This is a review of Carl Menger’s book Principles of Economics published in 1871. I will be judging this book on three criteria: 1) Is it adhering to the philosophy of science? 2) Does it address the question of what is the cause of real per capita increases in wealth? and 3) Does it address the question of what was the cause of the industrial revolution? These last two questions are the most important in all of economics and it is impossible to write something that is profound if it does not address a profound question. I will also be analyzing Menger’s “subjective” theory of value and prices.
Philosophy of Science
Menger addresses this issue in the Preface. He discusses the remarkable advances of the hard sciences and the high regard in which they are held. He also laments that economics is held in very low regard.
This method of research, attaining universal acceptance in the natural sciences, led to very great results, and on this account came mistakenly to be called the natural-scientific method. It is, in reality, a method common to all fields of empirical knowledge, and should properly be called the empirical method. The distinction is important because every method of investigation acquires its own specific character from the nature of the field of knowledge to which it is applied. It would be improper, accordingly, to attempt a natural-scientific orientation of our science. (P.47)
Menger however never states why it would be improper to use the philosophy of natural sciences. He implies that he is using the “empirical method” however he never explains what he means by that. The rest of the book has almost no empirical evidence in support of Menger’s positions. Menger’s lack of clarity on this point is consistent with much of the rest of the book. This means that it is often possible to argue that Menger held two contrary positions and find support for both in this book. This in and of itself is support that Menger did not follow the philosophy of science, however it is a useful rhetorical tool. In addition, his major protégé, Ludwig Von Mises, explicitly rejects the philosophy of science, in favor of philosophical rationalism.
Menger’s major intellectual influence was Franz Brentano, an Austrian philosopher best known for his works related to psychology. Brentano wrote a book entitled Perception is Misception, in which he claims that perception is erroneous. “In fact he maintained that external, sensory perception could not tell us anything about the de facto existence of the perceived world, which could simply be illusion.” Since Menger considered Brentano a friend and intellectual influence and Menger did not refute this position, it is reasonable to assume that Menger was sympathetic to Brentano’s anti-perception idea. This anti-perception point of view is very reminiscent of Plato. Plato’s ideas are not consistent with science.
The overwhelming evidence is that Menger did not follow the philosophy of science. This means that none of the major Austrian economists, Menger, Von Mises, or Hayek based economics on the philosophy science. Austrian economics is not a science.
Source of Economic Growth
This section, The Causes of Progress in Human Welfare p. 71, is the part of Menger’s book I consider most important. It also appears to be the payoff for pages of description of first, second, third, etc. order goods. Even Menger admits that his definition of these is a bit vague, however first order goods appear to be consumables or consumer goods. Menger argues that economic growth is the result of creating more second or high order goods. This is just a long winded way of saying increasing capital goods causes economic growth, which had already been said by many other economists. Not only has this already been said by other economists, but it is wrong. He also has one throw-away line about human knowledge.
“Nothing is more certain than that the degree of economic progress of mankind will still, in future epochs, be commensurate with the degree of progress of human knowledge.”
He never builds on this, he does not explore how human knowledge is created, how it results in increases in economic wealth, or what knowledge is important to economic growth. His followers, such as Mises also do not build on this, they all focus on increases in savings and capital as the cause of growth in the economy.
In a technologically stagnant economy adding more capital at best can lead to some sort of optimum output, but can never exceed this level. (I describe and provide evidence for this in much more detail in my book Source of Economic Growth). As a simple example, imagine Robinson Crusoe fishing with a spear. The spear is a second order good or higher under Menger’s approach. Now if Crusoe creates more spears will he have more fish? No, since he can only use one spear at a time. At best having more spears will allow him to replace his spear more quickly if he breaks or loses a spear. Another example is that if every farmer that can use a tractor has one, then giving them more tractors will not increase the production of first order goods. This has been shown empirically and Robert Solow’s paper (Solow, Robert M, Technical Change and the Aggregate Production Function, The Review of Economics and Statistics, Vol. 39, No. 3 (Aug., 1957), pp. 312-320) is just one of many that prove this.
