State of Innovation

Patents and Innovation Economics

CATO & Reason Demonstrate Ignorance of Property Rights – Patents

The CATO Institute are reiterating the findings of the flawed paper The Private and Social Costs of Patent Trolls , Boston University School of Law Working Paper No. 11-45, by James E. Bessen, Michael J. Meurer, and Jennifer Laurissa Ford.  This paper looks at lawsuits filed by NPE (Non-Practicing Entities) and the subsequent drop in the stock price of the company being sued.  The paper suggests that this loss of wealth is all “deadweight” loss, since little of the money ends up with the original inventors of the technology.  This last part is an intellectually dishonest slight of hand.  The authors make no attempt to determine if the cases are meritorious.  If the firms are infringing a valid patent, then the filing of the lawsuit represent the cost to society of deterring the theft of inventions.  This cost discourages further theft by companies.  If half the patent lawsuits (by cost) are meritorious then the net cost of these lawsuits is zero.  Unless you assume that the cost of protecting property rights has no value, which I am afraid is the ultimate problem with anti-reason people at Reason Magazine and CATO.  Neither of these organizations seems to understand property rights.

This lack of understanding of property rights causes multiple errors in both the paper and CATO’s and Reason’s analysis of this issue.  For instance, once you understand that patents are property rights you understand the purchase of patents by investors is not different that the purchase of a building from the builder.  The profits by the subsequent purchaser of the building are not “DEAD WEIGHT” costs and neither would a lawsuit by the purchaser to demand rent for someone squatting in their building.  When the (paying) occupancy rate for buildings is high this encourages the building of new structures.  The same is true for patents – when owners of patents receive good returns on their assets then inventors create more of these assets.

Unfortunately, the CATO Institute has become hopelessly lost on the issue of property rights.  They have adopted the Utilitarian point of view that property rights are just an efficient way of allocating scarce resources.  Professor Adam Mossoff has commented on this nonsense.  Mossoff states that Jeremy Bentham’s ideas are at the root of Libertarian’s attack on IP.  Bentham basic philosophy was Utilitarianism – the greatest good for the greatest number. Bentham stated that the reason for property rights was because of scarcity and conflict resolution not natural rights.  Mossoff then points out that the followers of Bentham argue that there is no conflict between people using the same ideas like there is with land.  Ideas can be copied and used endlessly.  This argument fails for because there is a conflict when a physical embodiment of the idea (invention) is created. The copier has clearly limited the return for the inventor and patent law only prohibits the physical embodiment.  I discuss the fallacies behind the scarcity theory of property at my post Scarcity: Does it Prove Intellectual Property is Unjustified and Scarcity -2 and Scarcity –3.  Mossoff points out that this is the philosophical point of view used by the Cato Institute and the Von Mises Institute to attack patents (IP).

Utilitarianism’s “greatest good for the greatest number” always leads to totalitarianism.  It also never leads to the purported goal.  The reason for this is that utilitarianism is merely a justification for short term actions.  Once something has been produced, it always looks like the greatest good is to redistribute the creation.  However, this is clearly only true in the short term.  In the long term it is clear that this always destroys the economy.  This is the theory behind the USSR, North Korea, and all socialist states.  As Ayn Rand pointed out you only need open your eyes to see that these countries do not produce the greatest good for the greatest number.  This is because stealing the product of one’s mind (mental labor is labor) is no different than banning free speech.  It stifles the mind, which source of all economic progress (values).

The CATO Institute’s article is under the header “Regulation.”  This again demonstrates that the CATO Institute does not know the difference between property rights and regulations.  Here are three easy questions for Libertarians, Socialists, and Economists to determine if a right is a monopoly (rent seeking) or a property right.

1) Does the right arise because the person created something?

2) If someone else was the creator would they have received the right in the creation?

3) Is the right freely alienable?

Patents meet all the tests of property rights.  They are not a regulation.  Enforcing property rights does not result in dead weight costs.

Another great article on this issue can be found at Gametimeip entitled Myopic Patent Cynicism.

