Fiscal Responsibility - Part 2: Markets and Innovation, Chapter IV: Patent Catch 22

There are two very divergent and very vitriolic extremities on the spectrum of thought regarding Intellectual Property. There are those who espouse the necessity to control and maintain IP rights as strongly as possible as the best way to foster innovation. The fundamental argument of this side is that an inventor should be able to profit from his or her labour. Without the inducement of the ability to profit from labour, innovation would be rare indeed - or so they argue. Then there are those who argue for the freedom of information and the abolition of IP. They argue that ideas happen no matter what you do, and the best way for us to advance is to disseminate and propagate those ideas as fast as possible. An example of the former - IP protection - would be the pharmaceutical industry, which expends billions on research and needs IP protection to realise profit. An example of the latter - open source - would be fashion design, which must advance by constantly re-creating itself. The conflict between to IP or not to IP is, at its core, one between concentration and diffusion.

There are both good and bad on both sides of the argument, and the only real way to reckon which is the superior would be to determine which of the factors is more important in the marketplace: whether concentrating IP in the hands of the people with the profit motive is a better motivator for invention or diffusion into the hands of the greatest number of potential inventors is a greater motivator for invention. Both sides agree invention is good, but disagree on how best to encourage it. Obviously, we all want to have our cake and eat it too... we'd like to be able to have the benefits of profit motive - the fact that individuals can devote their lives to invention, or the fact that corporations will spend billions on research - combined with the benefits of diffusion - the fact that thousands of programmers will converge on open source code and advance the industry, or the fact that fashion designers have to keep coming up with new stuff or become irrelevant. We also don't want the negative sides of each argument - like the recording industry, that effectively buys up rights to the work of artists and proceeds to squeeze far more profits out of those rights than the artists themselves will ever see. We also don't want the wild west of outright piracy, where the sweat and toil of innovators are ripped out from under them. Here's a thought, though, to put things in perspective a little: the question of IP is not simply about the rights of inventors and artists to profit from their work - it's about the entire economy of ideas. This is a systems problem. IP defines the recording industry. The companies that profit from IP do so because they structured themselves to use the tool of IP to make money. If IP was yanked out from under them, they would have to find a completely new way to make money because the incentive of IP effectively structures the payout matrix of the whole system. Some companies might live and some might die, but they'd have nothing in common with their former selves. IP is one of those "inducements" in the economic system that has enormous power over how the whole of industry organises itself. Fiddling with it does more than just anger Metallica.

MARKETS AND INNOVATION

Deriving the maximum benefit from innovation

How can we talk about IP and speak to all the pitfalls and potential of the system? A couple thought experiments might help. The first things I'd like to talk about are industries driven by innovation that requires little to no initial investment versus industries driven by innovation that require enormous time and investment to succeed. Key examples of these two extremes would be the recording industry and the pharmaceutical industry.

Brainstorm for a moment how the recording industry would look without IP. How would the companies derive profit from the creation and marketing of music? To be honest, several models are emerging currently from bands and fans who realise that music piracy is a fact that's here to stay. Some offer their music online for free, depending on reciprocal goodwill when it comes to purchasing their albums. I know several artists who do this, and are perfectly happy... but they keep their day jobs. Others offer tidbits online in the hopes of driving interest for their tours. A business model could be constructed where a band's real work is their stage performances, and their marketing is their music writing, as opposed to vice versa. You can see how it works... whereas nowadays tours are just promotions to announce a new album, in the no-IP music industry, songwriting would be the advertising and live performance would be how bands brought home the bacon. I don't know enough about the recording industry to speak to this authoritatively, but I'd bet dollars to doughnuts someone is already working this business model. Would it be the same industry as before? Absolutely not. Would music continue to be written? Yes it would.

