not favor it because it increase the power of private citizens.
Property rights are derived from the right to own oneself. If you do not own yourself, you are not free and do not live in a free society. If you own yourself, then you own that which you produce, including inventions. The patents are monopolies argument is without any merit from a historical, definitional, and empirical point of view. Understanding that patents are property rights is the key to both solving the patent problem and the Koontz case.
For more on patents and monopolies see.
This post explains the characeristics of a monopoly and a property right and poses three questions to show the difference. Patents fit all the characteristics of a property right and none of a monopoly. Note that professional license, such as a law license has some of the characteristics of a monopoly.
If patents are a monopoly, as some suggest, then it should led to certain outcomes. A close examination shows that none of the supposed monopoly effects result from granting patents.
This post contains a number of quotes from philosophers explaining that patents are not monopolies.
This post explains the difference in the concepts of property rights, possession, and objects. Most economists and patent detractors confuse these concepts. The origin, definition, and legal basis of property right are explained.
This post compares the definition of a monopoly to the rights obtained with a patent. It shows that the rights obtained with a patent do not confer a monopoly.
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