The Case Against Patents
The case against patents can be summarized briefly: there is no empirical evidence that they serve to increase innovation and productivity, unless the latter is identified with the number of patents awarded – which, as evidence shows, has no correlation with measured productivity. This is at the root of the “patent puzzle”: in spite of the enormous increase in the number of patents and in the strength of their legal protection we have neither seen a dramatic acceleration in the rate of technological progress nor a major increase in the levels of R&D expenditure [..]
A closer look at 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. Both theoretically and empirically, the political economy of government operated patent systems indicates that weak legislation will generally evolve into a strong protection and that the political demand for stronger patent protection comes from old and stagnant industries and firms, not from new and innovative ones. Hence the best solution is to abolish patents entirely through strong constitutional measures and to find other legislative instruments, less open to lobbying and rent-seeking, to foster innovation whenever there is clear evidence that laissez-faire under-supplies it [...]
A second widely cited benefit of patent systems – although not so much in the economics literature – is the notion that patents are a substitute for socially costly trade secrecy and improve communication about ideas. From a theoretical point of view the notion that patents are a substitute for trade secrecy fails even in the simplest model. If a secret can be kept for N years and a patent lasts M years then an innovator will patent exactly when N <= M. Hence, only those things will be patented for which the secret would have emerged before the patent expired, while those for which the secret can be kept will not be patented. [..] It is also the case that modern “disclosure” in patents is negligible – it is essentially impossible to build a functioning device or software program from a modern patent application [..]
The related idea that patents somehow improve communication about ideas – a notion key to the “public-private” partnership between governments and private research organization in which the government funds the research and then gives the private organization a monopoly over anything developed in the course of research – is backed neither by theory or evidence. It is impossible to study the history of innovation without recognizing that inventors and innovators exchange ideas as a matter of course and that secrecy occurs, in those cases in which it occurs, only in the final stages of an innovation process, when some ambitious inventors hope to corner the market for a functioning device by patenting it. A good case in point is that of the Wright brothers, who made a modest improvement in existing flight technology which they kept secret until they could lock it down on patents, then used their patents both to monopolize the U.S. market and to prevent innovation for nearly 20 years [..] The role that Marconi and his patent played in the development of the radio is altogether similar [..]
The conventional view starts with competitive equilibrium and observes that welfare losses from small price variations are quadratic as a function of the price, hence grow very slowly as the price increases. In the case of full monopoly – as is the case with patents – we are not interested in small price deviations from competition but rather we are interested in pricing near the top of the profit function. Witness for example the fact that patented pharmaceutical products often sell for hundreds of times the marginal cost of production as some astonishing pricing differences between the US and the European markets show. Here social loss increases nearly linearly with prices, while the deviation of profits from the maximum are quadratic. Hence small price increases have a only a small effect on profits – although still worthwhile from the perspective of the monopolist – with substantial social loss. It is impossible to observe the behavior of modern IP monopolists without recalling this theoretical prediction. Most of the copyright wars revolve around measure to prevent piracy, empirically a relatively minor factor as far as profits of media corporations are concerned [..] In the case of patents, and particularly pharmaceutical patents, the situation is even more severe [..T]he empirical study of the Quinolones family of drugs [..] measures the economic consequences to India of the introduction of pharmaceutical patents for this family of drugs and concludes that the consequence to third world India will be nearly 300 million USD in welfare losses [..]
Patenting has exploded over the last decades. [..]. In less than thirty years, the flow of patents roughly quadrupled. By contrast, neither innovation nor R&D expenditure have exhibited any particular upwards trend, not to speak of factor productivity [..]
One could argue that purely defensive patenting is pretty harmless – after all it costs only about $40,000 to file a successful patent application, and doing it on a large scale may make it cheaper. However the acquisition of large patent portfolios by incumbents creates huge barriers to entry. [..]
There is little dispute among economists that a well-designed patent system would serve to encourage innovation [..] but, again, there is little dispute among economists that the patent system as it exists is broken. ... As we will document in the next section, in our view the evidence is instead clear that the patent system taken as a whole does not play an important role in spurring innovation [..].
If a well-designed patent system would serve the intended purpose, why recommend abolishing it? Why not, instead, reform it? To answer the question we need to investigate the political economy of patents: why has the political system resulted in the patent system we have? Our argument is that it cannot be otherwise: the “optimal” patent system that a benevolent dictator would design and implement is not of this world and it is pointless to advocate it as, by doing so, one only offers an intellectual fig-leaf to the patent system we actually have, which is horribly broken. [..]
Now we need to provide some support for that initial empirical statement: if there is to be any rationale for patent systems, with all their ancillary costs, it must be that they actually do manage to increase innovation and productivity. What is the evidence? How can we say so definitively that there is no evidence that patents have the desired effect? [..]
Except for two of the possible specifications (see below) there is, in general, no statistically significant correlation between measures of productivity (both labor and TFP) and patenting activity (both number and citations). This is a more surprising result than one would expect on the basis of purely theoretical considerations. In fact, one would expect patents to be at least a decent predictor of productivity growth across sectors, certainly for the last couple of decades during which their use was extended to more and more sectors. This finding leads us to conjecture that the use of patents either as a defensive or as a rent seeking tool [..]
I was able to replicate the regression [geek] with fixed effects, accounting for year and industry [/geek] between TFP and number of patents per year - see code, data ref is also there. TFP is total factor productivity [geek] the portion of output not explained by the amount of inputs used in production, so its level is determined by how efficiently and intensely the inputs are utilized in production [/geek].
Indeed as the paper says the relationship is weak as to be non-existent.