Menger fails to answer the question of what causes real per capita increases in wealth.
Menger never mentions the industrial revolution in this book. The Industrial Revolution is the first time that people escape subsistence living (the Malthusian Trap) in large numbers. It is the most significant event in the economic history of the world and Menger shows no interest in it. By the time Menger wrote Principle of Economics the Industrial Revolution was at least seventy years old and had exploded in the United States. This shows a profound disinterest in the empirical side of economics. It would be like an astronomer ignoring and eschewing the telescope or biologist who refuses to do or even explore the results of dissections.
Menger does not compare the economies of different countries or the economy of a country at different times, despite the profound differences in the economies of countries around the world. This is not how a scientist thinks or works. Instead Menger examines propositions in his own head, like the monks of the middle ages arguing over how many angels can dance on a pin head. Menger’s style is completely consistent with Mises praxeology – philosophical rationalism.
The cause of real per capita increases in wealth is increasing levels of technology (new inventions) and the cause of the Industrial Revolution is legally enforceable property rights for inventions (patents) as William Rosen, shows in his excellent book The Most Powerful Idea in the World and I show in my book Source of Economic Growth.
Menger does not discuss inventions, technology, knowledge, patents or their importance in economics. Menger fails to add anything useful to the two most important questions in all of economics.
Menger is generally credited with the idea of subjective value in economics. This is described as a reaction to the labor theory of value described in classical economics, which is an intrinsic theory of value. Despite this many people have argued that Menger was not advocating a subjective theory of value. Note that when modern Austrians use the term subjective value they mean that values are disconnected from reality – they are peoples’ arbitrary decisions. The interesting thing is that in his Principles of Economics you can find support for both positions. For instance, if you want to argue that Menger was advocating an objective theory of valuation you can provide the following quotes:
Value is thus the importance that individual goods or quantities of goods attain for us because we are conscious of being dependent on command of them for the satisfaction of our needs. p. 115
Value is therefore nothing inherent in goods, no property of them, but merely the importance that we first attribute to the satisfaction of our needs, that is, to our lives and well-being, and in consequence carry over to economic goods as the exclusive causes of the satisfaction of our needs. p 116
Menger also makes this distinction between real and imaginary goods. He appears to be making a point about objective values, however he never does anything with these concepts once he introduces them.
Note that Menger never defines what he means by needs. Are needs anything someone wants? Menger never says. Then he talks about the satisfaction of needs. Is this a personally, subjective decision? Menger never says.
On the other hand if you want to say Menger was advocating the modern value subjectivism of Austrians, then you can find these quotes.
It is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men. It is, therefore, also quite erroneous to call a good that has value to economizing individuals a “value,” or for economists to speak of “values” as of independent real things, and to objectify value in this way. P. 121
The measure of value is entirely subjective in nature, and for this reason a good can have great value to one economizing individual, little value to another, and no value at all to a third, depending upon the differences in their requirements and available amounts. What one person disdains or values lightly is appreciated by another, and what one person abandons is often picked up by another. P. 146
Hence not only the nature but also the measure of value is subjective. Goods always have value to certain economizing individuals and this value is also determined only by these individuals. P.146
Another factor favoring the subjective theory of values is that Menger is clear that ethics and morality are outside the study of economics.
But it seems to me that the question of the legal or moral character of these facts is beyond the sphere of our science. P. 173
Here he is talking about the morality of charging interest, however it is clear that this statement is a more general statement about economics. This suggests that Menger’s ethics, like most Austrians, is some version of Utilitarianism, which means he rejects Locke’s and Rand’s Natural Rights. Another quote that supports this point of view is Menger’s ideas of property.