February 3, 2012 Posted by | -Economics, -Philosophy, Patents | , , , , , , , | 1 Comment

Introduction to Trademarks

Trademarks have their origin in ancient history.  Manufacturers and artisans would place a mark on the goods they produced to distinguish it from competitors’ goods.  English common law recognized a tort (of unfair competition or passing off) for deceiving consumers by placing a competitor’s mark on your product.  The first recorded case in English law covering trademarks is Southern v. How, Popham 143, 79Eng. Reprint 1243, first reported in 1656.  The starting point forUS trademark law is the English common law on trademarks.

The policy behind trademark law is to prevent people from profiting by deceiving consumers as to the origin of a good.  In order to deceive a consumer the owner of the mark must have established in the marketplace that consumers associate the mark with the manufacturer’s goods.

Trademarks can develop into incredibly important intellectual property assets.  Image if McDonalds did not have an exclusive right to the name McDonalds ®.  How much would a franchisee be willing to pay for a franchise that had no exclusive right to the name McDonald’s ®?  Coca Cola company has a market capitalization of $110.4 Billion and total tangible assets of $25.3 B.  Thus the market values Coca-Cola’s intangible assets at $85.1 B.  Coca-Cola has two main intangible assets, its “secret formula” and its trademarks (Coke ® and Coca Cola ®).  The “secret formula” can probably be duplicated and therefor the trademarks probably account for most of the value of the intangible assets.

Trademarks are still recognized under the common law of most states.  The court will recognize a company’s trademark if they can show that relevant consumers associate the mark with the company.  When a company wants to let the world know that they believe they have rights in a mark, they use the ™ symbol with their mark.  This puts the world on notice that the company believes they have rights in that mark.  Note that the SM symbol may be used with a mark designating a service.  The law for service marks SM and trademark ™ is essentially the same.  In this post when I use the term trademark it means both trademarks and service marks.  In addition to common law trademarks, many states have statutory and registration processes.  This post will not focus on individual state registrations.

A federal trademark law was enacted in 1879 and found unconstitutional.  This effort was followed up by a trademark Act in 1881.  The present trademark statutes can be found at 15 USC § 1051 et seq. and are commonly referred to as the Lanham Act.  It is important to remember that the federal trademark statute only applies to trademarks used in interstate commerce.  This is because Congress only has the right to regulate interstate commerce under the constitution, US Constitution at Article 1, Section 8, Clause 3.  The Lanham Act provides for registration of marks used in interstate commerce.  When a mark is registered with the US trademark office, the owner may now use the ® symbol with their mark.  A federal registration has a number of advantages over relying on common law trademark rights.  For instance, by obtaining a federal registration it is a non-rebuttable “legal assumption” that the owner of the mark is using the mark through all states and territories of theUnited States.  15 USC §1057(c).  Federal registration of a mark also provides the owner with prima facie evidence of the right to use the mark exclusively.  15 USC §1155(a).  The term of a trademark is indefinite, however federal registrations must be renewed every ten years.  15 USC § 1059.  A trademark terminates when the owner abandons the mark.  The statute defines abandonment as three consecutive years of non-use.  15 USC §1127.

Continue reading

May 24, 2011 Posted by | Featured Videos, Trademark | , , , | Leave a comment

Great Again: Corp Tax Rate Driving Jobs Overseas

The excellent book Great Again by Henry R. Nothhaft with David Kline, points out that 2000 was the year in which the tax and regulatory burden in theUS reached a tipping point compared to other OECD (First World) countries.  2000 was also the year in which average corporate tax rates of OECD countries fell below theUS’s.  TheUS now has highest marginal corporate tax rate in the world (in most states) and our effective tax rate is 50% higher than the European Union average.  Is there any wonder why the US is losing high quality jobs to other countries?

The book’s identification of the year 2000 as the tipping point is ironic since this is also the year that I identified in my book as the tipping point for anti-technology startup regulations.  The book Great Again calls the decade from 2000-2010 the lost decade, let’s hope it is only a single lost decade.  Besides the negative effects of the US corporate and capital gains tax rates, the US has also significantly weakened our patent system and made it extremely difficult for startups to raise capital because of Sarbanes Oxley (although Dodd Frank only makes this worse).  The major asset of startups is their patents – legal title to their inventions.  Weakening our patent system has undermined this asset.

