Wednesday, 6 February 2013

Heretical Economists Argue For Demise Of Patents, Citing Costly Patent Litigation As Proof

In a recent paper presented in a symposia issue of the American Economics Association’s Journal of Economic Perspectives, two economics affiliated with the Federal Reserve Bank of St. Louis argue that patents should be abolished because they do not promote innovation or technological progress, and exact too high a social toll in terms of transaction costs and impediments to other innovators. M. Boldrin and D. Levine, The Case Against Patents, 27 Jl. Econ. Perspectives, 3-22 (Winter 2013).

In part, the authors suggest that the conventional view that a strong patent system promotes innovation is not supported by available data. They find no evidence that the high rate of patenting activity in recent years has led to a “dramatic acceleration in the rate or technological progress” or increase in R&D budgets. Moreover, they argue that the real incentive to innovate flows from the “first mover” advantage: 
Both theory and evidence suggest that while patents can have a partial equilibrium effect of improving incentives to invent, the general equilibrium effect on innovation can be negative. The historical and international evidence suggests that while weak patent systems may mildly increase innovation with limited side effects, strong patent systems retard innovation with many negative side effects. More generally, the initial eruption of innovations leading to the creation of a new industry—from chemicals to cars, from radio and television to personal computers and investment banking—is seldom, if ever, born out of patent protection and is instead the fruit of a competitive environment. It is only after the initial stage of rampant growth ends that mature industries turn toward the legal protection of patents, usually because their internal growth potential diminishes and they become more concentrated. These observations, supported by a steadily increasing body of evidence, are consistent with theories of innovation emphasizing competition and first-mover advantage as the main drivers of innovation, and they directly contradict “Schumpeterian” theories postulating that government-granted monopolies are crucial to provide incentives for innovation. A properly designed patent system might serve to increase innovation at a certain time and place — and some patent systems, such as the late-nineteenth century German system allowing only process but not final product patents, have been associated with rapid innovation. Unfortunately, the political economy of government-operated patent systems indicates that such systems are susceptible to pressures that cause the ill effects of patents to grow over time. The political economy pressures tend to benefit those who own patents and are in a good position to lobby for stronger patent protection, but disadvantage current and future innovators as well as ultimate consumers.
The authors suggest, based on the recent high-profile smartphone patent wars, that companies obtain patents for strategic value, rather than protecting proprietary technology: 
To understand more about the actual effect of patents in the real world, consider the recent purchase by Google of Motorola Mobility, primarily for its patent portfolio—not for the ideas and innovations in that portfolio. Few if any changes or improvements to Google’s Android operating system will result from the ownership or study of these software patents. Google’s purpose in obtaining this patent portfolio is purely defensive: it can be used to countersue Apple and Microsoft and blunt their legal attack on Google. These remarks apply to the vast bulk of patents: they do not represent useful innovation at all and are just weapons in an arms race.
In addition, the authors argue that patent litigation is costly and contributes nothing to innovation or the betterment of society (except apparently for the income of litigators): 
While patent litigation has increased, few patents are actively used. Patent litigation often involves dying firms that have accumulated huge stockpile of patents but are no longer able to produce marketable products and that are now suing new and innovative firms. For example, Texas Instruments was one of the first producers of microchips, and many in our generation remember the capabilities of their first TI calculator. But Texas Instruments was unable to make the transition to the personal computer revolution and became, for a while, the symbol of a dying company trying to stay alive by suing the newcomers. In more recent times, Microsoft—once the giant bestriding the software industry—has been unable to make the leap to portable devices such as telephones and tablet personal computers. Thus, Microsoft now uses patent litigation to try to claim a share of the profits Google generates in this market.
As evidence for the disproportionate cost of patent litigation, the authors cite a study estimating that by the end of the 1990’s, litigation costs constituted nearly 14 percent of total research and development for publicly-traded companies.

Although the article may seem heretical to Schumpeterians, it does suggest that proponents of a strong patent system need to do a better job justifying patents as a catalyst for innovation. Much of the authors' anecdotal observations relate to the smartphone wars, which are in no way typical of the cost or strategic value of patent activity in most industries. On the other hand, the authors do not comment on the importance of patents in attracting capital, something that even economists would acknowledge is critical to new venture creation. I doubt many venture capitalists would be eager to invest in new companies relying only on "first-mover" status to maintain their technological edge, rather than a sound patent portfolio.  

1 comment:

Suleman said...

At the end of the article the author comments on VC's wanting to see patents before investing. However of course if there was no patent system VC's would need to devise other (perhaps better) ways of choosing where to invest. As the pharmaceutical industry starts to fall off its 'patent cliffs' perhaps they too will start to see there are alternatives. I'm a patent attorney who loves patents, but I can see that as open innovation becomes more credible and starts delivering patents will get in the way, and perhaps it's time to start thinking about a post-patent future.