The economic case against patents

Ever since James Watt was awarded a patent for the improvements he made to the Newcomen steam engine in January 1769, economists and libertarians have been divided over intellectual property rights (IPR). Edmund Burke argued eloquently, but unsuccessfully, against Watt’s patent as a creation of an unnecessary monopoly. Today patenting has reached absurd levels. Amazon has been able to patent its “one click” ordering function, and Microsoft holds a patent related to the scheduling of meetings on smartphones.

Advocates of patent protection assume that IPR provide an incentive to innovate, and there is no doubt that on its own, the granting of monopoly power as a reward for innovation does that. However, there is also little doubt that monopoly protection will produce many negative results associated with monopolies in general, including rent-seeking behaviour.

Surprisingly perhaps, libertarians such as Ayn Rand and Milton Friedman were supporters of IPRs as extensions of the rightful claim to the product of one’s labour. Friedman thought that in the absence of IPR, inventors and entrepreneurs would find it difficult or impossible to collect a payment for the contribution their invention made to output. Those inventors would confer benefits to others for which they could not be compensated, thus weakening incentives to devote their time and effort to come up with the invention in the first place. It should be noted, however, that Friedman advocated restricting patents to “real” inventions. He opposed dubious “trivial” patents that were predominately designed for maintaining private collusive arrangements.[1]

Murray Rothbard defended copyright protection as a legitimate contractual arrangement that prevented reproduction of an author’s work, but took a different view on patents. Rothbard considered IPRs that attempted to go beyond the original contract as incompatible with free markets, because they outlawed practices that were neither explicit nor implicit theft. Rothbard stated that should another inventor “arrive at the same invention independently… he will, on the free market, be perfectly able to use and sell his invention.”[2]

Many 21st century critics of patents focus on the administrative problems and the costs associated with current patent rules and standards. Especially in the software industry, patent information gathering costs have become prohibitively expensive. The unintended consequence of the current patent system is that the escalating cost of seeking information has put off many firms in the software and information industry from even bothering about potential patent infringements. Therefore, it is not surprising that most patent lawsuits involve information technology and software firms.

Some economists object to patents on the grounds that they produce monopolies that drive up prices and produce artificial scarcity that leads to a social deadweight loss. Others advocate a reformed patent system that would retain patents on pharmaceuticals and a few other products that are expensive to create and cheap to copy, but abolish patents on everything else. Joseph Stiglitz proposes a prize system as a superior alternative to patents.  According to Stiglitz, a prize system would also provide incentives for research, while avoiding the inefficiencies associated with monopolisation. [3]

A more radical solution has been advocated by Boldrin and Levine, who argue that there is no empirical evidence that patents increase innovation or productivity, unless the latter is measured by the number of patents awarded. Their research indicates that in less than thirty years the number of US patents has quadrupled, but there has been no particular upward trend in R&D expenditure, factor productivity or innovation. However, there is an indication that patenting activity is partly self-feeding –patents beget more patents – and although few patents are actively used, patent litigation has increased. Boldrin and Levine note: “patent litigation typically involves dying firms that have accumulated huge stockpile of patents but are no longer able to produce marketable products, suing new and innovative firms.” [4] Hence, the best solution is to abolish patents and replace them with legal instruments that are less open to rent-seeking behaviour, to foster innovation whenever there is clear evidence that laissez-faire under-supplies it.

Abolishing patents may seem like an outlandish proposal. However, the absence of empirical evidence supporting the claim that the patent system fosters innovation means that we should not shy away from taking steps to reform it. Patents are a trade restriction, and economists and policymakers have fought for decades to gradually abolish other types of trade restrictions. There are a number of interim measures that we could take to reform the patent system without abolishing them altogether. One of the first reforms could be to narrow the scope for patentability, as well as for frivolous patent infringement lawsuits. Second, competition policies, not the patent system, should become the key mechanism to foster innovation. Finally, as patents have a finite lifespan, an incremental reduction in patent duration could be used to gradually phase out patents. The advantage of gradual approach is that should it turn out that there is indeed an adverse impact on the level of innovation in the economy, the process could be easily reversed.

[1] Friedman, M (1982) Capitalism and freedom. The University of Chicago Press, Chicago and London.

[2] Rothbard, M. N (1962) Man, economy, and state with power and market, Scholar’s Edition, Ludwig von Mises Institute (2009).

[3] Kahn, B.Z (2013) Trolls and other patent inventions: Economic history and the patent controversy in the twenty-first century. Bowdin College and National Bureau of Economic Research.

[4] Boldrin, M. & Levine, D. K (2012) The case against patents.  Working paper 2012-035A, Federal Reserve Bank of St. Louis, p 6.


3 thoughts on “The economic case against patents”

  1. Posted 23/01/2015 at 08:40 | Permalink

    “Hence, the best solution is to abolish patents and replace them with legal instruments that are less open to rent-seeking behaviour, to foster innovation whenever there is clear evidence that laissez-faire under-supplies it.”.

    Can you provide some examples of what these legal instruments might be and how they would work?

  2. Posted 23/01/2015 at 14:46 | Permalink

    One could imagine a form of royalties to be used to replace patents. Some academic work has been done on this in the case of pharmaceuticals. Another mechanism that has been considered is to think of a patent like a “real option” contract because it allows its owner to choose between exclusively commercialising the patented invention sometime during the patent term or foregoing commercialisation altogether. The latter could prevent patent trolling behaviour.

  3. Posted 25/01/2015 at 19:09 | Permalink

    Just a thought. I may have overlooked someone, but wasn’t Albert Einstein one of the more distinguished people to be employed in a patent office albeit 110 yrs. ago. I wonder does anyone know if he had anything to say about patents in general?

Comments are closed.