Some other interesting points made by the book include that a SBA (Small Business Administration) study showed that 1% cut in the corporate tax rate increases the number of start-ups by 1.5% and decreases the rate of failure by 8%.  A World Bank study showed that 10% increase in the effective tax rate results in 2.2% reduction in investment to GDP.

The policies necessary to grow high quality jobs and get our economy growing are clear.  The only conclusion is that the US is not interested in growing the economy, it is only interested in growing government power.

Great Again: Revitalizing America’s Entrepreneurial Leadership, by Henry R. Nothhaft with David Kline

May 19, 2011 Posted by | Featured Videos, Innovation | , , , , , , | Leave a comment

Adam Mossoff Lecture: Ayn Rand on Intellectual Property

The Ayn Rand Institute held a lecture on intellectual property (IP).  The talk was given by Adam Mossoff a law professor at George Mason University School of Law.  There are eight parts to the lecture.  I provide a short synopsis/comment about each video with a link below in case you want to skip to a particular section of the talk.  I have previously written on Ayn Rand’s views of intellectual property, see Ayn Rand on Intellectual Property.  My post is more about the issues of patent law, while this lecture is more about how IP is the most fundamental of all property rights.

Part 1 of 8: Introduction

This part is a general discussion of the state of the economy and how Ayn Rand’s ideas apply.  Mossoff argues that intellectual property has risen to prominence and discusses all the new advances in technology that are based on IP.  He explains that Leftists and Libertarians have joined in an all out attack on IP, particularly patents. He also argues that “Net Neutrality” is an attack on IP.  He notes that recent Supreme Court cases have significantly weakened patent rights.  He concludes with the idea that all property is really intellectual property.

Part 2 of 8: All Property is Fundamentally Intellectual Property

From this point forward the lecture focuses on patents and inventions.  Ayn Rand stated that patents are the heart and core of property rights.  The talk is about the moral justification for IP.  All property is based on two concepts: 1) the nature of value, and 2) man as a rational animal and his mind is his basic tool of survival.  It is only life that makes the concept of value possible.  Unlike other animals, man has to first determine what values are necessary to sustain his life using his mind.

Professor Mossoff seems to be making an argument that all products/services we use are/were inventions (products of the human mind).  They may have been invented a long time ago, but they do not exist in nature (separate from man) and therefore they had to be invented by man before they could be produced.  He then points out that human needs do result in the creation of products/services to fill those needs.  First, the solution to the need has to be invented and produced and only then can the need be satisfied.

The birth of Industrial Revolution corresponds with the creation of property rights in inventions, i.e., patents.  I make this point in my post, Source of Economic Growth.

Part 3 of 8: The Industrial Revolution

The Industrial Revolution was an explosion of inventions that occured when patents were created.  Daniel Webster argued that an invention is the product of the inventor’s mind and he has more rights to his invention than any other property.  Mossoff quotes a US judge in the 1800s who states that patents are a natural right.  Mossoff argues that theUSpatent system (first modern patent system) was the key reason theUSsurpassedEnglandas the driving force of the Industrial Revolution.  This explosion of inventive and economic activity in theUSamazed Europeans.

Ayn Rand in Atlas Shrugged refers to machines as the frozen form ingenuity.

Mossoff states that Jeremy Bentham’s ideas are at the root of Libertarian’s attack on IP.  Bentham basic philosophy was Utilitarianism – the greatest good for the greatest number.  Bentham stated that the reason for property rights was because of scarcity and conflict resolution not natural rights.  Mossoff then points out that the followers of Bentham then argue that there is no conflict between people using the same ideas like there is with land.  Ideas can be copied and used endlessly.  This argument fails for two reasons.  One, there is not conflict between ideas, but there is a conflict when a physical embodiment of the idea (invention) is created.  They the copier has clearly limited the return for the inventor.  Second, a specific purpose of patent laws is to spread the knowledge behind the invention so that other inventors can take advantage of this knowledge – so patents do not limit access to knowledge they increase it.  I discuss the fallacies behind the scarcity theory of property at my post Scarcity: Does it Prove Intellectual Property is Unjustified and Scarcity -2 and Scarcity –3.  Mossoff points out that this is the philosophical point of view used by the Cato Institute and the Von Mises Institute to attack patents (IP).