The entire sum of goods at an economizing individual’s command for the satisfaction of his needs, we call his property. His property is not, however, an arbitrarily combined quantity of goods, but a direct reflection of his needs, an integrated whole, no essential part of which can be diminished or increased without affecting realization of the end it serves. P.76
Property, therefore, like human economy, is not an arbitrary invention but rather the only practically possible solution of the problem that is, in the nature of things, imposed upon us by the disparity between requirements for, and available quantities of, all economic goods. P. 97
The first quote is really Menger’s definition of property. Note that this over 200 years after Locke. It is a clear rejection of Locke and Natural Rights.
The second quote is a forerunner of the inane idea that property “rights” are socially useful tools for allocating scarce resources adhered to by Austrians.
Menger’s position on subjective value is confused. Note that this is not the work of scientist, which shows once again that Menger’s ideas are not based on the philosophy of science. Despite this Menger’s rejection Natural Rights, rejection of ethics in economics, and the direction his students took suggests that on balance Menger was an advocate of the radical subjective theory of value.
I undertook this task because a number of people I have respect for argued that Menger was not the same as Hayek or Von Mises. In addition, a number of well-known Objectivists have tried to reconcile Austrian Economics with Objectivism. I have analyzed in depth the irrational roots of the two main branches of Austrian Economics: 1) Hayek and 2) Von Mises. I have shown that the positions of Austrians on a number of positions are absolutely flawed including their position on property “rights”, the Austrian Business Cycle, their position on fractional reserve banking, and their position on intellectual property. Carl Menger has not proven to be the savior of this fall from grace. This is not to say that other schools of economics are better or that there is nothing useful in Austrian economics. For instance, Menger’s marginal utility is a useful concept, but hardly profound.
I found Principle of Economics boring, repetitive, and written in the pseudo-scientific style of many pop management books or psychological self-help books. This is consistent with other books I have read by Austrians. The best writer among the major Austrians is Hayek.
I did not force myself to read every word of Principle of Economics because it is boring, repetitive, and non-scientific. I will not apologize for not reading all of a book that is clearly not based on science. I also will not waste my time reading anymore books by Austrians. I know more about the underlying tenants of Austrian economics than many of its proponents, just as I know more about the underlying tenants of christianity than many of its proponents.
Objectivism and Austrian economics are incompatible. I think many Objectivists are fooled into supporting Austrian economics because they talk about free markets. Austrian economics is not the product of reason, the Enlightenment, and the philosophy of science. It is best described as a branch of the Scottish “Enlightenment”, which really was a counter enlightenment movement. If Objectivism wants to make progress in economic science it needs to wall itself off from Austrian economics.
 https://mises.org/library/philosophical-origins-austrian-economics, The Philosophical Origins of Austrian Economics, Mises Institute, by David Gordon, June 17, 2006.
Opponents of patents often like to refer to them as a monopoly, which is a thoroughly discredited idea (see here, here, here, here, and here). Another argument they often raise is that “real” property rights do not expire, they go on in perpetuity. Since patents and trademarks expire after a certain period of time, they cannot be true property rights.
To answer this question, it is necessary that examine the nature of property rights more carefully. You obtain property rights in something because you made it productive or created it. Of course you can also trade your rights in something you created for currency and then contract to buy something else, thus obtaining property rights in the item. Your rights in say land are limited by the activity you undertook to obtain those rights. For instance, if you farmed the land and say put a house on it, then you have a right to continue those activities and ones reasonably related to them. However, this does not mean that your property rights extend to the center of the earth or up infinitely into space. It also does not mean you can put a huge pigsty on the edge your land next to your neighbor’s house. Note this was/is true under common law, no need for regulatory law or home owners’ associations.
Property rights are part of the system of natural rights, which are based on the foundation of self-ownership or self-sovereignty.
Is man a sovereign individual who owns his person, his mind, his life and its products – or is he the property of the tribe …
Capitalism: The Unknown Ideal, What is Capitalism, p 10.
