A while back, I sent David an email questioning whether patents and copyrights didn't contribute significantly to rising income inequality in the US. He didn't think so (his emphasis was on significantly) and I ceased that line of inquiry. This week, Matt Yglesias raises the same question (link here) and references posts from Brad Delong on income inequality (link here) and from Bradford Plumer who writes on how rich people control politics and get their wealth enhanced (link here). Yglesias cites the Sony Bono Copyright Term Extension Act and sends readers to Wikipedia. The logic of that story is that the act served no purpose but to enrich existing copyright owners (usually not the creator and therefore constitutes little incentive to innovate) and served to create income inequality. As David argued earlier, this by itself could not be a significant contributor to total inequality. I remain unsure and would like to see more evidence.

Yglesias cites as well Dean Baker's book, the Conservative Nanny State (free to download here), which argues that the rich have overwhelming political power. Commenters on Yglesias' piece cite only one additional piece of evidence, that the Mar's and other rich families spent $500 million to get the inheritance tax reduced (link here). But none of this actually uses statistical data to make the case that it is a significant cause of income inequality.

Ideology, Marxist or Libertarian or Friedmanesque or Keynesian, doesn't count in this discussion. We need more numbers.

One of the problems with discussions of the distribution of income is that the discussants invariably focus on the raw, statistical income numbers without considering two crucially important questions: (1) are the relevant numbers gross (i.e., pre-tax) or net of tax (i.e., after-tax) income figures; and--more importantly--(2) how are incomes earned? If all dollars earned are made on the market, then at least the second point vanishes from the radar. But consider incomes made through rent-seeking and state employment, which are paid for with money taken from tax payers, and therefore involuntarily, in the case of the latter group, or by a combination of consumers, businesses, and taxpayers, in the case of the former one. So for example, a lawyer working in private industry or private practice, who makes $100,000 annually and pays $30,000 in taxes (primarily income tax), is what Murray N. Rothbard, the libertarian Karl Marx, called a net taxpayer (see his book Power and Market). His net income is $70,000 stemming from his private production. Economically, he is a producer. (This excludes form consideration any other income he might have, such as dividends, capital gains, etc.) On the other hand, consider a lawyer working for the government, who makes $100,000 and pays $30,000 in taxes (primarily income tax). He is what Rothbard called a net tax consumer, or what I like to call a pure public parasite, to the tune of $70,000 taken from taxpayers.

I haven't read Dean Baker's book (I hope to), but I suspect he overlooks these points. As for the Mars family (and many others), the fact that they employ lawyers in legally reducing their estate taxes is a good thing to the extent it preserves their estates from the government, which has absolutely no right to it to begin with. This is certainly not rent seeking on their part.

Regarding the original question of does IP result in income inequality, I don't know (John is right that more data is probably needed), but I do know that it enriches parasites at the expense of producers and ordinary people wishing to use their own property (e.g. MPs files) in ways consistent with the law of tangible property. The Gershwin family, to name one, is continuing to make boatloads of money from the works of George and Ira Gershwin, even though they had nothing to do with the original creations, and might not have been born when they were produced. As good rent seekers, they are using the state (the executive committee of the "ruling class") to accomplish this.

One way to solve the problem: abolish the state and move on to a truly free market. They Dean Baker won't be able to complain about the rich using the political means to snooker the poor.

I don't have any substantial data to offer myself (yet), but I lean in the direction of patents/copyrights DO tend to increase income inequality. I suspect there are really two levels at which p/c laws affect income distribution.

The first is the initial transfer of wealth effect: users have to pay for the royalties & licenses. This wouldn't necessarily make distribution more unequal if patents/copyrights were themselves equally distributed across the population. But they aren't. P&C's are overwhelming concentrated in the hands of corporations (and large corps at that). At least with patents, it can be easily argued that patents have become more concentrated over the last 3 decades.

The more significant effect (and probably harder to quantify) would be the chilling effect on entry across industries that increased volumes of patents produce. More patents --> less entry. Less entry --> more accumulation of wealth in the hands of established firms & their owners, and less chance for the mythical American success story of climbing the income ladder via business startups.

If we did have significant data, I suspect the first effect wouldn't look that significant, but the second effect might be.

First, the facts as best we know them on income distribution, and how it has changed. Piketty and Saez show that the very top income shares dropped during World War II and remained at that level until the rose very abruptly in about 1987. It is argued by some that most of the productivity increase since then has been absorbed by these upper income shares. However, Fatih Guvenen who knows the data much better than I points out a fact well known among labor economists: the rate of growth of income increases nearly linearly with income. That is people who are in the high percentiles have income growing faster than those in the low percentiles. This explains fairly obviously why college graduates have faired so much better than high school graduates - and it makes the data for the very high end suspect. That is, it appears as if their share should have been growing during 1945-1987 but it didn't. Perhaps there was a lot of hidden growth due to tax avoidance until the Reagan era? In addition to omitting income that is explicitly concealed from tax authorities, Piketty and Saez don't have data on either unrealized capital gains or on "perks" - both likely ways of avoiding high marginal income tax rates.

What does this have to do with IP? No doubt copyright and patents transfer from the poor to the rich. But the copyright industry is trivial in its economic significance - even if all the growth in Hollywood/recording studio incomes was due to copyright, it would scarcely be a blip in the income distribution. In the case of patents, relatively few industries derive much benefit from patents - mostly holding them as a costly means of advertising ("buy our product - it must be good we patented it") and as a means of self-defense ("don't try to sue us for patent violation, we hold all the patents in the world already anyway.") Basically we are down to pharmaceuticals, and I think it hard to argue that the reason higher income people have more rapidly growing incomes is because of the pharmaceutical industry.

Looking at the wealthiest Americans according to Forbes arguably the fortunes of Gates, Ellison, and Allen owe something to copyright. Buffet earned his money making good investments - not perhaps very socially valuable, but not dependent on IP either. Adelson was apparently a great innovator - bringing conventions to Las Vegas and changing the way they did business - but it is pretty clear that his innovations weren't and aren't protected by IP. Same for the Waltons: Waltmart made a great many innovations, but none patented. We can say the same for Michael Dell: he pioneered a new way of building and selling computers, but everyone was free to imitate him, and everyone tried to.

If we go to the world's richest we find that in Latin America (why is this not a surprise?) wealth is inherited not earned. In Sweden, we find Ingvar Kamprad who made his fortune from IKEA. Again, a very innovative company, but the innovations weren't and aren't protected by IP. Interesting also is Bernard Arnault - who made his fortune in the highly competitive and not well protected by IP fashion industry.

So it seems if you want to be rich, you should have a really great idea, and rather than wasting your time trying to protect it with IP, you should get busy and make a fortune off of it.