So what would happen to record labels in such a system? Well, they would cease to exist. The label's sole claim to profit is now IP and the merchandising thereof. Song rights are all they have now. I say that confidently because, if you talk to the owner of a label (and I have), they'll tell you that moving records is more about logistics than music. Labels were the people who had the capital to press the vinyl, the connexions to push the music on to the radio, and the coordination to move the LPs into record stores. Except for the guys who press vinyl nowadays (and they not only exist, but are pretty cool), production and distribution is no longer an issue. As a matter of fact, it's a throwback to a now bygone era that we still purchase CDs at the brick-and-mortar store. There is enough studio time out there for a lot of reasonably-priced recording, so up-front capital isn't an issue. If you are willing to go electronic, you can do it all yourself. The only things a label has are marketing and penetration, and they won't market what they don't own. If IP goes, the entire business model of recording labels ceases to exist. Does music exist because of labels? No. Would the loss of IP matter to the recording industry? Yes... but not as much to the artists; just to the people who profit from artists' work. In sum, the loss of IP for the music industry would just kill off the fat cats. Music would continue to be made, it would just be made under a different market paradigm.

The question of IP becomes far more sticky when we talk about pharmaceuticals. For all their problems, pharmaceutical companies do make stuff that makes people feel better. Some of the stuff they make even makes them better for real. The way they make money is by having a guaranteed window of time in which they can make mammoth profits from their multi-billion dollar research and licensing programs. Unlike music, many pharmaceuticals are necessary to modern existence, and the development thereof should be encouraged. Given the regulatory hoops that pharmaceutical companies have to get through to bring a product to market, such a high-stakes game has to be rewarded with some form of payback. Profit motive being what it is, pharmaceutical companies want to be able to sell high quantities of high-priced goods to the market for as long as possible to recoup costs and make a handy profit. It is, however, in the interest of public safety that the IP reverts to the public domain after a reasonable time so that generic drugs can drive prices down. Does IP work to incentivise research and development of lifesaving drugs and treatments? Yes. What would happen if IP didn't exist in the pharmaceuticals industry?

It would change for certain, but medicine would go on being done by government and university researchers. As a matter of fact, when I hear about possible cures to type I diabetes or the cure for peptic ulcers or, you know, any cure at all... I think about universities and state-funded medical centres, not big pharma. There is a place for pharmaceutical companies in the universe, but the question of whether the incentive of profit moves them to make our lives better is not as cut-and-dried as we might imagine. Cures are not as profitable as treatments. By creating an inducement to incentivise innovation in medical treatment, we neglected to say it should be to find cures rather than symptom management. Still, there is some use to the incentive of IP in this case because bringing a medicine to market does take a lot of work and is highly capital-intensive. Even cures developed by universities must go through rigorous testing that takes a great deal of time and money to accomplish.

Some industries would seem to be served well by IP whereas in others, IP perpetuates an obsolete business model. The problem is that IP is IP is IP, and whether we like it or not, the strength of IP is either exerted on a product or it isn't: it's tough to find a good balance. Diffusion benefits the producers of innovations: generic drug manufacturing depends on it. They compete on price and process, not ideas. Musicians also could compete solely on the merits of their music without the input of labels. However, for some companies, ideas are where they compete. Pharmaceutical companies are a big and important example. Innovators like 3M are another. For each model, there must be a sensible way to handle IP.

My thoughts lean toward diffusion, but not completely. IP must exist in order to act as a carrot for people with good ideas. IP can be used to advance the ends of the government as well as increase the diversity and liveliness of the economy. When deciding how to apply IP, states must consider first whether IP is the right solution to sparking competition and innovation in a market. In fashion, IP would lead to stagnation. In music, some could argue it has already lead to stagnation. Second, the decision has to be made for how long it would be appropriate to allow the IP to be controlled. In my mind, pharmaceutical companies should be allowed to keep IP for longer on cures and shorter on treatments. If cures are what interest us, then the system should be nudged in that direction. On an industry by industry basis, we have to decide whether IP orders the market in a positive or negative direction. IP, like any other policy, is a tool; it is not some Gods-given right to eternal royalty cheques. The government, for its part, should intervene when it is in the interest of the market to do so. For instance, if an innovation in efficiency would spark major gains by being cheaply and broadly disseminated, government should acquire the patent and open it for general use. A few thoughts on this:

1) Open the product for construction only within Canada by Canadian owned companies.

2) Since the patent is Canadian government property, the Canadian government would chase down IP violators outside of the country.

3) The originator of the patent would be reasonably rewarded... but forfeiture of the patent (for said reasonable price) would be mandatory.

This is a quick fix that works within the existing IP system to attempt to derive benefit from both the incentive of IP and the market benefits of diffusion.