Locke also based natural rights on self-ownership or self-sovereignty. These ideas are not axioms but derived from observation and logic. You obtain property rights in something because you created it or made it productive. Since you own yourself, you own those things you create, however the limits of your property rights are determined by what you created (made productive) and some practical legal implications.
When it comes to land, most people obtain property rights in the land because they farmed it or made it useful for habitation or both. These property rights do not go on forever as commonly conceived. Dead people cannot own something, only living people can have property rights. When a person dies their property rights expire including their property rights in land. The heirs do not acquire the property rights in the land (assuming they were not an active part of making the land productive), they just receive the first right to acquire the property rights in the land, by making it productive. If they are unable to make the land productive or they are otherwise not a productive people they will quickly have to sell the land to someone who can make it productive.
You might argue that the law does not precisely follow the philosophical basis of the law and that would be correct. However, the law has to consider factors that the pure philosopher does not, for instance, efficiency, evidentiary issues, and certainty of title. If the ownership of land and other property were not passed to the heirs in the form of first right to acquire, then every time someone died there would be a free for all to acquire the land, etc. This would lead to fights, both legal and physical. This would defeat the legal goals of efficiency, evidentiary clarity, and title clarity. However that is not to suggest that the system we have “inherited” for the disposition of estates is perfect or the best.
In the case of patents/copyrights the most philosophically correct position for the length of a patent/copyright (from this point forward I will just discuss patents) would be the inventor’s life. However, this would cause all sorts of practical patents. The patent for a first inventor could issue and one day later the inventor could die, while another inventor could live for another seventy years. This would be unjust. More importantly it would make it very difficult to verify if a patent was still active. Last it would make it very risky to invest in company built around an invention that was patented. Imagine that you are asked to invest in company whose main asset is an invention that could be worth hundreds of millions of dollars, however if the inventor dies tomorrow the company would lose its most important asset. These practical realities of the law mean that patents should have a certain set period of time. The patent cannot go on in perpetuity because the inventor’s heirs cannot make the asset productive as in the case of land, so they cannot reacquire the patent rights. The US has tried out a number of different term lengths for patents. Presently, it is 20 years from the date of filing and that makes it essentially uniform with the rest of the world. My suggestion would be to make the term of a patent closer to half a person’s life, since most people do not invent things as a child and there is absolutely no macroeconomic evidence that stronger patents have ever inhibited the economy.
 Rand in other places states that Rights are based on the right to life. She necessarily had to mean the right your own life, to be consistent with inalienable rights. It is clear that she was not opposed to the idea of self-ownership and did not see this inconsistent with the idea of natural rights. It is also easier to understand natural rights from a self-ownership point of view than a right to (your own) life.
 It is beyond the scope of this paper to explain the derivation of natural rights by Locke and Rand.
Dale B. Halling’s new book Source of Economic Growth is now available. This book examines the two most important questions in economics: 1) What is the source of real per capita economic growth, and 2) What caused the industrial revolution? The industrial revolution is important, because it is the first time any large group of people escape subsistence living (Malthusian Trap) and their incomes start to grow. By examining these questions, the book devises a science of economics that is consistent with natural rights, the founding of the United States, and is tied to the biological reality of life.
Mr. Halling gave a related talk at Atlas Summit 2015 entitled The Source of Economic Growth. No school of economic thought is consistent with Objectivism, which is why Ayn Rand, in the very first sentences of “Capitalism: The Unknown Ideal”, said “This book is not a treatise on economics. It is a collection of essays on the moral aspects of capitalism.” Patent attorney and novelist Dale Halling proposes a science of economics that is consistent with Rand’s philosophy. The path to that understanding of economics results from examining the source of real per capita increases in wealth, which puts man’s mind at the center of economics. No other school of economics puts emphasis on man’s mind, which is one reason why Rand had a tenuous relationship with even free market economists.
