Recently, the Research Division of the Federal Reserve of St. Louis released an article of interest to stakeholders in the patent system entitled The Case Against Patents, and authored by Boldrin & Levine. This post is a summary of the article prepared by Scott Berger. In a following post I will comment on this article.
The article is organized into five main sections; Introduction, Theory and Practice of Patents and Innovation (with subsection on Arms Races and Patent Trolls), The Political Economy of Patents, Do Patents Encourage Productivity Growth (with subsection on Patents and Productivity) and Conclusion.
There is no empirical evidence that patents serve to increase innovation and productivity, unless you use as a metric the number of patents awarded. However, the number of patents awarded, as evidence shows, has no correlation with measured productivity. Instead of simply increasing R&D and productivity, patents have a disproportionate amount of negative consequences. The reality is that competition and first-mover advantages contradict “Schumpeterian” theories, which postulate that government-granted monopolies are crucial in order to provide incentives for innovation.
In essence, patent protection is not essential when true innovators first break into a particular market; instead, patents are a last-ditch effort made by mature industries once rampant growth has stagnated. Weak patent systems aren’t inherently evil, but they tend to transform perniciously into strong patent systems. Since this is an organic process, we are better off abolishing patents altogether.
2. Theory and Practice of Patents and Innovation
Granting monopolies does spur innovation, but the ill consequences that comes with monopolies still outweigh the positive effects. There is a strong incentive of a government-granted monopolist to engage in further political rent-seeking to preserve and expand his monopoly, or try obtaining one. This lobbying effect is wasteful to society on the aggregate.
E.g., Microsoft has a patent for scheduling meetings on a smartphone. It’s a vague patent, but every company but Motorola simply paid the licensing fee. It’s a trivial feature, rarely used, but this type of activity creates a gigantic hold-up problem. This type of negative externality is widespread and with the high complexity of current technology, this serves to unreasonably increase costs across the board.
Secrecy vs. Patents. Patents only have value if they would grant to the inventor the continued protection beyond the length of time that an invention could be kept secret. In 19th century examples, innovation was not substantially lower without patents, but simply shifted innovations to areas that could be more easily kept secret. The iPhone is a good example of product that created a market segment by being first, and patent suits did not appear to factor in to their 15-plus month total dominance of the smartphone market. Open source movements, like software, show that innovation can thrive without any desire to patent.
Pharmaceuticals, however, are a different animal. Roughly 80% of cost of developing a 1-billion-dollar new drug occurs during clinical trials. Disclosure for these drugs actually allows a competitor to copy the drug, whereas many patents simply do not bestow the reader the ability to truly reproduce the invention.
Monopolies in patents create hurtful societal losses. The small increase in price and profits for the patent holder yields a multiplied cost to society. In a pure competition model, without patents, the profits are made not from price manipulation, but from systemic efficiencies. Some estimate that when pharmaceutical patents were introduced in India, the benefit to the patent holders was outstripped by detriment to the people by a ratio of 15:1.
Arms Races and Patent Trolls
Patenting has exploded over the last decades, even in times of economic downturn. At the same time, R&D and innovation have not shown signs of commensurate growth. Patent litigation typically involves dying firms that have accumulated huge stockpile of patents by are no longer able to produce marketable products, like a young and innovative firm, e.g., TI, Microsoft.
Now, a company like Google buys a Motorola for purely defensive and counter-offensive purposes. To countersue the bullies and trolls. Microsoft looks desperate right now as they hold patents but their patents don’t seem to yield products that consumers desire. Now they are a substantial player in the patent troll business.
The key feature of the patents arms race is that a firm without a product but with a patent can still claim a share of the market against a firm that has both a product and a patent.
3. The Political Economy of Patents
Most agree the patent system today is broken, and there is dispute as to whether it encourages innovation at all. Pro-patent people argue that the system is out of balance, but can be fixed. The problem with this is the political economy of patents. It is fine to recommend reform, but if politics make it impossible to accomplish that reform, then reform is not a viable option.
Pro-reformers argue that a benevolent planner could revise and fix the patent system, but countervailing is the sentiment that patent laws are mostly designed by interest groups keen to increase their monopoly rents, not aggregate welfare.
It is simple math that the lobbying effort and power of IP’s advocates are bound to be much stronger than those of IP’s opponents. See DMCA. Neither Landes nor Posner, nor most industrial organization researchers seem interested in figuring out why patents are either ignored or scarcely used in new and competitive industries while being highly valued and over-used in mature and highly concentrated ones.
Also is the issue that patents, perhaps more than virtually any other facet of government, is so arcane and esoteric that voters don’t possess an adequate grasp of it to utilize their votes with efficacy.
Case in point; Amazon.com’s 1-click method patent. If taken as a reasonable person would read it, it would apply to soda-vending machines, a reduction ad absurdum. Words no longer mean what they seem to mean.
Interests of inventors, patent troll and patent lawyers all align; they would like to see more patents issued. Likewise, the USPTO is constantly under pressure from its clients to issue more patents. Indeed, even the Federal Circuit has shown a pro patent bias, especially among the judges who were formerly patent practitioners. The 1994 Tektronix case was split, pro-software-patent from the judges who has worked in patent law, and anti-software-patent from the two who had not worked in patent law.
4. Do Patents Encourage Productivity Growth?
A metastudy from 2006, taking from 24 studies concluded that “these studies find weak or no evidence that strengthening patent regimes increases innovation; they find evidence that strengthening the patent regime increases patenting! They also find evidence that , in countries with initially weak IP regimes, strengthening IP increases the flow of foreign investment in sectors where patents are frequently used.” Additionally, it seems plausible that the strengthening of US patents may have contributed to the rise in patenting over the past decade and a half.
Another study that looked at all patent systems and their evolution over the last 150 years found that the changes made to strengthen patent systems did not spur innovation. These results are coherent with the predictions of economic theory.
Patents and Productivity
Except for a couple studies, there is, in general, no statistically significant correlation between measures of productivity and patenting activity. In fact, an up to 2% larger rate of growth was shown in industries subject to competition and not monopoly.
Fritz Machlup in 1958 stated “If we did not have a patent system, it would be irresponsible, on the basis of our present knowledge of its economic consequences, to recommend instituting one. But since we have had a patent system for a long time, it would be irresponsible, on the basis of our present knowledge to recommend abolishing it.” Over the past six decades that followed this famous sentiment, the evidence has mounted to force disagreement with Mr. Machlup; the patent system should be dismantled.
If we were to, say, reduce patent terms of certain types of inventions, that could be later reversed if found to be catastrophic.
Here is our list of small reforms that could be easily implemented:
- Stop the rising tide of “things” that can be patented.
- Use anti-trust and competition policies to foster growth.
- Like FTAs, apply this to free competition instead of patents.
- Tailor patents’ length and breadth to different sectors.
- Reverse the burden of proof for patents.
- Utilize prizes and competition where possible.
- Reform pharmaceutical regulation for rare diseases.
- Reform ALL pharmaceutical regulations for all diseases.