I hope that this has made us think of IP in a different way. IP is not a right, it's a policy tool that was conceived in order to drive innovation. It's been around for so long that some people consider it a necessity to technological advancement. It is not. Its use should be studied and understood, and applied only when it is useful to the market. Whether the interests vested in IP are served by its elimination is not my concern here - our concern is the health of the market and the goal of competition through innovation. IP does not always serve that end.

Fiscal Responsibility - Part 2: Markets and Innovation, Chapter III: Runaway Leader Problem

A great deal of Libertarian thinkers have highly seductive theories about social order stemming from the complex interactions between interested stakeholders. As a believer in the power of capitalism myself, Libertarianism has some natural draw. However, we must remember that when the government keeps out of the business of business, bad things happen. As much as I would like to say that the Invisible Hand works, it simply does not. If we are fine with an economic life that is "brutish and short" for the majority of the people that inhabit the wilds of near unrestricted capitalism, then the laissez-faire capitalist ideal of Libertarianism is for us. As it stands, my belief in capitalism is the same as my belief in the power of Mother Nature: Her Laws are immutable. You diverge from the laws to your own detriment. You cannot defy the laws of nature just as you cannot defy the laws of money. Nature seeks energy from niches, business seeks profit from margins. Any and all economic thinking must take these simple immutable laws into account.

I will go further and say that companies that fail to follow the laws of the market should be allowed to die. It is only by clearing their niche and letting the little companies vie for their place in the sun that the economy renews itself. Those companies that have trouble deriving profit from the environment should pass away, and better-suited companies will follow. The key, then, is to make companies die for reasons that fit national policy, and let new companies grow for reasons that fit national policy. The market will handle the rest. National policy should, instead of regulating and restricting, make unethical and inefficient business practices inherently more costly than efficient and ethical practices. By hampering the ability of inefficient companies to derive profit from the market, policy is able to guide existing immutable market forces rather than trying to stand in their way. It's much easier to guide the flow of a river than dam it up. Even from a dam, water must pass through or the dam will overflow. When the river's direction is changed, the natural flow of water works to the advantage of the engineer rather than to her disadvantage.

All this is to say that I believe the death of companies that are unable to take profit from the market is a good thing for the economy. Subsidies are inherently flawed in application, as constant subsidy only rewards bad behaviour and inefficient business practice. This may sound Libertarian, but it's simply good business sense. Arguments could be made that subsidies destroyed the cod fishery in the east because it encouraged overfishing. If the fishery had been allowed to evolve without subsidy, there might still be cod fishermen on the east coast (assuming, also, that we had a Lord Admiral Brian Tobin at the helm of Fisheries and Oceans to protect the catch from Spanish overfishing).

The problem currently is that the climax community corporations of each industry tend to be able to squeeze out up-and-coming new companies attempting to make a niche of their own within these industries. This is something we call the "Runaway Leader" problem in game design: the person who starts leading gets a stronger position, and from this strong position has a greater ability to keep on leading. Naturally, companies with more money can stand to make more money, and newcomers to an industry are more or less at the whim of the established companies there. To use another game analogy, spawn camping is both an effective way to play a deathmatch first-person shooter but it also punishes new players. Established companies are able to choose to "spawn-camp" new companies because of their established positions. This decreases competition based on innovation, and instead encourages competition through other more Machiavellian/minimax business practices. The solution must allow for one of three things to happen in the economy: allow for the large companies that stifle innovation to die under the weight of efficiency-minded taxes and feebates; force large companies to spend money on taxes, feebates, and upgrades so that they are rendered financially unable to engage in minimaxing behaviour, thereby allowing the development of unprotected niches in their industry that newcomers can fill; or simply force large climax community businesses to advance and innovate in order to hold their apex position in the industry rather than doing so through more Machiavellian means. If the market is like nature, then we must treat both the life and death of companies with reverence, for both things happen for a reason. National policy allows a government to intervene in how natural selection occurs in the market, and the rise and fall of companies in response to natural selection must be allowed to proceed, uninterrupted by subsidies. This is how to solve the runaway leader problem, and go from monopoly to competition.

MARKETS AND INNOVATION
Combating the Runaway Leader Problem - from monopoly to competition.