The Economist has printed another of their fantasy articles on patents entitled “A question of utility.” Gene Quinn has written a great article showing the numerous inaccuracies in The Economist’s article entitled “What ‘The Economist’ Doesn’t Get about Patents.” The Economist article argues that patents were irrelevant to the industrial revolution. Mr. Quinn shows the fallacy of this statement, but I want to amplify on what he said. The industrial revolution started in England and the United States, which were the two countries with functioning patent systems. The industrial revolution was not about industry but about a continuous invention revolution as the book “The Most Powerful Idea in the World” illustrates. Modern ‘New Growth Economics’ has shown that the only way to increase real per capita incomes, is to increase our level of technology and that means creating new inventions.
My new book Source of Economic Growth tackles these important questions specifically it answers these two questions: 1) What is the source of real per captia increases in wealth? And 2) What was the cause of the industrial revolution? I provide overwhelming evidence that new inventions are the only way to increase real per capita incomes and property rights for inventions, i.e., patents, are the only way to provide a high enough level of inventing to escape the Malthusian Trap and enter the Industrial Revolution.
The Austrians, such as those on the Von Mises website, like to tout that they are pro-freedom, capitalists, and arch enemies of the socialists and Keynesians. Strangely enough this means that they have aligned themselves with socialists in opposing property rights for inventors and attacking Locke’s ideas on property. Even more fundamentally the Austrians seem to share intellectual roots with the socialist or more broadly the post-modernist movement, which is a reactionary movement opposing the enlightenment, reason, and science. I have written on Fredrick Hayek’s anti-reason, anti-natural rights, moral relativist positions in Hayek vs. Rand: Patents and Capitalism.
However, Hayek was not the only Austrian with post-modernists roots. Von Mises was clear that values and prices are subjective. By this the Austrians do not mean that they are personal or that each person puts a different value on things, they mean unconnected in anyway with reality. Von Mises also said that economics is a value-free science. This may sound high-minded, but science is not value free. Science starts with an objective reality, demands logic and evidence, and morally requires that scientist report data accurately. These positions of Von Mises place him firmly in agreement with the post-modernists (socialists, Keynesians). Some people think I am misinterpreting the Austrian position so here is a video of a talk from the Mises University that demonstrates that the Mises people are serious about the subjective theory of value. They are not saying it depends on your circumstances, they are saying there is no connection to reality between prices or values in economics. The meat of the video starts at 7:35 in which the speaker states “value is just a state of mind.” At 7:57 he is clear that value has no extensive property, which means it is not related to the real world. 8:16 the speaker states that all we have is a state of mind – that value exists only in the mind of the individual. 9:23 value is a state of mind. 9:54 there is no relation between the external world (reality) and the judgments of our minds – this is as clear as it will get that the Austrians are ignoring reality and believe economics is separate from reality. 11:14 The speaker describes profit as subjective.
Of course this position cannot logically be held to be true so you will find contradicting statements in the talk. Just like people who deny reality, meaning they deny A is A, the position cannot be held without contradiction. But since they deny reality matters in economics, they free themselves from the science of non-contradictory thinking – logic. This makes the Austrians consistent with the post-modernist (socialist) movement. I cannot say that every Austrian economist makes this mistake, but it is the accepted position of the modern Austrian school of economics and it got its start with Von Mises.
The speaker is trying to destroy the intrinsic theory of value. Classical economists followed the labor theory of value which is an intrinsic theory of value. According to this theory the value of an item is the sum total of the labor that went into the item. The Austrians are correct that the classical economists’ position was incorrect, but their solution is no better. They want to say value is determined without reference to the real world – that is it is all in the mind of the valuer, while the classical economists said value could be determined without reference to the valuer. Both are nonsense. Objective valuation has to take the position of the valuer and the item being valued into account. Ayn Rand has a great explanation of this topic in Capitalism the Unknown Ideal starting on page 13 I believe.
Capitalism is based in reality, reason, and the ethics of natural rights. Austrians are not capitalists.