Utilitarianism’s “greatest good for the greatest number” always leads to totalitarianism.  It also never leads to the purported goal.  The reason for this is that utilitarianism is merely a justification for short term actions.  Once something has been produced, it always looks like the greatest good is to redistribute the creation.  However, this is clearly only true in the short term.  In the long term it is clear that this always destroys the economy.  This is the theory behind theUSSR,North Korea, and all socialist states.  As Ayn Rand pointed out you only need open your eyes to see that these countries do not produce the greatest good for the greatest number.  This is because stealing the product of one’s mind (mental labor is labor) is no different than banning free speech.  It stifles the mind, which source of all economic progress (values).

Part 4 of 8: Libertarians Assume Resources

Mossoff shows that Libertarians ignores the creation of these inventions.  They just assume they exist.  The Leftists version of this in theUSis the statement “theUSis the wealthiest Nation in the World” and therefore we should be able to afford X (national health care, social security, free education, fill in the blank).  Both groups ignore how and why these resources were created.

Libertarians deny the very foundation of all property rights in their attacks on IP – the rational mind.  Libertarians embrace the anti-mind collectivist premises that Leftist use to attack all property rights.  I made the same point in my book The Decline and Fall of the American Entrepreneur.

Part 5 of 8: Why the Utilitarian Defense of IP Fails

Mossoff points to the ACLU v. Myriad, see my post ACLU – Gene Patent Non-Sense.

Value creation is the source of property rights according to Ayn Rand.  Mossoff states that it is no coincidence thatRandin Atlas Shrugged had the state nationalize all patents in the infamous Directive 10-289.  It was because patents are the most fundamental of all property rights.  Man’s mind is the root of all material value ever produced in the world.

Mossoff argues that Locke’s labor theory of property is incorrect.  He argues that Locke was specifically talking about physical labor.  Note it takes calories and effort to perform mental labor, so the distinction between physical labor and mental labor is not that one involves the physical transform of the world.  (A similar point seems lost on computer programmers).  I would argue that Locke never intended labor to mean “physical labor” but productive effort in modern terms.  However, Locke also never clearly defined that all material values comes from the mind.

Part 6 of 8: Question -1

The question is from a teacher at theHenryGeorgeSchoolwho suggests that Kilby and Noyce’s decision to resolve the interference (who owns the patent) to the integrated circuit by not pursuing a patent resulted in faster development of the IC.  Mossoff points out that this is fallacy.  First, other people would have been inspired to design around the patents or license them and there is no evidence that the development of the IC would have been slowed down.  (Most patent attorneys will tell you that there has never been a patent that cannot be designed around eventually)  Second, the macroeconomic evidence shows that countries with weak patents are slow to adopt new technologies.  Third, Mossoff points to the Bayh–Dole Act, which was enacted because federally funded research was not being commercialized.  The reason it was not being commercialized was that the ownership rights were uncertain.  This is a typical tragedy of the commons problem.  Fourth, Mossoff points out that when the uncertainty about the ability to patent genetically modified life forms was removed in theUSthe biotech industry took off.  Biotech languished inEuropefor another decade because of their resistance to recognize patent rights in genetically modified organisms.

The questioner clearly did not listen to a single thing that was being said during the lecture.

Part 7 of 8: Question – 2 & 3

Another question from a teacher at theHenryGeorgeSchool.  He suggest that land is special.  He argues that the value of land is often enhanced by what is done around your parcel of land and has nothing to do the owner’s labor.  As a result, he argues that people should pay “society” a rent for the use of the land.  The questioner is confusing externalities with property rights.  Externalities and spillover benefits have been used over and over by socialists to justify stealing from producers for the socialists pet projects.  The questioner also confuses luck with property rights.  Just because someone is lucky and becomes wealthy does not justify stealing from them.

Mossoff points out that land has value because people used their mind to create value from land.  Land has no inherent value.

The next questioner asks about multiple people who contribute to the invention of a chair.  In patent law this is why patent are a right to exclude, not the right to make something.  This ensures that all contributors have rights to the invention.  If we did not have a right to exclude, then the final inventor (or first inventor) would be the only one who would receive an economic return.