As we've already discussed, big companies are able to make advantages for themselves through their sheer size. There's a teaching in Kendo (Japanese swordfighting) that says there are "three things to kill" the opponent: his sword, his technique, and his spirit. In a similar fashion, there are three things to kill in the business world in order to quash competition: the marketing, the product, or the money. Of these three, money is the easiest thing for big corporations to attack. Unless the small company has a superior marketing strategy, or a game-changing product, they will inevitably lose when fighting a monetary battle of attrition. In some cases, they will still lose even with better marketing or products. He who has the gold, in effect, makes the rules.

This is sad, because it would be far better for the consumer if the product was the most important or effective deciding factor in competition. The logic of money being the supreme arbiter of commercial success is that we presuppose that the best product will invariably succeed on the market. This is simply not true. Often, the product that succeeds is simply the one that has a lapsed patent, or that is well-branded, or that has the most caffeine in it. Since we are on the topic of game design, Yahtzee was a game developed by a couple to play while out on their yacht (now the name makes sense, no?). They sold it to a marketer lock, stock, and barrel. The marketer was keen to promote it because all the profit from the idea from that point on would be his. Would he have tried as hard to make it a success if the yachting couple still owned the rights at the end of the day? In a word, no. Yahtzee is not a good game, but it sells like hotcakes. Did it sell because it somehow was appreciated by a huge number of people who play it every weekend, or did it sell because a good marketer got a hold of the rights to something he could sell to lots of people who would play it once or twice and then put it in their closet? I think we know the answer to that question.

Consumers do not make rational choices to purchase the product that will best fulfil their existing needs. There is no chance that a consumer, who purchases a faux Fabergé egg on the home shopping channel at 2 a.m. after a long night alone doing crosswords and listening to soppy love songs, is buying a product because the product itself fills a need. Utility maximisation and the rational consumer being a myth, the idea that the company with more money makes a better product is also recognised for a myth. We are reduced to seeing the market cynically as a place where - since value is subjective - the art of selling is actually a process of perception manipulation rather than a game of who makes the product best suited to the real needs of the consumer. The market, therefore, doesn't choose the best product, just as it does not choose the most efficient process, or the least wasteful manufacturer. It is up to national policy to define these traits as desirable through financial penalties and rewards. Competition is the only way the market improves, and innovative new companies must be given a fighting chance to establish themselves so that competition is increased. More companies means more competition.

The big box stores also eliminate entire ecologies of little shops. Businesses buy more "stuff" than most consumers do, and business to business purchases are far more lucrative than selling to individuals. It makes sense that the more businesses there are, the more purchasing there will be. Big box stores can cut costs and streamline - they pay minimum wage, buy in bulk, and can derive benefit from economies of scale. They have logistical networks and dedicated sources to get all their supplies in the most efficient and cheap manner possible. Mom and pop stores can't. The little shops may each individually make less money, but they also keep more money in the local environment. Their lack of continental supply chains makes it necessary for them to spend locally for what they need. They have to pay their workers (mom and pop) a living wage and they can't normally benefit from economies of scale. Keeping the big stores from establishing control over a market niche therefore not only increases competition, but increases overall consumption as well!

A couple previous discussions play directly into this topic. One, the "national labour law", and the other, feebates. The national labour law we talked about before was about two things. It was mainly about wage equity and freeing workers from being simple expendable pawns in the great game of profit maximisation. A knock-on effect that comes into play here is that it cuts into the scale advantage that large companies have. The larger the company, the more specialised it can make its workers, and the more efficient it can make its processes. This efficiency means profit, because a larger company typically pays less dollars of salary per dollar of income than a smaller company does. This is a contributor to the runaway leader problem, and wage equity just happens to cut into the ability of any leader to "run away". Second, feebates will penalise inefficient companies that are unable to improve their wasteful processes and practices. Letting the big companies hit by this double-whammy fail is part and parcel of the program: through the death of the inefficient, the efficient are given the chance to grow. If the big companies adapt and improve, the result is the same: both wage equity and efficiency is enhanced, and innovation flourishes.