An article on Cato Unbound entitled, “What’s the Best Way to Fix the Patent System’s Problems?” by law professor Christina Mulligan, argues for two different solutions of what she perceives are problems with software patents. One solution advocated by Eli Dourado is to eliminate all software patents (See CATO and Mercatus Center: Another Flawed Study on Patents). The other solution, advocated by John F. Duffy, is a more rigorous application of the obviousness standard. Ms. Mulligan comes down on the side of Eli Dourado’s solution of eliminating patents on software.
What is amazing is that Ms Mulligan never even addresses the inherent contradiction that if you are going to eliminate patents of software you have to eliminate all patents on electronics. Of course this may be because Ms. Mulligan does not have a technological background, she is not a patent attorney nor is she legally or factually competent to be a patent attorney. Software is a way of wiring an electronic circuit. Any invention implemented in software executed on a computer can be implemented in hardware (i.e., an electronic circuit) as any competent electrical engineer knows. In fact, this is exactly what happens when software is executed, it is converted into a series of voltage levels that open and close switches in a general purpose electronic circuit called a computer to create a specific electronic circuit.
Ms. Mulligan quotes the clearly incorrect statement that:
Many software patents are merely mathematical formulas or abstract ideas and should not be considered patentable subject matter because they remove too much “raw” material from the public domain.
This statement confuses two separate points. One point is that many software patents are merely mathematical formulas or abstract ideas. The second point is that software patents remove too much raw material from the public domain. The idea that any software patent is a mathematical formula is complete and obvious nonsense to anyone who has worked with computers. While it is true that software often uses mathematical formulas, so do electronic circuits, radar, rockets, mechanical systems, chemical processes, in fact almost every area of technology.
Ms. Mulligan does not define what she means by an abstract idea. In one sense every invention in the history of the world is an abstraction. Inventions define a class of things. For instance the invention of the incandescent light bulb is not a specific incandescent light bulb, but the class of these objects. The only logical definition of an abstract idea is “a thought or conception that is separate from concrete existence or not applied to the practical”. Every invention that meets the requirements of 35 USC 112 first paragraph is not an Abstract Idea, since this section requires that the invention be described in a manner so one skilled in the art can practice the invention. Something that can be built and used (practiced) is concrete and applied, therefore it is not an abstract idea. Clearly software patents are not abstract ideas because they are concrete and applied to a problem of life. If they did not solve a problem of life, then no one would care, because no one would want to practice their invention.
The second point is that they remove too much raw material from the public domain. This is a bald statement without any support. In fact, patents do not remove any material from the public domain. They secure the property rights of an inventor to their invention that did not exist before they created the invention. To suggest that this removes anything from the public domain would make even the most strident Marxist blush.
Ms. Mulligan attempts to use Ayn Rand in support of her position.
Even Ayn Rand sidestepped suggesting a length for intellectual property terms, stating that if intellectual property “were held in perpetuity . . . it would lead, not to the earned reward of achievement, but to the unearned support of parasitism.
Of course she forgets to mention that Rand stated “Patents and copyrights are the legal implementation of the base of all property rights: a man’s right to the product of his mind.” You can see from this statement that it is very unlikely that Ayn Rand would have supported Ms. Mulligan’s position.
More importantly, all property rights are term limited. A dead person cannot own property. Property is a legal (moral) relationship between a person and something. Once the person is dead they cannot have a legal relationship to something on this Earth that would be a contradiction. There is only a question of what happens to property relationship when someone dies. But no property rights go on forever.
Ms. Mulligan also ignores the obvious Constitutional problems with a law prohibiting patents on software or any other group of inventions. Article 1, section 8, clause 8 requires that the right of inventors to their inventions be secured. There is no basis under the Constitution to discriminate between securing the rights of inventors for chemical inventions, but not to software inventions for instance. Ms. Mulligan may argue that the preamble to article 1, section 8, clause.8 is a limit on patents, but this is a clear misinterpretation of a preamble under legal construction. Preambles are never considered limiting in law. In addition, if the founders intended such a limitation then they would have said Congress can take whatever steps they believe will promote the sciences and useful arts.