Part 8 of 8: Question – 4 . . .

Is IP enforcement of copyrights censorship?  Mossoff points out that if a Leftist comes into your house and spouts off socialist nonsense it is not a violation of their free speech rights to force them to either leave or shut up.  The right to free speech does not give you the right to use someone else’s property.  The government’s enforcement of your property rights is not a violation of the 1st Amendment because you do not have a right to free speech while on or using someone else’s property.  Milton Freedman showed that free speech is actually impossible without property rights.

Another question suggests that IP slows down the adoption of new technologies.  There is absolutely no statistically valid evidence for this point of view.  There are anecdotal stories of this happening, but the actual evidence is that countries with weak patent rights have slower adoption rates of new technologies not vice versa.

April 24, 2011 Posted by | -Philosophy, Patents | , , , , , , , , , , , , , , , , , | 1 Comment

Could Apple Get Funded Today?

This intriguing question and its implications for US economic policy are tackled in the groundbreaking book Great Again, by Henry R. Nothhaft with David Kline.  They answer the above query with a series of questions:

Could a twenty-year-old college dropout, just back from six months in an ashram somewhere, attract funding for a capital-intensive venture based on the manufacture (yes, the manufacture) and sale of a $2,500 consumer product unlike any that had ever been bought by consumers before?  One whose potential uses were at best unknown, and possibly nonexistent?  And one for which the total current market size was exactly zero?

Not only could Apple not get funded today, it probably could not go public. Nor would Apple have received its first patent (USPN 4,136,359) in only 20 months.  The book asks “how many of today’s Apples are not getting a chance?”

The authors use the above example to make a broader point that theUSis failing economically and technologically because of the policies we are pursuing.  They show that all net new jobs created in theUSsince 1977 (and possibly longer) were created by startups like Apple.  All increases in real per capita income are due to new technologies and most revolutionary/disruptive technologies are created by startups and individual inventors.  So what are the policies that have undermined our economy, by undermining technology startups?

The book examines five areas:

1.Role of regulations.  The Authors show that our tax policies, Sarbanes Oxley and our indifferent (some might say arrogant) regulators’ application of well meaning regulations to startups is driving them either overseas or out of business.

2. Underfunding the patent office. This is costing theUS millions of jobs and billions in GDP.  According to the authors, each issued patent is worth 3-5 jobs on average, particularly patents issued to startups.

3. Manufacturing policies in the US.  Manufacturing is key, particularly in a world that does not respect property rights in inventions, to ensuring that theUS profits fromUS innovation and not other countries.  TheUS is also losing the global battle for human talent.

4. Battle for global talent. Our restrictive immigration policies are depriving theUS of talented entrepreneurs such as Andy Grove, founder of Intel.

5. Funding for research.  The book shows that our spending on basic science and engineering is not only declining as a percentage of GDP, but the system has become short-term oriented and bureaucratic.

While this book tackles complex issues, it is a quick easy read.  It is full of interviews from entrepreneurs, venture capitalists, and technologists who built America’s technology startups over the last three decades.  Great Again provides numerous real life examples to illustrate its points.

This pioneering book shows how the US can create jobs and increase per capita income.  The policy prescriptions are based on solid science.  Just cutting government spending (balancing the budget) will not cause theUSeconomy to grow vigorously, we need pro-growth policies.  The authors are some of the few people that understand what policies are needed for the US to be GREAT AGAIN.

Great Again: Revitalizing America’s Entrepreneurial Leadership, by Henry R. Nothhaft and David Kline

April 18, 2011 Posted by | Innovation, Patents | , , , , , , , , , , , , , , , | Leave a comment

Are Transaction Costs for Patents Too High?

I was confronted with the statement that there are “Hugh transaction costs related to patents.”  This statement implies the assumption that these transaction costs are unjustified.  I disagree with the premise, but since all systems can be improved I will provide a number of specific proposals to reduce the transaction costs.

The alternative proposed by the author of this statement, was to shorten the length of patents and increase government funding of R&D.  The proposed system of government funding for research is not effective substitute for patents.  The history of government funding for research is mixed at best and much more expensive than patents.  The US patent system is completely funded by user fees (in fact Congress has been stealing user fees to pay for their pet projects).  The patent system has been significantly more effective at stimulating innovation than government funded projects – see Zorina Khan’s work including her book The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920 (NBER Series on Long-Term Factors in Economic Development) also see The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention, by William Rosen.