A large part of this plan isn't "doing" something so much as it is about doing nothing. The key to this part of the policy is not to bail out that darling company of the swing constituency simply because it's politically expedient. We all know it happens. Strathcona gets a hospital, and Shawinigan gets a national tax processing centre... the swing and home ridings get disproportionate attention. If a company that accounts for a lot of jobs is about to perish, often the government will find funds in order to make certain those jobs survive - even if it encourages poor business practice. Well, I'm a prairie boy. The grass grows up lush and green after a prairie fire. It's a natural form of renewal. There will be a black spot there for a year or two, but the patch will grow up healthier than ever in no time. Stress the big companies, let the small companies develop, and it will be harder for the big companies to compete with them using money alone.

One final thing that is a little off topic, but still along the same lines as the runaway leader problem. Big stores have a great capacity to raise capital through keeping their shares high-priced and raising funds by releasing more shares to the market. If need be, they still have this ability to out-spend their smaller competitors at their fingertips. One way some companies keep their share prices high is, well, through lying. The corporation has evolved into an entity that somehow makes lying (called fraud) a crime without a perpetrator. This seems a little unfair, because with accountability comes responsibility, and responsibility tends to increase self-discipline. I propose, as my final recommendation along these lines, that CEOs, CFOs, and COOs be held accountable for the illegal actions of the corporation as a whole through the doctrine of command responsibility as enshrined in the Geneva Convention. Put simply, it means that if an atrocity is committed under your command, and you didn't try to stop it, you're responsible for it. The end. Lack of knowledge is not a defence (and shouldn't be) because as a commander, it's your damn job to know what's going on. With that happy thought, I will leave you with a short selection from the - rather well-written - Canadian Criminal Code:

Sentencing — aggravating circumstances
380.1 (1) Without limiting the generality of section 718.2, where a court imposes a sentence for an offence referred to in sections 380, 382, 382.1 and 400, it shall consider the following as aggravating circumstances:
(a) the value of the fraud committed exceeded one million dollars;
(b) the offence adversely affected, or had the potential to adversely affect, the stability of the Canadian economy or financial system or any financial market in Canada or investor confidence in such a financial market;
(c) the offence involved a large number of victims; and
(d) in committing the offence, the offender took advantage of the high regard in which the offender was held in the community.

As the saying goes, take care of the pennies, dollars can take care of themselves. With a bit of protection for the small companies, competition is improved and the little guys have a change to become big companies. By letting failing companies die, we not only rid ourselves of inefficiency, but allow for new ideas to fill the niche left by the departed. By increasing accountability, we make it less likely that big companies can game the market, and encourage stability in the national economic system.

Fiscal Responsibility - Part 2: Markets and Innovation, Chapter I: short-term to long-term

So far we've talked about the people part of fiscal responsibility: wealth distribution. To me, this means to give from rich to poor, from unsustainable to sustainable, and from downsizing to conservation. This next part deals specifically with how we approach the market, and how we encourage companies to improve themselves continuously. Innovation is a greater resource than any other, and constant creation and capitalisation of new ideas enriches the economy, creates more density to the flow of goods and services, and makes an economy more resilient. An economy based on only a few products is fragile. An economy bursting with new ideas is always able to adapt. Even if some businesses don't survive, the economy will keep on chugging. Oddly enough, what makes an economy resilient is not always what makes it efficient. In an interesting blog post on efficiency, Peter Radford examines in general what Jane Jacobs has been saying since the early 60s: efficiency is good at extracting profit from the existing system; efficient companies survive a change in the system at a rate inverse to their efficiency. In other words, efficiency is fragile. Efficiency means a company is optimised, that it has specialised in its form of profit generation. If the system has a shock of any kind, such as in 1979, or 2008, efficient companies shatter like a crystal vase. The higher you build, the less sure your footing.

Companies need room to manoeuvre, the ability to change direction, some degree of leeway in order to adapt to shifts in the economic climate. Sometimes companies have to be forced to do this in spite of themselves. That was the reason that Chretien didn't let the banks merge - guess what? Canada weathered the financial crisis better than any other G8 nation. Bank mergers would have given Canada some enormous banks able to contest on the global market with the likes of Sumitomo and Deutsche Bank. It would have allowed a much higher degree of efficiency and far more leverage... under the pre-2008 system. Lucky we didn't go there, I guess. Canada also doesn't allow a home-buyer to purchase a house without equity unless they buy mandatory mortgage insurance. Guess what? No mortgage crisis. China is sitting on a raft of bad loans, Japan and the US have already had their mortgage-induced hangover, but the only place with a problematic price bubble in Canada is Vancouver (and that's because Mainland Chinese investors keep buying houses there on speculation. I'm actually not kidding there, it's serious... but that's another discussion entirely).

