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Underworld Inc - Knock-offsToday we are going to continue exploring the unusual thinking (to say the least) typically portrayed by so-called "documentaries" and "educational" TV shows and videos. The thinking portrayed by these documentaries is clearly based on arbitrary definitions of "good" and "evil" according to existing laws and socialist principles. The solutions they imply (but do not explicitly recommend nor suggest) are the old tried-and-true failures: more law and order.

Our series of articles was prompted by a neat (and short) series of videos we came across. The series is called Underworld Inc and was produced by or for the US National Geographic Channel. This series typifies all that is wrong in current popular thinking, conveniently packaged in six instalments. If you have access to them, we encourage to view the series in order to fully understand the depth of the erroneous views they portrait. The fifth episode is called:

KNOCK-OFFS

As you can imagine, this episode deals with counterfeit goods.

Summary

A wholesaler counterfeit kingpin states that the key of success in this area is understanding the market as "everybody is in the counterfeiting these days and there is nothing wrong with it". He ships to many states.

His counterpart, a customs officer states outrageously that there is no hesitation of shipping counterfeit goods. The following shot shows a team of 50 officers preparing to storm a number of counterfeit traders in a market by taking all their goods and to "seize money". They have been developing this case for over 18 months. They end up arresting a number of people.

The scene switches again to NY where a hustler states that they are there making some small money and hurting nobody. He is just trying to make a living but without "paper" you can work and without work you can't survive. It is risky because if caught there is jail time or deportation.

The counterfeit economy is estimated in 500 billion a year despite the efforts of at least two enforcement agencies which show large warehouses containing seized items. Several items are shown and the items' quality is described as "fairly decent" and very hard to discern "what is real and what's not real". They comment that there is an insidious side since these items are sold as "the real thing".

Another middleman states that he is leaving his house not knowing if he will return to his children since he may be arrested and for this reason he hates this job. But he has responsibilities; people above and below him. His weekly take oscillates between 1500 to 5000 USD but with his knowledge if he could work in a Chanel store, he would do it and become "legal".

The next scene is about a police unit specializing in counterfeits where an officer states that the "shadow economy's" biggest threat is Intellectual Property Rights counterfeit goods. This economy is a parasite on legitimate commerce and it drains away money on which we rely as a society and that "we just don't have enough people". The scene continues showing a sting operation to bust a counterfeit Tide soap manufacturing facility. This operation shows at least 8 fully armed police officers. The officer states that they don't know if the product is safe and that it affects poor people looking to get a deal and concludes with an outraged voice that the counterfeiter makes 300% markup unlike drugs dealers who make less. However, as the counterfeiter did not add the Tide label, the item is not counterfeit but "a cheap one".

A watch maker does not import counterfeit goods; he buys the components "legit" and makes them himself. He says to his clients "why spend 45.000, spend 10.000 and you will get them the exact same watch". Attention to detail is everything. They replicate every watch exactly as the original. These items only become illegal when they are branded and are in high demand. For another counterfeiter, knock-offs are a giant leap from drug dealing because he is doing something positive by having a business and changing his life around. About 50 to 60 people and their families depend of him. Yet, the risks that this person is taking are far higher than normal business, including loss to customs, arrest, and fraud.

The next scene shows a private investigator with about 10 agents and 30 supports staff tracking down counterfeits in China where counterfeiting is widespread but technically illegal. The scene shows an operation where a counterfeiter is "stealing" the market share of the IPR owner. As the Chinese market explodes, customers become "exposed" since there is no quality control, there is no guarantee to the consumer and the counterfeiter is "stealing and exploiting the good will of that brand". He continues stating that now there are different grades of counterfeit items; A, B and C.

A counterfeiter in China states that they create jobs for workers, distributers, retailers and so on thus maintaining the employment rates and stability of society.

The next shot shows counterfeit credit cards with which fraudster embezzle over 12 billion USD world-wide.

The "classic" solution

The implied message is always the same: counterfeit items are bad. Law and order must prevail there are so many of those items that "we just don't have enough people".

