Counterfeit Wealth: Some Thoughts on Rent-Seeking and SOPA

One week from today is the one-year anniversary of the beginning of the 25 January Egyptian popular uprising. A year ago I was blissfully unaware of the struggles for dignity that were spreading through Tunisia and Egypt — until suddenly on the 27th when Egypt disappeared from the global Internet. It was a stunning wake-up call to geeks and would-be activists, like me, to what was happening in the world. A government that can’t trust its citizens to communicate with each other or the world can’t be trusted to govern.

Today, January 18th, less than a year later, has been chosen as a day of online protest against bills being discussed in both houses of the United States Congress (SOPA in the House and PROTECT IP (PIPA) in the Senate) which would give the federal government unprecedented control over the Internet, including the ability to order ISPs to stop resolving domain names of foreign websites accused of infringing American intellectual property. The backlash to these bills has been immense, and today many websites, including major sites like the English Wikipedia and are taking themselves offline while others, such as Google and craigslist, are adding links to their front pages in order to protest and raise public awareness of the negative consequences of these bills.

Overview of SOPA

I focus on SOPA, rather than PIPA or any other similar bill, in this article because that is the only one I’ve read. It also seemed, until very recently, to be on the verge of passing the House and so deserving close scrutiny.

The Stop Online Piracy Act was introduced to the House of Representatives by Rep. Lamar Smith “to promote prosperity, creativity, entrepreneurship, and innovation by combating the theft of U.S. property, and for other purposes.” The best way to get a feel for the bill’s scope and purpose is to read its summary. The Wikipedia article includes a good overview of its goals and potential impact. Reddit’s Jason Harvey has a nice technical overview of the bill. Finally, Alex Howard’s article from November is a long and fairly comprehensive overview of the issues presented by SOPA and PIPA.

In short, as things are now, there is little US law enforcement can do about websites registered under top-level domains not under US jurisdiction and hosted on servers in other countries which offer downloads of Justin Bieber songs, knock-off Nike shoes, or inexpensive Canadian pharmaceuticals. SOPA fixes this by providing the Department of Justice authority to take action against American intermediaries which make it possible for Americans to access these “pirated” goods:

  • ISPs can be ordered to block access to foreign infringing sites

  • Search engines can be ordered to not link to foreign infringing sites

  • Payment networks (like PayPal or credit cards) can be ordered to refuse service to Americans in transactions related to foreign infringing sites

  • Advertisement services can be ordered to stop serving ads for foreign infringing sites

What’s Wrong with SOPA

Opposition to SOPA includes technical, civil rights, and economic concerns.

The technical concerns stem from the requirement for ISPs to block access to infringing sites. Although there have been recent promises to remove the DNS provisions from the bill, this paragraph, from section 102 describing what actions a court can authorize the Attorney General to ask of service providers, was included in the version of the bill when it went to committee:

A service provider shall take technically feasible and reasonable measures designed to prevent access by its subscribers located within the United States to the foreign infringing site (or portion thereof) that is subject to the order, including measures designed to prevent the domain name of the foreign infringing site (or portion thereof) from resolving to that domain name’s Internet Protocol address.

The Domain Name System (DNS) is the system which assigns and resolves domain names (such as to the numerical Internet Protocol addresses (such as which are used for routing information throughout the network. An issue with the current DNS is that it is sometimes possible for an attacker to spoof the address of a domain name and send a user to a rogue site masquerading as the site the user thought they were accessing. The most promising solution to that issue is an authenticity layer on top of DNS called DNSSEC.

One problem with the censoring proposed by SOPA is that messing with domain names at the ISP level (instead of at the root DNS servers for each top-level domain — most of which are not physically located within US jurisdiction) will make DNSSEC impossible. (One expert to point this out is the former assistant secretary of the Department of Homeland Security.) Because of this, SOPA would actually diminish the security of Americans using the internet and make various phishing and counterfeit scams easier to execute.

On top of that, how could users who use nameservers outside of the country be prevented from resolving domains? Or how could users who type in the IP address of their destination be stopped? Depending on how “reasonable measure” is interpreted, both scenarios might require the sort of widespread and intrusive deep-packet-inspection that makes the “Great Firewall of China” possible. Even disregarding the privacy concerns, trying to force America’s numerous and distributed service providers to implement the sort of central control regimes like China or Iran struggle to achieve is impractical. This country was not built for that.

