“Set Innovation Free” read the cover of the economist last month. You can skip the fluffy leader, and dive straight into the main article, or better still, the working paper by economists at the St. Louis Federal Reserve Bank upon which most of the article is based.  The article posited that we would have more innovation without patents, that patents don’t encourage the behavior they are designed to encourage, and that gradual rollback of patent laws — leading to abolition — would be good policy.

As an intellectual property advisor and a patent applicant, I want strong protection for my ideas and my clients. At the same time, as a former patent examiner, I’ll be the first to admit that our patent system isn’t perfect (one small example — average time between application and the first response from the office for software patents: 21 months). But the case for doing away with the system altogether isn’t often made. To understand the arguments for and against, let’s start by looking at why we have patents in the first place.

What good are patents?

Put simply – patents let an inventor block others from using or selling the invention (granting a monopoly), in exchange for sharing information about the invention. The inventor can, of course, let people use the invention and charge a licensing fee, or give it away for free (like Tesla did for its charging technology).

Patents promote innovation in two ways. First, patents encourage an inventor to invest in a new innovation because it gives exclusive rights to sell that invention. Second, the patent discloses how the invention was made, giving everyone an information advantage and speeding up the next round of invention.

There are three primary arguments in favor of a strong patent system:

1) Open-source invention. Because a patent describes the invention in detail, new inventors can stand on the shoulders of those who came before and move the field along quicker.
2) Incentivize investment in new invention at big companies. Large public companies are answerable to their shareholders. If they can’t reap the financial rewards of an innovation, they will not invest in innovation.
3) Encourage new players to enter a market. If a small startup can’t protect its new invention, an existing well-capitalized business with existing supply chains, manufacturing, distribution, and a strong brand can copy the idea and crush the startup.

There’s a fourth argument that doesn’t come up quite as often, but is just as important:

4) Countries with stronger IP attract more investment. When companies choose where to manufacture, they prefer to keep critical patent-protected inventions in countries that guarantee them their intellectual property rights.

The case against patents

Given the strong case for patents, why would the economist suggest we should get rid of them?

The arguments against our system can be summed up in three points:

1) Patents do not actually lead to more innovation.

2) There are lots of negative side effects.

3) Any patent system will evolve over time to be better for established players and worse for new entrants.

Less innovation with strong patents?

Recall that patents are supposed to increase the incentives to innovate in the first place, and then make subsequent innovations (improvements) easier.

The article raises a few interesting examples of studies indicating that patents don’t always lead to more invention. For example, a study of inventions at international fairs in the 1800s  showed that the rate of invention was no different between countries with and without patent systems. In the 1970s, new rules that expanded the ability to patent crops didn’t lead to more R&D or increases in wheat yields.

After that, the examples get a bit weaker. According to the authors, prior to a new rule allowing German companies to patent new drugs, they invented more new drugs than British companies. Unfortunately, they don’t provide any details about what happened after the rule was changed, nor do they compare Germany to other countries.

The article is weakest when it quotes an article from 1851:

Most of the wonders of the modern age, from mule-spinning to railways, steamships to gas lamps, seemed to have emerged without the help of patents. If the industrial revolution didn’t need them, why have them at all?”

Nevermind that all of these inventions were patented: the spinning mule was patented in the 1700s, and the first automatic mule was patented in 1825, gas lamps were patented in the late 1700s/early 1800s, rail designs were patented, and steam engines were patented in the 1600s. It is easy to say patents “weren’t needed”, but since each of these components of the industrial revolution was patented, the burden of proof is on the authors to show that these would have been invented anyway.

As to whether patents encourage follow-on innovation, the authors of the paper also state that patents are written using confusing legal language, and therefore do not accomplish the goal of spreading knowledge of the invention. More interestingly, the authors state that companies instruct their engineers not to study existing patents, in order to protect them from claims of infringement. (If they didn’t know about the patent, they couldn’t willfully infringe.)

These authors, and the economist article, have provided some evidence that innovation isn’t increased by patents, but a few examples from the 1800s and anecdotal evidence about what happens at a few large companies leaves a great deal of further study to be desired.

Side effects

Both the article and the St. Louis paper make the case that the many negative side-effects of our current patent system are enough to warrant some major changes.

The article suggests that a patent system:

• restrains free trade
• restrains competition
• encourages fraud
• encourages rent-seeking
• creates arguments among inventors
• creates lawsuits
• allows patent trolls to stop inventions (block competition)
• enables patent trolls to “appropriate the fruits of the inventions of others”
• does not give security to “really good inventors”

There is ample evidence for each of these points, which leads many to agree that the system simply needs to be reformed to prevent these side effects. That brings us to the final point:

Evolution of the system

The article maintains that any patent system will devolve to encourage rent-seeking behavior as large, established players seek to protect their market share. These companies, they say, will use their leverage to lobby for rule changes that favor them, and that they can spend their substantial wealth to buy defensive patents and bring legal action (or the threat of legal action) to block smaller entrant firms.

The economist’s patent-free paradise

So what would the world look like without patents? The authors acknowledge that in some fields, like drug discovery, a patent system does encourage R&D spending. A better model, they suggest, would be a prize competition where firms who develop a new drug receive significant funding from the government. The drugs could then be manufactured by anyone, reducing the sale price of the drug, thereby reducing Medicare and Medicaid payments. Those welfare savings would more than pay for the prizes. While this sounds like a reasonable approach, I’m afraid it would fail in the details. While the government could announce a list of highly sought-after life-saving cures (say: malaria, HIV, specific cancers), how many prizes would the government set aside for drugs that improve the quality of life, like those that slow the progression of dementia, or treatments that aren’t covered by Medicare and Medicaid.

Closing Thought: Are patents different from copyrights?

Many of the same arguments for and against a patent system can be made for copyright protection as well. If the Economist is serious, maybe the newspaper should give up copyright protection on its content?