Litigation Costs:  There has been a very effective propaganda campaign to suggest that the patent litigation is out of control.  The implication is that there is an explosion in patent litigation.  This is just not true.

“The real facts of the so called litigation crisis are that for the past two decades the number of patent lawsuits commenced annually has been about 1.5 percent of all patents granted. In 2006, it was 1.47 percent. This is business as usual. Most patent lawsuits, moreover, settle before trial. In 1979, some 79 percent of patent cases settled before trial, while in 2004 almost 86 percent did. Matters are actually improving.

Also, the U.S. has few patent trials. For instance, in 2001 only 76 patent lawsuits were tried and only 102 went to trial in 2006. By no measure can 102 patent trials be considered a national litigation crisis. The annual report of Federal Judicial Caseload Statistics, which is on the Internet, provides the factual antidote to false claims of a litigation crisis ( caseload2006/contents.html).” see

Even though this data is a little old nothing has changed in the last several years.  In a $14.4 trillion economy built on technology this is anything but a litigation crisis.

There is also a myth that there is a patent quality issue in the US.  This is not supported by the facts.

“As to the massive numbers of “unworthy patents” argument, the real-world test is how many patents are challenged and the outcome of those challenges. Between 1981 and 2006 the USPTO issued more than 3.1 million patents. In that period, 8,600 were challenged at the Patent Office through inter partes and ex parte reexaminations. The number challenged amounts to less than three-tenths of one percent. Of those challenged, about 74 percent resulted in claims narrowed or cancelled. In addition, almost 60 percent of the relatively few patents challenged in a court trial are sustained.

My point is that the USPTO’s work is certainly not perfect, but the Patent Office is also not pouring out a stream of bad patents.”

By every objective measure: R&D per patent, GDP per patent, and number of citations per patent patent quality is increasing.  See and

Cost and Time to Obtain a Patent: When Edison applied for his light bulb, he received a patent in 3 months.  The reason it takes so long to obtain a patent today is because Congress has been stealing money from the Patent Office.

I have an angel investor friend who was a highly successful entrepreneur who complained that when he invested in a company he did not know about hidden prior art and this created a large amount of uncertainty.  He supported the idea of publication of patents.  However, the answer was not publication of patents, which breaks the social contract, but fully funding the patent office – as the Edison example above proves.

Disingenuousness of Libertarian Argument about Costs of Patents:  All property rights systems have some costs involved in them.  GE employs 600 attorneys to comply with tax laws, it probably employs another 600 to comply with SOX, discrimination laws, environmental laws, health and benefit laws.  However, it probably employs less 100 patent attorneys.  Their patent costs are a drop in the bucket compared to dealing with tax and other regulatory laws.  The Libertarian attack on patents in light of all the other burdens imposed on business is disingenuous.

Patents are property rights and companies’ purposeful infringement of other people’s property rights is not a regulatory burden, it is the result of purposeful belief that they can get away with the theft.  It is called efficient infringement.  See “Technology Theft as a Business Strategy”


Patent Litigation: While patent litigation costs are similar to litigation costs generally, there are a number of things that can be done to make the system more efficient.  Some are changes to government and some are private sector initiatives.

Secondary Market/Title Insurance for patents.  Before the advent of title insurance it was very expensive to buy a piece of land.  You had to pay an attorney for a title report that did not come with any insurance.  Lawsuits over the boundaries of real property were epidemic before the advent of modern survey tools.  Patents are in the same position where no title insurance has been created.  Unfortunately, antitrust law undermined the first efforts to create a title insurance/secondary market for patents.  Patent pools were a way to determine the validity of patents, enforce patents, and widely license the patents in a cost efficient manner.  But the antitrust idiots said that they were illegal.  Today, Luddites are using the rallying cry of “patent troll” to kill off the beginning of a secondary market – see For more information see Jump Starting a Secondary Market for Patents

Accelerated Patent Court:  A new court similar to the ITC that has expertise in patents and accelerates the patent litigation process is needed.  The court should be sufficiently funded and have procedures that allow patent cases to be resolved in under a year.  Perhaps the court would be limited to issuing injunctions as a remedy as opposed to economic damages.  The goal of this new court is to establish the US as the premier arbiter of patent rights.  The US is the best positioned country to protect patent rights, despite our recent history.  This would increase the US’s standing as a technological leader in the world and draw innovative companies and people to the US.

