How intellectual property rights are like ethanol credits

No doubt I won’t be the only one to point out how funny it is that today’s New York Times front page exposé on the excesses of the Renewable Fuel Standard puts the blame on Wall Street firms trading in the market for ethanol credits. But I also want to make a comparison to intellectual property.

As the headline puts it, “Wall St. Exploits Ethanol Credits, and Prices Spike,” Yet ethanol credits are a thing that affect the price of gasoline only because the government created them out of thin air and mandated their use. Having created a new commodity–and a mandatory one for many refiners–it’s no surprise speculators entered the market. Yet this is how the NYT describes it:

The banks say they have far less influence in the market than others are suggesting, and are doing nothing wrong. But the activities, while legal, could have consequences for consumers.

See that? It’s the perfectly legal activities of the banks that will have consequences for consumers. I’d say it’s the entire program itself, created out of thin air by the government, that allows for these activities in the first place.

Because Congress and the EPA didn’t accurately predict future gasoline consumption (shocker that) they set the amount of ethanol that refiners must blend into gasoline too high. Refiners are on the hook to use more ethanol than possible, which forces them to buy ethanol credits instead. So of course commodity speculators are going to play in this made-up market, but it’s not the players we should be hating, it’s the game.

And for the record, I don’t mean to excuse the banks. I don’t know enough about this issue, but it wouldn’t surprise me if the banks had a hand in getting the government to create this market. If they did, then that’s par for the crony capitalist course.

The analogy to intellectual property, although imperfect, should be clear. Ethanol credits, like patents and copyrights, are property. Unlike traditional forms of property (say, in land or chattels), they are property rights created by statute out of thin air in order to incentivize creation of a public good. More renewable fuels in the case of ethanol credits, more creative works and inventions in the case of IP.

Creating new property rights can be a very healthy exercise and it’s generally preferable to government production of the public good. As the ethanol credits mess show us, though, getting right the design of the new property right is crucial, yet something regulators are bound to screw up for all the reasons that Hayek and Buchanan and Tullock pointed out.

As I mentioned, the analogy is not perfect. Government requires that refiners buy ethanol credits, while there’s no such law about IP. And yet, if you think about software and process patents, it plausible to make a case that there might as well be a requirement. Given how broadly these patents are interpreted, you might find that you have to pay tribute to a patent holder to be in a particular line of business. This is why we have patent trolls.

It’s funny, then, that diagnosing the ethanol mess the NYT falls into the same trap many do on patents. Namely that they confuse a symptom (trolls) for the disease (the scope of software patents). “[B]y allowing anyone to trade, including those with no real interest in energy, the E.P.A. encouraged speculation, the critics say,” the NYT tells us. But again, the problem is not the players, but the game.

So despite the fact that some find it surprising, it’s perfectly logical and ideologically consistent to be a strong defender of property rights, yet be a proponent of scrapping statutory property rights regimes that don’t work. If you are a conservative or libertarian who would feel some sympathy for abolishing the Renewable Fuels Standard, then you have some insight into why so many of us are sympathetic to abolishing some kinds of patents.