Ms. Mulligan’s arguments do not stand up to scrutiny. Part of the problem may be that Ms. Mulligan is not a patent attorney. But some of the problems are so outrageous, especially for someone who is a Yale Law professor that the only conclusion is that she has a political agenda.
The United States of America created the strongest patent system in the world. Most of the greatest inventors in the history of the world, Edison, Tesla, Bell, etc. lived and worked in the United States. In less than 100 years, they created the most technologically sophisticated country ever. Almost every modern product you use today was subject to a patent or a patented processes at some point. Your cell phone is the subject of hundreds of patents. The same is true of your computer, the Internet, the power system, the medicines your take, the car your drive, even your glass windows (Venice patent system), even cement. For Ms. Mulligan to suggest that patents on software or anything else inhibit the progress of technological is an extraordinary claim and requires extraordinary evidence. Ms. Mulligan has failed to provide even a scintilla of evidence and logic for her position.
The CATO Institute attacks patents in an article entitled What Is a Software Patent?, by Christina Mulligan. The article argues that the word “process” in the patent statute should be limited to those processes that have an effect on matter. The article suggests that this would eliminate the “wrong” kind of patents. Software is not patentable, per se, software is a set of written instructions and are just bad prose. When people use the term “software inventions” they are talking about executing the software in hardware (electronic circuits). What the software does is define the connections or wire the general purpose electronic circuit that we call a computer. This special purpose electronic circuit consumes energy, generates heat, causes electrons to move – in short, it has an effect on matter. The whole premise of the article is based on a lack of understanding of what software is. Logically, the article has to address the issue that all “software inventions” are electronic circuits and therefor the article’s position requires that it explain why certain electronic circuits should be patentable and other electronic circuits should not be patentable. It should be noted that the author is not a patent attorney, has never written a patent or a claim, nor does she appear to have a technical background. While this is not absolutely required, it leads to the obvious mistakes made in this article.
The Constitution requires Congress to protect the rights of inventors to their inventions. There is no justification for the distinction made in this article. An invention is a human creation with an objective and repeatable result. For instance, the incandescent light bulb always puts out light when electricity of the right voltage and current is applied. Art is a human creation with a subjective result. Software enabled inventions are clearly a human creation and they have a repeatable, objective result. The first patent ever issued in the US was for a Method of making potash and it was a method of doing business. The inventor was not making potash as a hobby, he planned to make a business of it. The label of “business method patent” is thrown around commonly, but never defined as it is not in this article. All patents are about a method of doing business.
The article ends with praise for Mark Lemley. Another law professor who is not a patent attorney, is not legally or factually competent to be a patent attorney, has never written a patent, has never written a patent claim, but somehow knows that we should not use “functional claiming.” Mr. Lemley does not even know what functional claiming is. What he appears to mean is that the claims should have to include every little step or element in the invention. This would mean that if you were writing a patent about cell phones, you would have to claim the individual transistors. Patent law had determined that this made no sense and as long as, for instance, heterodyne receivers were well known you could claim the heterodyne receiver without claiming the individual transistors or even explaining the invention to this level of detail. Patent law is right on this point and Lemely and the author are clearly wrong.
As a patent attorney, with a BSEE, an MS in Physics and twenty years of practicing patent law, it would be nice if CATO, when discussing patents and patent policy would actually include those who are factually and legally competent to be patent attorneys in technical discussions about patent law, including defining what software is.
Dale B. Halling
What Is a Software Patent?, by Christina Mulligan.
