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Home Publications Blogs Beat the Press Stiglitz Explains How Patent Protection Both Slows Growth and Increases Inequality

Stiglitz Explains How Patent Protection Both Slows Growth and Increases Inequality

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Monday, 15 July 2013 05:00

Very nice column from one of my favorite Nobel prize winning economists. Stiglitz explains some of the ways in which patent protection impedes growth and increases inequality.

It's great to see Stiglitz raising alternatives to patents for financing research, but I would disagree with the prize for patent buyouts that he proposes as being the best alternative. I have always preferred a system of direct upfront funding, which could be done through private firms operating on long-term contracts. In response to a number of requests, here is the argument in brief. (Here's a little longer discussion.)

First, I doubt very much that the prizes will typically go to the right person. As we know, and Stiglitz writes in his piece, innovation is inevitably a cumulative process. If we allow people to get patents and then have them bought up for a prize and put in the public domain, I have little confidence that we will typically give our prize to the person or company that had the key innovation. There may well be a situation where a great innovation brought research 99 percent of the way to the final product, but the main innovator was blind to the last simple step. A patent buyout system is likely to reward the last simple step, not the innovation that got us 99 percent of the way there.

I am well aware of the ideology that says we have to be able to find the "best" innovator, but this is just an ideology. Years ago when I was teaching, we had a small prize that went to the best undergrad econ major. Half of the faculty had one student who they considered outstanding, the other half had another student. There was no one who had both students. For some reason the prize could not be shared.

I proposed flipping a coin. Everyone laughed assuming that this was a joke. When I insisted that I was serious and that we had no rational basis for resolving this through discussion, my friends on the faculty politely dismissed my suggestion implying that it was close to crazy. Eventually, the louder voices got their candidate the prize.

This was a simple case, but that is the way it works all the time in the real world. Do we really think that it's important we hand large prizes (e.g. billions or tens of billions of dollars) to a person or company who we will credit with an innovation for which they may not deserve credit?

The other problem with a prize system is that it encourages secrecy in the research process before the prize is awarded. In order to have the best claim to getting a prize, researchers would not share their results until they have a patentable product. This could lead to much duplicative research and many pointless deadends. By contrast, if a condition of getting upfront funding is that all research results are made public as soon as practical then research should be able to advance far more quickly.

We could still have prizes in this system, but they would be secondary compensation like Professor Stiglitz's Nobel Prize. While I'm sure Stiglitz was happy to pocket a million plus dollar prize, he had already been paid for his work. Even if the Nobel committee had overlooked his contributions to economics, he need not have worried about going home without a paycheck.

Similarly, in a system of publicly funded research there is no reason not to include funding for many Nobel-type prizes. If someone has a great breakthrough in the treatment of cancer, malaria, or some other major disease, why not give this person $5 million or $10 million? But the point would be that their paycheck would not hinge on having a patent that the prize committee would then decide was worth some vast sum.

Anyhow, that's my two cents on the topic, but the key point is that we need to have the discussion. The abuses of the patent system are a daily occurrence. They cost lives, slow growth, and increase inequality. It's great that Stiglitz has raised the topic and that the NYT has run his piece.

Comments (10)Add Comment
The true motif
written by nassim sabba, July 15, 2013 8:22
Don't you think that Mr. Stiglitz worked diligently all his adulthood in order to get the Nobel Prize. He should tell us what else motivated him? Probably he is eying other prizes as he thinks of how we live together and what economic system would serve us best.

Thanks to the Nobel Prize, we have had his thoughts.
Spell Check
written by H. S. Rockwood III, July 15, 2013 11:32
It's "occurrence," not "occurance."
Have Patent, Will Sue
written by AlanInAZ, July 15, 2013 12:32
http://www.nytimes.com/2013/07...=all&_r=1&

I don't fully agree with Dean Baker's ideas about patent elimination, but there is no doubt that the system is currently screwed up.

Patents main benefit is to encourage the deployment of risk capital. I agree that they are not the prime generator of "innovation".
Joe Stiglitz
written by medgeek, July 15, 2013 12:37
Paul Krugman has called Joe "an insanely great economist" and I think he's a great human being as well.
The myth of "the best"
written by Jennifer, July 15, 2013 12:44
Agree that the idea of "best" innovator is really an ideology. Your example is interesting-most important research is collaborative by nature and pulls from many sources. Frequently the person who is gets the most credit is often the one that won that coin flip.
People who do this work are intrinsically motivated. Some years ago I heard a report about people who studied the psychology of lines. What the researchers found was the most important characteristic of a line was not that it moved the fastest but that it was perceived as "fair". Many researchers get put into certain lines of work because "that's where the money is". A fully public-funded research system that treated all important discoveries as worthy would lead to better outcomes and less gaming the system-all for less money overall from the public.
If Innovation is Cumulative Then Patents Are Not Necessary
written by Last Mover, July 15, 2013 1:50
A patent buyout system is likely to reward the last simple step, not the innovation that got us 99 percent of the way there.


