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Patents Are Not the Only Way to Finance Research

Sunday, 20 April 2014 05:44

Joe Nocera had an interesting column, based on a book by Lawrence Goldstone, that discussed how disputes over the Wright brothers' patents held up the development of the airplane. Unfortunately Nocera concludes the piece with a quote from Goldstone:

"That is, of course, the irony of the patent system. Without patent protection, a competitor can simply replicate an invention and undercut the inventor’s price — which necessarily includes all the time and expense of research and development — so the incentive to experiment and create is severely inhibited. But if innovators such as Glenn Curtiss [the Wright brothers' main competitor] cannot build on the progress of others without paying exorbitantly for the privilege, the incentive to continue to experiment and create is similarly inhibited."

In fact, patents are not the only mechanism for supporting innovation. The federal government spends $30 billion a year financing bio-medical research through the National Institutes of Health. It also funds research in other areas. Most of this research is directed towards more basic science, but it nonetheless has led to many important innovations. If funding were targeted for developing marketable products (possibly through private contractors) there is no reason for believing it would not be successful.

Given the enormous inefficiencies associated with patent financed research, we should be discussing alternatives. It is unfortunate that Nocera's article implies there are no alternatives to patent financed research.


Note: Thanks to Peter for calling this column to my attention. I also see from comments below that Lawrence Goldstone has explicitly argued that we need to pursue alternatives mechanisms to patents for financing innovation. This is encouraging.

Comments (8)Add Comment
Patent Alternatives
written by Lawrence Goldstone, April 20, 2014 7:29
Thanks for posting this comment. I don't, however, believe that Mr. Nocera's column implies that there are no alternatives to the patent system, nor does my book. Quite the contrary. I noted in a WSJ op-ed, "In something of an irony, the patent system, designed specifically to promote and protect innovation, has never been particularly adept in dealing with new technologies." As such, patent law will always be chasing the innovators. In these areas particularly, as you noted for bio-medicine, we need alternatives, both intra- and extra-governmental, that will allow innovation to flower without descending into legalistic minutia.
Patents are good for speculative ventures
written by Dave, April 20, 2014 7:47
I think that patents are best suited to very risky ventures by undercapitalized inventors. When the marketability of a product is difficult to know ahead of time, there needs to be a bigger reward to encourage a person to take that risk.

Drug companies have really abused the system, and I think patenting of drugs is most often counterproductive. The marketability of a good, well-tested drug is pretty easy to predict. Sure research often goes the wrong direction, but it should be easy for well-capitalized drug companies to smooth the bumps with shorter-term monopolies. Perhaps something like a 5-year limit to drug patents could help.

We need to pay more attention to the specific kind of risk that drug makers face. They would say they face litigation risks, and I believe this is one of their main reasons for demanding strong patent protection. Well, litigation risks should not be mitigated by monopoly rents. People die from bad drugs, and providing long-term monopoly rents to insulate drug companies from such catastrophic consequences doesn't really align the drug companies incentives with the population's desire to avoid being killed for profit.
Patent Laws Have Cannibalized Efficiency in an Age of Planned Obsolescence
written by Last Mover, April 20, 2014 9:12

The key word is "replicate". For example land property by definition cannot be replicated so it doesn't need protection by way of intellectual property rights. Land is protected instead by government law that controls physical occupation and crossover (and crossunder) rights.

However in economic terms, because some land is so much like other land, it can effectively be replicated by way of possession to do what that category of land does in general.

When some owners of land are better than other owners of land at producing whatever, they may be rewarded with more profit accordingly, which in no way can arise from "replicating" (read stealing) property from owners of land nearby without actually taking physical possession of it in a way that prevents the original owner of possession.

Not true for intellectual property because many can "possess" it at one time by way of replication.

So what does Dean Baker mean by alternatives to solve the problem of vast overprotection for intellectual property?

This has resulted in its overpricing to collect monopoly rent profit and create economic inefficiency on a scale of hundreds of billions not necessary to induce the creation, production and distribution of the product or service in question

Baker is trying to introduce competition back into the equation of capitalism. The same kind of competition that inspired the Wright brothers to achieve the first flight of sustained power. Market entry was wide open for anyone to attempt this.