And of course privacy is a concern, as well as the restrictions to the freedom of speech and assembly these bills impose on American citizens. John Gilmore’s famous quote that “the Net interprets censorship as damage and routes around it” assumes the robustness of the net has not been intentionally damaged by law. And, since the bill authorizes the Attorney General to bring an action for injunctive relief “against any entity that knowingly and willfully provides or offers to provide a product or service designed or marketed for the circumvention or bypassing” the restrictions, tools like Tor, which is based in the US and allows oppressed people around the world to use the internet anonymously, are endangered.

On the economic front it’s not hard to see why tech companies which host user-submitted content are concerned with the increased responsibility and liability SOPA would bring. The issue is often framed a battle between Hollywood and Silicon Valley. For example, in November Google, Facebook, Mozilla, Zynga, eBay, Twitter, Yahoo, LinkedIn, and AOL ran a full-page ad in the New York Times which supported the goals of SOPA but rejected its implementation. Google, which is a search engine and an ad service and owns YouTube, is understandably especially concerned. The United States would certainly look less appealing to businesses which provide or depend on internet services if SOPA or a similar bill were to pass.

More interesting to me, however, are the economic reasons for those who support SOPA.

The Rent Seekers

The response of those who are against SOPA has been overwhelming. From the boycott of which turned GoDaddy from a supporter to a grudging opposer of SOPA in 24 hours to the white house petition which garnered a response from the Obama administration largely opposed to SOPA (“Any effort to combat online piracy must guard against the risk of online censorship of lawful activity and must not inhibit innovation by our dynamic businesses large and small […​] We must avoid creating new cybersecurity risks or disrupting the underlying architecture of the Internet”) to today’s blackout protest, it has been the most effective awareness campaign I’ve ever seen.

So who supports SOPA and why? The House has published a list of official supporters of the bill. It consists mainly of companies and trade groups whose business model depends on owning intellectual property rights: music publishers, the Motion Picture Association of America (MPAA), Tiffany & Co., News Corporation, the National Football League, etc.

Is there anything wrong with businesses which depend on intellectual property asking the government to protect them? After all, the ‘copyright clause’ is right there in the first article of the US Constitution giving congress the power “to promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”

Whether and at what cost the temporary monopolies granted for intellectual property actual advance the progress of science or useful arts is an open debate. However, I would suggest that the aggressive leverage of the government against consumers by rights holders, from Disney lobbying for longer copyrights to the recording industry suing its own customers for downloading music to lobbying for control over which websites Americans are allowed to look at, is way into the harmful column.

In classical economics, a rent is unearned income deriving from payment for a resource which exceeds its opportunity cost. Economic rents arise when there is some sort of barrier to competition in a market. For example suppose a labourer would be willing to work for $10,000/year but she has a highly demanded skill and is actually paid $40,000/year. The difference, $30,000, is the economic rent she receives simply for possessing a skill. Or suppose a company would be willing to sell its widgets for $5/each at the current demand, but it happens to have a monopoly on the industry and can sell them for $10/each. That company is receiving $5 of economic rent for every widget it sells. When a company seeks monopoly privileges from the government, it is described as rent seeking.

Rent-seeking behavior results in huge economic losses: money is spent lobbying congress for monopoly privileges which in turn stifle competition and innovation. The House’s own Joint Economic Committee issued a report in 1996 titled “Rent Seeking Hobbles Economic Growth”:

The crucial thing to understand about rent seeking is that the resources spent to influence the political process are wasted to society. […​] Economic theory predicts that the sum total of funds spent to acquire political privilege exceeds the value of those privileges. […​] The major problem with rent seeking is that it is successful. Changes are made to the tax system to benefit special-interest groups. Regulations are passed in a manner that include special protections for various groups. Seekers of economic privilege are emboldened by past successes, so they pressure for additional assistance. The sum total of all these demands hobbles the American economy.

The rent-seeking behavior of SOPA supporters is especially insidious. The essential business model of SOPA is to buy the free and open Internet out from under the American people in exchange for economic rents on music recordings, movies, sports broadcasts, and whatever Tiffany sells. Perhaps the biggest insult of SOPA is that it purports to promote prosperity, creativity, and entrepreneurship. The prosperity it promotes is a prosperity for monopolists at the expense of everybody else. It is a counterfeit wealth. Pirates may be guilty of making money off of other people’s hard work, but no pirate could hope to be as guilty in that regard as the rent-seeking companies which support SOPA.