The paper, Patent Trolls: Evidence from Targeted Firms, by Umit G. Gurun and Scott Duke Kominer assumes that NPEs are enforcing patents of questionable validity. However, the paper offers no proof of this and does not even try to justify this position. Once you start with that position, it is a foregone conclusion that any litigation is unjustified and wastes resources. However, the initial assumption is not proven and in fact many papers have shown the opposite. If you do not start with this assumption then the paper’s whole argument falls apart. Litigation losses by operating companies are a justified return to the inventor and their investors. The operating companies are not victims, but victimizers and the return to inventors and their investors encourages more inventive activity.
The paper’s big conclusion is:
“Specifically, in the years following litigation, firms against whom cases are dismissed produced spent on average $211 million (t = 1.96) more on R&D expenditures than firms that lost to NPEs. These firms also spent on average $49 million more (t = 2.95) to acquire more in process R&D from outside.30 Furthermore, in the years following litigation, firms against whom cases are dismissed produced 63.52 more new patents (t = 2.96), and these new patents received 723.98 more citations (t = 3.45), relative to the group of firms that suffered the cost of NPE litigation.31 These large differences in R&D expenditure, patent production and in the quality of produced patents do not appear until after NPE litigation.”
Inherent in this statement is that anytime an operating firm that loses a patent litigation case to a NPE is a bad result. If the firm was stealing an invention, then the fact that they lost is a good thing.
The companies that lost in litigation spend less on R&D according to the paper. Perhaps that is because they were not as inventive to start with, perhaps it is because they decided to focus on manufacturing and purchasing their R&D from outside inventors, and perhaps it is because they lost a substantial amount of money. These are not dire results or unexpected results or necessarily bad results.
The paper implies that NPE lawsuits result in less spending on R&D, but just because firms that lose patent lawsuits spend less on R&D in the years immediately following, does not mean that total R&D is down. When inventors see their rights are upheld then they are encouraged to spend more time inventing. Unless you measure the amount spent by independent inventors or inventive firms who now see their rights upheld, you cannot draw that conclusion. These comments also apply to the citation differences. The authors are only looking at the microeconomic system that they care about, but you cannot draw the macroeconomic conclusions they do, because they don’t consider all the macroeconomic effects.
The paper does not define what a NPE is. It starts with this surprising conclusion, “We show that NPEs on average target firms that are flush with cash (or have just had large positive cash shocks).” They needed a study to tell them that? Of course NPEs focus on companies with cash on hand, why would they waste their time suing companies that could not pay them? Especially after the eBay decision, in which they are unlikely to get an injunction.
The paper goes on to state:
“A new organizational form, the non-practicing entity (hereafter, NPE), has recently emerged as a major driver of IP litigation. NPEs amass patents not for the sake of producing commercial products, but in order to prosecute infringement on their patent portfolios.”
Edison, Tesla, Bell, Amstrong ‘amassed patents.’ In fact, most of the US’s greatest inventors were just inventors. They did not create patents ‘for the sake of producing commercial products.’ They specialized in being inventors and let manufactures concentrate on manufacturing. All of them were involved in numerous lawsuits. The difference between them and today’s inventors is that the courts were much more likely to uphold their rights to their inventions. As a result, manufacturers were much quicker to license inventions. In fact, one study showed that in the late 1800’s an inventor’s chance of monetizing their invention if they received a patent was around 85%. In other words they made money specializing as inventors. Today that figure would be less than 2%. Because courts allow companies like Google, Microsoft, Samsung, etc. to get away with stealing other people’s inventions, they make the calculated risk that it is better to go to court than pay an inventor a licensing fee. As a result, inventors often have to team with someone with a deep pocket in order to get large corporations to pay them the licensing fees they deserve. In fact, large companies such as IBM, Microsoft and others will also often team with people who are experts in licensing or litigation.
Division of labor is generally considered a positive in economics. The fact that this paper is arguing against it means that it has to give extraordinary proof for its extraordinary claim. The attack on NPEs is really an attack on the profession of inventing. A uniquely American profession.
This is not an academic paper, it is a propaganda paper pretending to be science.
Patent Trolls: Evidence from Targeted Firms, by Umit G. Gurun and Scott Duke Kominer
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