The essential question going forward was how much future innovators need to do what the Wright brothers did - but no more. Airplanes today are a collection of thousands of patented components. Do these components compete with each other to keep prices low or act collectively to drive prices up loaded with monopoly economic rent as increasingly evident?

Why are proposals by Dean Baker to use a competitive framework to finance research ignored, in order to keep in place a system that systematically undermines competition in favor of monopoly power? Why aren't the makers who can make it best at the lowest cost allowed to do so under the traditional spirit of entrepreneural capitalism?

The answer is obvious. The power to replicate drives the scale economies to produce at very low unit cost. Capturing the power to replicate through abusive patent laws allows unit price to be set high above that low unit cost, much higher than necessary to induce production.

If the ownership and production of labor-intensive non-replicable yet similar land had evolved this way, there would be highly concentrated owners of each land category of production, each prior owner claiming the entire category constitutes a "replicable" economic property for which a patent fee is collected from each subsequent buyer of similar land. (Note this does not include traditional land rent.)

This would have blocked virtually any gains from cost reductions of whatever is produced on the land going to subsequent owners, diverted to prior owners instead.

Patent laws for replicable intellectual property reached a tipping point long ago to turn on themselves and suppress way more innovation than they enable at the margin, the latter widely hailed as "innovation" by sock puppets for the economic predators behind the cannibalism of competitive capitalism.

The sock puppets are actually praising a new wave of planned obsolescence by way of crowding out genuine innovation with predatory capitalism.
patent alternatives (2)
written by Lawrence Goldstone, April 20, 2014 3:37
Just to expound a bit more...I believe that government programs are, except for the obvious boondoggles, implemented because some mechanism in the private sector is not functioning for the public good. Medicare, for example. The problem, of course, is that, once in place, most programs, even the most honorable in purpose--like Medicare--will tend to take on a life of their own and will often cease to perform the function for which they were initiated. The only solution to the bureaucratic imperative, as I see it, is constant evaluation and reformulation to try to keep a program as consistent with its stated purpose as possible. Won't solve all the problems, obviously, but it's better than hand-sitting. With patents, in particular, they provide needed protection in some areas of the market, but become elephantine in others. I'd like to see that discrepancy addressed, either by government or in the private sector. (Not that I think it will happen but, hey, we all can dream, can't we.)
Joe Nocera sure didn't mention any alternatives to the patent system
written by John Wright, April 20, 2014 3:39
I read the Nocera column, and while he may not have implied there were no alternatives, he certainly did not list any.

The USA spends about $650 billion (year 2013) on the military, and one should consider if a large portion of this were allocated to public domain medical,industrial, energy, and agricultural research to benefit the entire world, perhaps the USA would be even more secure as a result.

Having well equipped and staffed research facilities and contracted research throughout the USA doing public domain research could truly benefit the world and the USA's image.

A shift away from military/homeland security expenditures might inspire new college graduates to pursue research rather than the parasitic financial industry.

Nocera's column does point out what is called the "tragedy of the anticommons" in which new innovations are inhibited because a new innovator can not economically get the rights to base innovations needed for a new design.

Furthermore, patents frequently seem to benefit only a large corporation. The small inventor has a costly struggle enforcing them. See Armstrong FM radio patent vs RCA, Kearns vs Ford on the intermittent windshield wiper, Roberts vs Sears on the push button ratchet wrench.

All of these involved large companies and lone inventors.

The Armstrong saga is documented here:
written by S. Ken Brown, April 20, 2014 5:31
Patents when wielded, are weapons for offensive or defense. When not used they are simply for ornament. The Wright Brothers true innovation was an engine light enough to power an airplane but of course that was not a useful patent. Anyone handy enough could build one in enough different ways to have a defensible argument. So they patented a dangerous and unstable airframe the defense of which held up aircraft development in the US for a decade. Most of the useful aircraft used in WWI were British, French, Spanish and German. The true usefullness of our patent system is as an orifice or check valve that energizes developers to go around it.
written by Review, April 20, 2014 6:36
So what are some good to patent financed research?

Very True Statement
written by jacobalvords, April 28, 2014 7:28
Yes you said very true here patents are not the way to finance research some other factors are also important.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.