THE LIBERTARIAN POINT OF VIEW

The crux of the matter

As one of the officers said this so-called problem is all about "Intellectual Property Rights counterfeit goods". This whole issue and all their spin-offs revolve around IPRs. However, IPRs (as normally understood) are garbage. A scam. We have explained this point of view quite exhaustively in our series Intellectual Property Compilation. Basically what all this comes down to is much "ado about nothing". From a Libertarian point of view, there is no such thing as "counterfeit" goods; it is a figment of the "legal" imagination.

Legalisms and contractual agreements

In a Libertarian system selling a counterfeit good does not breach a contractual agreement as long as both parties understand that the good is a copy of the original. But what happens when one of the parties advertise a copy as genuine?

Technically speaking under the law this would constitute fraud. But is it? In a Libertarian system as there is absolute freedom of speech, one can advertise anything however ludicrous it may sound. In this sense advertising for a Gucci and selling a Chinese copy is no breach of contract at all because there is no contract yet. Buyer beware. However, what the contract stipulates is something entirely different. If the contract stipulates that the item is a Gucci but it is a Chinese copy then the seller is in breach of contract and liable for all damages. But even under these circumstances, the seller is not a "criminal". The seller is simply a person in breach of a contractual arrangement.

It’s a product

As the statements of all counterfeiters indicate, they are simply selling a product on discount. This is simply a voluntary contractual agreement among emancipated adults. Nothing more and nothing less. Whether customers get what they paid for, that is an entirely different matter.

Scams and frauds

There are two types of customers for counterfeit goods. The first type is the person who knows that the good is counterfeit but he/she buys it anyways. This group does so because they can't afford to buy the "real thing" (most of the time) and sometimes because they are acting in an economic manner (i.e. they are spending their limited resources in the most efficient way). This group knows exactly what they are getting and are happy and satisfied customers. There is no scam or fraud here because, again, these are simply voluntary contractual agreements.

The second group is the group that buys something believing it is something else because it is being advertised as such. They get an incredible offer (incredible as not-credible) but they buy it anyways. In this case it is all down to the contents of the contract. If the contract says "original" then the seller is in breach; if the contract says "copy" then the seller is not regardless of what the buyer may thing. Again, buyer beware.

Quality Assurance and Guarantees

One of the issues raised by an officer is that counterfeit goods come without QA or Warranties. And the question is, so what? We routinely buy used items without QA or warranty. We routinely buy legal items from China or Turkey or some other place without warranty and unknown QA. This is nothing new. Actually, it is a very old market problem that the market solved by itself long time ago. The most brilliant example was the industrial revolution in England and food manufacturing. In the beginning food manufacturers were creating products of really low quality, some of them being downright toxic. However, over time, manufacturers discovered that there was a market for non-tampered food (i.e. good food) for a slightly higher price. This discovery shifted purchasing habits of people towards items with good quality so much that tampered products simply disappeared from the market. They lost their economic viability. The free market ensured the quality of the products all by itself; no government necessary. Furthermore, only after the free market cleaned the situation the English government stepped-in with product quality laws. Too little and too late. Product quality is a free market issue, not a government or legal issue.

The heavy hand of the law

Which brings us to the concept of the "criminal" counterfeiter. As this episode points out, there are very heavy penalties for counterfeiting, particularly in bulk. They can amount to thousands of USD in fines and years in prison. The episode clearly shows the twisted mindset where a horde of 50 officers falls on simple counterfeiters selling their products in an open market. 50!!! Officers!!! And 1.5 years!!!??? For what? A few socks, handbags, watches and perfumes. Wouldn't these officers be better utilized patrolling the streets to prevent violence for example? Apparently not.

And how about the "unit" of about 6 officers that "took down" a criminal selling bootleg Tide detergent? Seriously? Detergent? 6 officers? What's next? The Jaywalking brigade in full tactical gear? To make matters worse, as this "counterfeiter" did not label his product as Tide, the product is considered to be "cheap" but not counterfeit. Sooo… cheap products without QA or Guarantee are OK but not counterfeit goods in the same conditions. Got it! What is scary is that people can't see how ludicrous this whole situation is.

Note: please see the Glossary if you are unfamiliar with certain words.

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