For reasons that are inherent to the nature of corporations, big corporations often do not make the choice to spend money on long-term efficiency and instead opt for short-term profitability and growth. The only time a corporation tends to make huge monetary outlays for strategic purposes is when it is a matter of survival or the inability to access a market. Natural Capitalism isn't progressing as fast as a rational person might think it should due to this systemic corporate myopia. I've written about this myopia here and here. To sum up the cause of this problem, corporations are run by shareholders who want to profit from shares, and share price does not perfectly track corporate profit or future profitability. This is a break from the fundamental urge of the capitalist ecology: to derive profit from margins between outlay and income. (As an aside, this ignoring of the need for markets to exploit margins is at the root of the failure of centrally-planned economies, but the sins of central planning against the market are far more grave than those of the corporation. Still, it's the same sin - the only difference is the order of magnitude.) Part of the problem of the market, then, is that corporations have to be compelled to do what's good for their long-term survival - often against their own shareholders' will. Another problem of the market is that short-term profit taking can severely undermine long-term strategy. Finally, the nature of big corporations as a "climax community" makes them naturally tend toward monopoly and stifling new energetic companies that might rise up to threaten their niche. The Markets and Innovation part of this text is therefore about going from short-term to long term, profit-taking to profit-making, and monopoly to competition.

MARKETS AND INNOVATION:
Best Available Technology - from short-term to long-term.

Before beginning the main discussion, it would be wise to talk about feebates. Hawkins, Lovins, and Lovins adore feebates, as discussed in Natural Capitalism. Amory Lovins suggested them first for encouraging the development of cleaner automobiles. The concept is that you ding the most inefficient and pay the most efficient. This could be problematic, as most car-makers have several lines of cars, each with their own pollution profile. A decision would have to be made to compare only the most polluting model in the line, naturally, so that the company is only as good as its worst designs. A few issues I have with feebates: if they are applied too broadly, they would have the tendency to cancel one another out. For instance, car manufacturers could make the metrics too narrow and numerous, and by doing so make the whole exercise futile: e.g., Ford has the best catalytic converter, Honda has the lowest emissions, Subaru has the least chemicals in its upholstery, they all pay in and they all cash out. Nobody would be penalised or rewarded, and that would be senseless. To be useful, feebates have to target one, at most two main technologies or metrics of waste that any given industry produces. While Lovins indicates that feebates would be used in a kind of "sliding scale" manner - the most egregious pays the most by proportion to its egregiousness - I feel this also leaves the middle range in a kind of wishy-washy position of neither being rewarded nor penalised enough. To me, feebates are going to represent a kind of yearly "ante" that all businesses in an industry pay into a central kitty. The most efficient gets the whole amount, equally efficient companies divide the kitty proportionally to their net worth. Only the most important metric to the industry is chosen, and companies deposit to the kitty each year 1% of their gross profit... or better still, the degree of their egregiousness in the previous year sets their ante at anywhere between 1-5% of gross profit, just to make sure the worst offenders don't calculate this simply as a "cost of doing business".

Another problem with feebates is that the government would have to maintain a great deal of administrative overhead in order to monitor this program. This is no small task, monitoring feebate programs in every major industry in the country. There is, however, a solution. Industry associations can oversee the process, only providing the results of certified third-party testing to the government through the Canada Revenue Agency (CRA) with the yearly taxes of each corporation. The CRA would monitor the compliance of corporations in the feebate program as the ante would be paid along with annual taxes, and rewards would be paid out along with tax returns. Industry associations would be awarded 10% (or another suitable amount) of the total kitty as a consideration for monitoring the program, but would never touch the rest of the money. This would incentivise the industry associations to encourage broad participation and report free-riders. The Canadian National Research Council (CNRC) would review the test submissions on a risk-management basis much as tax filings are reviewed now. They would also be in charge of certifying third-party standards institutes within Canada that do the testing for the industry associations. This way, administrative overhead is offloaded to the industry organizations, the CRA does what it does best with very little novel work added, and the CNRC does what it does best - measuring and testing stuff. The matter of paying for such a unit in CNRC, however, does rear its ugly head. Some people don't know this about the government, but some organizations in the Canadian government are classified as financially autonomous. The RCMP Musical Ride is one such organization. Not a penny of taxpayer money supports the Ride. It supports itself by breeding and selling prize horses that fetch prices in the tens to hundreds of thousands of dollars on the auction market. The standards unit of the CNRC used to conduct spot testing and certification could be so classified, so that the entire exercise of maintaining feebates is completely cost-neutral to the taxpayer. They would collect fees as any other standards organization would. Never underestimate the creative use of existing processes to save time and money.