Judges:  Appoint judges with technical backgrounds and who have passed the patent bar to adjudicate patent cases.  Judges without these qualifications make silly mistakes, such as stating that any invention that is just a combination of known elements is suspect whether it should obtain a patent.  All inventions are combinations of known elements – it is called conservation of matter and energy.  You cannot create something from nothing.  (For more on the Supreme Court’s ignorance see )

Patent Acquisition

Patent Reciprocity: One of the largest costs of obtaining patent protection is foreign filing.  Patent reciprocity would significantly reduce this cost.

If you drive your car across the border into Canada you do not lose title to your car.  If you take your manuscript across the border into Canada you do not lose the copyright to your manuscript.  But, if you take your invention across the border into Canada, you lose your patent protection and anyone can steal the invention – not the physical embodiment, but the underlying invention.

Patent reciprocity would automatically provide patent rights in a foreign country when you obtained a patent in the US and vice versa.  This idea was first proposed by the US in the mid 1800s according to B. Zorina Kahn’s book “The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920“. Unfortunately, the idea died and since then patent rights have been part of the convoluted process of trade negotiations.

Patent reciprocity would significantly increase the value of patents and increase the value of research and development.  As a result, it would spur investment in innovation.  Reciprocity would increase the valuation of technology start-up companies in all countries that participated.  It would also increase per capita income.

Eliminate Maintenance Fees: Maintenance fees are the major cost associated with a patents filed outside the US.

Maintenance fees are a backhanded way of introducing a “working requirement” to patents.  Working requirements for patents have always been rejected in the US.  These fees favor large entities and reduce the effective life of patents.

A strong patent system pays for itself several times over in increased tax revenues from increased economic activity.  The supply side returns from a strong patent system probably exceed the return resulting from lowering the capital gains tax.

Reduce Formalism in Patents:  A large part of the cost of obtaining and litigating a patent is overly formalistic requirements.  The Non-obviousness requirement should be repealed.  It is not logically a part of the definition of an invention and is the source of uncertainty, and increases the cost of both obtaining and enforcing/defending patent lawsuits.  For more information see Non-Obviousness a Case of Judicial Activism

Some of the other overly formalistic requirements include the rules on restrictions, the inequitable defense, and the silly requirements related to section 101.  Restrictions are required for trivial differences that are embodiments of the same inventive idea.  The doctrine of equivalents has been dead for over a decade.  Formalism over logic rules in the realm of inequitable conduct.  USC 101 issues related to software inventions also place form over function that require absurd recitations to computer hardware.  All of these formalistic requirements favor patent thieves at the expense of real innovators.

April 15, 2011 Posted by | -Philosophy, Patents | , , , , , , , , , | 1 Comment

Monopoly/Rent Seeking vs. Property Rights/Intellectual Property

Here are three easy questions for Libertarians, Socialists, and Economists to determine if a right is a monopoly or a property right.


1) Does the right arise because the person created something?

Creation is the basis of all property rights.  The law is just recognizing the reality that the person is the creator and without that person the creation would not exist.  This is consistent with Locke’s Natural Rights and Ayn Rand’s Objectivism.


2) If someone else was the creator would they have received the right in the creation?

This ensures that the right does not arise from political favoritism.


3) Is the right freely alienable?

Freely alienable means that right can be sold, transferred, divided, leased, etc.  This is a key feature of property rights.


Let’s see how this applies to some common property rights, some monopolies, and rent seeking systems.


Land: 1-yes, 2-yes, 3-yes.

Some people may be confused about why question 1 is a yes with respect to land.  Clearly no one created land.  That is true, but the reason that the person owns the land is because they improved it.  This was the major criteria for receiving land under the Homestead Act.

