Against Intellectual Monopoly

Association is not, yet, as powerful a lobby as are the music
and video industries, so it is unlikely that some benevolent congressperson
will ever propose such a doubtful piece of legislation.
    Despite the fact that encryption schemes work well without legal protection, the monopolist naturally prefers that the scheme be legally mandated.
Otherwise profits are reduced by the cost of the device. However, the cost of
the device is part of the social cost of producing music and movies. Without
the device, the music will not be produced. Hence, by making the purchase
of the device mandatory, we actually subsidize the monopolist by taxing the
consumers. The latter must pay for the cost of the device, and still pay the
monopolist the full value of the music they then purchase. The mandatory
device results in a transfer to the monopolist from the consumers. This is the
re distributional effect. This redistribution, by altering the price at which the
monopolist can sell the music, also induces an economic inefficiency: music
is now overpriced, and the monopolist has an incentive to overproduce it.
    Overproducing a few songs and overrewarding a monopolist by subsidizing the cost of an encryption device may seem to be a small matter.
However, the social cost of mandating a device is not merely the fact that
too many songs are produced. More seriously, consumers for whom it is
not socially optimal to purchase the device are forced to bear the cost of
the device. This social cost may be very large: in the case of mandating
protection for general-purpose computing devices, we would think of this
as including the entire business market for computers. By way of contrast, the social benefit is fixed regardless of the social cost of mandating the
device. Because the potential benefit (protecting the "copyright" industry)
is quite small relative to the potential cost (destroying the forty-times-larger
information technology industry), we would describe a legally mandating
content-protection scheme as not merely a policy mistake, but as a policy
blunder.

    Even encryption schemes can be cracked. An example is the DVD encryption, which was cracked when an authorized but carelessly written piece of
software revealed the encryption keys. It is also the case that the encryption
schemes used by video-game players have been widely cracked. Sometimes
hardware add-on devices - the so-called mod chips - are used to physically
undo the encryption. In other cases, software flaws are exploited to hack into
the device. This points out two important facts. First, no encryption works
perfectly forever. Second, the video games are produced and sold profitably
despite the fact that the encryption is eventually cracked. No matter how
much the video game manufacturers may dislike it, their business is scarcely
threatened by the mod chips.
    Should encryption schemes be legally protected as with the DMCA?
The substantial costs of the DMCA and the fact that occasional cracking
of encryption scarcely poses a threat to the copyright industry argues it
should not. Worse, the only really effective legal protection against cracking
encryption schemes is a draconian legal mandate that prevents software
from even examining encrypted material without authorization.
    How would it be possible to prevent unauthorized software from even
looking at encrypted material, given that it is transmitted over the Internet
and stored on hard disks? It would not be easy, obviously. At a minimum,
it would require a complete rewriting of operating systems, and it would
require computers that would load only authorized operating systems. The
reason is that the operating system would have to check every program
loaded and make sure that the program is authorized to see encrypted data.
The Microsoft Xbox uses such a scheme. The difficulty of implementing such
a scheme can be seen in the fact that the scheme Microsoft implemented in
its Xbox hardware has, in fact, been successfully cracked and has a number
of known security flaws. The simple fact is that, though people prefer not
to have their computer broken into by hackers and attacked by viruses,
no one has yet produced an operating system immune to attack. No less
a government agency than the National Security Agency is working on a
secure system. The level of success attained may be judged by the fact that
the agency is now proposing to set up a new network not connected to the