Which implies that patents and even patent alternatives may not be necessary to incentivize what is claimed economically lost without them.

If the last person at the end of development chain gets undue rewards compared to those gone before, consider what could happen under effective competition with no patents at all.

Innovation could still emerge because incremental cost of completing creation at the margin is small, given the substantial costs already born by others.

In some cases the product in question could simply be waiting to be snapped up patent-free for production and distribution to market. In other cases it could be kept secret until a contract is made for the same purpose.

The point is the product would still be created absent patents to incentivize them. Otherwise why did all those losers still go through so much trial and error to benefit the few winners cumulatively at the end of the process? (If the answer is to pursue economic patent rent, then there were too many losers in the first place.)

Producers and distributors could provide patent-free incentives by competing on cost and price to get the product to market rather than compete wastefully to acquire the monopoly value of the patent designed to suppress competition. In this context no one could "steal" the product design unless they were the low cost producer and distributor.

If the product in question is unique and valuable with no substitutes, short term economic rent could be collected with would also stimulate market entry and competing substitutes over the long run with more patent-free alternatives. This would be a critical incentive to replace that claimed necessary from patents.

Of course the real value to be gained in eliminating patents lies in the current huge overhang of low hanging fruit in productivity gains snuffed out by patents themselves in tandem with highly concentrated market power.

Maybe there could be a temporary suspension of all patents in name of creative destruction, just to see what would happen. Of course given the obscene level of economic rent collected from patents and market power, combined with thousands of suppressed inventions, the market response would be overwhelming.

But that's the point isn't it. When patents are used to advance economic predation, it makes perfect sense to kill inventions and effective markets at the same time.
Slow growth, patents and other impediments to market entry
written by ddf, July 15, 2013 3:57
Besides impoverishing robots, excessive government debts or intervention, corporate pessimism and other chimeras holding growth down, a theme that has been getting a lot of airtime recently has been the dearth of significant technological innovation. But reading your columns makes me wonder if growth is held back by a lack of new disruptive technologies or rather if the introduction of disruptive technologies is held back by impediments to market entry such as patents. China under the Song Dynasty was technologically well ahead of the West but lost its advantage when its political and economic institutions became more extractive.. The US seems well on its way to becoming a more extractive society: patents, artistic copyrights but also bankers who are more focused on protecting their huge taxpayer-funded subsidies than on funding entrepreneurs, universities that have made education unaffordable to tomorrow's entrepreneurs... Surely this can't be good for growth...
Patents Are Necessary to Protect Innovation
written by Tom Stickler, July 15, 2013 8:48
While Baker may have a point about the patent system excessively rewarding patent winners in highly restricted fields like pharma, patents protect the competitive advantage that innovators should be able to enjoy.

Some of my personal patents were the result of innovative solutions to print quality and printer cleanliness. If not for patent protection, my company's competitors could easily reverse-engineer my innovations by examination of our products and make use of them at no expense, negating my company's competitive advantage.

On the other hand, there are manufacturing methods that can be retained as trade secrets and not disclosed in patent filings that can give a competitive advantage, but that advantage can only continue via diligent security.
...
written by watermelonpunch, July 15, 2013 10:15
Because printer cleanliness can save me from ovarian cancer, we should keep the patent system as is?

Or... ?
Re: patents are necessary to protect innovation
written by John Wright, July 19, 2013 11:59
A beneficiary of the current patent system may be less interested in changing the system.

It is similar to asking a high income earner if it is a good idea to increase their tax rate, the answer is predictably "no, it will hurt the economy".

Baker's point is that patents, and their enforcement, is a government policy that could and should be changed as necessary to maximize the common good.

I'm concerned that the US military will eventually be used to enforce USA intellectual property laws in foreign countries because the USA has converted to a pure rentier society that no longer manufactures and is living on past "innovation".

Perhaps a good, and unpatentable, innovation is to change the patent laws?

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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.

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