Now, hopefully the description of my conception of feebates is clear, the fact that they would be entirely cost-neutral is established, and that even though they are run by industry organizations they would be impartial - because they get cash out of it and they are monitored by the CRA and CNRC ("trust but verify").  Feebates can be used to encourage the development of the most efficient techniques and technology through two different prongs of the efficiency concept: best available technology and best available practice. For each industry, what these are would be decided by the government based almost solely on input from civil society groups. While industry associations can be consulted in this phase, this is a decisive moment in the program, and industry associations do not have an incentive to pick the most central or important technology in this system. Civilian think-tanks and civil society group consultations are the best way to find the most pressing concern experienced in the industry, and would keep the process from getting torpedoed right out of the dock.

The terms "best available technology" and "best available practice" are covered briefly in The Natural Advantage of Nations. Best available technology (BAT) is a European industrial doctrine. Best available practice (BAP) is a term used to differentiate when industries do not rely on polluting technologies, but can improve their best practices and thereby reduce waste. I am proposing that these concepts not simply be applied to industrial CO2 emissions, but to the central environmental/waste/inefficiency problem in every major industry in Canada. The incentives are properly weighted: civil society groups have an interest in addressing the most serious issues of waste and inefficiency because their purpose is to protect the environment or quality of life of Canadian citizens. Industrial associations would hopefully see the profit (for their own organization) that identifying and addressing a critical industrial need would create. Private standards laboratories would benefit from increased patronage, the CNRC's Standards Unit would be able to maintain itself through consulting to private standards laboratories, and the most efficient companies in an industry are rewarded. Since the entire process can be initiated by industry or civil society groups, it would provide a grassroots level of interest and increase the satisfaction of civil society groups with overall governance. More on this engagement of civil society in the next section. Finally, civil society groups would be given the option to change the focus of BAT/BAP programs if a different problem becomes more pressing.

The economic benefits of this progression of innovation are many. First of all, as is well-argued through The Natural Advantage of Nations, companies which exceed product standards and make innovative leaps in efficiency are better positioned in the market. First, because they can find more large (specifically, government) buyers which can't avoid but purchase socially responsible products due to their own legislation. Second, holding patents in tech advancements that exceed European standards would find a government-mandated market in Europe due to the doctrine of BAT there. Third, buyers are becoming more ecological footprint-conscious, and socially responsible products are demanded by ecologically conscious consumers. There are many other reasons, but technological/technical advancement does pay dividends, even if the only thing a shareholder can comprehend is an "expense". Shareholders will be more keen to lay out a little profit now for a windfall later if their company is able to exceed the BAT of the previous year.

While this is only a teaser for later chapters, this process has the knock-on effect of giving new companies in the market a real fighting chance. If a new and nimble industry is able to bring the BAT into production and clean the clocks of all their competitors' efficiency numbers, they stand to win a disproportionately large windfall that may establish their position in the market for years to come. This is a single way this process combats the "runaway leader" problem inherent in capitalism that I will talk about in a later chapter. Through the adoption of BAT and BAP, implemented with a group of stake-holders through feebates, Canada can pry open new markets. The process will get investors accustomed to capital expenditure on efficiency improvement, and perhaps in some cases, they may demand it. BAT and BAP will start corporations thinking about the long-term survival and competitiveness of their companies rather than squeezing the most out of the current paradigm and changing only when necessary for survival. Constant, incremental improvement is possible with such a program, and competition will move from simply price to innovation. Feebates and BAT/BAP will help Canadian industry go from short-term to long-term in their corporate planning.