Now some people may complain that most of us do not obtain title to land because we improved it.  This is true, but we had to create something and trade this for money.  This money was then used to buy the land.  Because property rights are freely alienable, they can be transferred for other property.  As a result, creation is still the reason we own the land.

Thus a right in land is a property right.

Note in the modern world land is usually not completely alienable because of various regulations.  However, this is an encroachment on property rights but does not change the underlying fact that rights in land are property rights.


Utility Grants: 1-yes, 2-no, 3-no

Utility grants includes electric utilities, water utilities, cable television, etc.  In all cases, the company that receives the right has to build something (electrical power system, water purification and distribution system, or cable system.  As a result, the answer to question one is yes.  However, if someone else created a utility system in the same geographic area they would not receive the same right.  Utilities receive their legal rights not because they created something, but because a political entity selected the particular organization.  The grant is generally not alienable.  If the present holder of the utility right wants to sell, lease or subdivide their utilities rights, they have to get permission from a political entity.

Thus utility grants are monopolies not property rights.


Patents: 1-yes, 2-yes, 3-yes

You obtain a patent because you created an invention.  If someone else had created the invention, they would have received the patent to the invention.  Patent rights can be sold, leased and subdivided.

Patents are property rights.

Note that you have to apply for a patent in order to obtain it.  The same was true for land under the Homestead Act.


Mineral Rights: 1-yes, 2-yes, 3-yes

You obtain mineral rights because you discovered minerals at a particular location.  Much like land in the modern world most mineral rights are purchased, but this is still the result of creation.  If someone else had discovered the minerals they would have received the right.  Mineral rights can be sold, leased, subdivided etc.

Mineral rights are property rights.


Professional licenses: 1-no, 2-yes, 3-no

Professional licenses include medical licenses, legal licenses, cosmetology licenses, etc.  You obtain a profession license because you proved a mastery of certain knowledge and fulfilled other bureaucratic requirements.  You do not obtain a professional license because you have created something.  If someone else proved mastery of the subject matter and fulfilled the other bureaucratic requirements they could also receive a license.  Professional licenses are not alienable at all – they cannot be transferred, sold, subdivided, etc.

Professional licenses are pseudo monopolies or rent seeking devices.  They clearly do not limit the market to one provider, but they do limit the number of providers in a market.



Antitrust Law

Modern antitrust law turned the law against monopolies on it head.  The Statute of Monopolies limited the power of the Crown (government) to interfere with private property rights.  The Statute of Monopolies excluded patents for inventions because they result from the creative act of the inventor and therefore are property rights.

On the other hand modern antitrust law increases the power of government to interfere with private property rights.  The underlying theory of antitrust law is the efficient market hypothesis.  The hypothesis postulates that wealth is created by falling prices for existing goods and services and this is result of competition to sell existing goods and services.  However, this is not true.  Increases in per capita income are the result of increases in technology – inventions.  Antitrust law undermines the incentive to create and invest in new technologies and therefore hurts our economic health.


April 14, 2011 Posted by | Innovation, Patents | , , , , , , , , | 2 Comments

The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention

This book has an extremely intriguing title.  The book’s goal is to explain why the Industrial Revolution happened and how it happened.  The book explains that there are over two hundred theories for why the Industrial Revolution occurred.  The author points out that most of these theories miss the most obvious point, “which is that the Industrial Revolution was, first and foremost, a revolution in invention.” (Italics in the original)  It further explains, “For a thousand centuries, the equation that represented humanity’s rate of invention could be plotted on an X-Y graph as a pretty straight line.  . . .  Then during a few decades of the eighteenth and nineteenth centuries, in an island nation with no special geographic resources” it changed.  Ultimately, the Industrial Revolution was a perpetual innovation machine.

The author explains that England’s patent laws democratized invention and this combined with the advent of limited liability companies and the new capital markets resulted in an explosion of new inventions that created unimaginable wealth.

“The best explanation for the preeminence of English speakers in lifting humanity out of its ten-thousand-year-long Malthusian trap is that the Anglophone world democratized the nature of invention.

In England, a unique combination of law and circumstances gave artisans the incentive to invent.  . . .  Human character (or at least behavior) was changed, and changed forever, by seventeenth-century Britain’s insistence that ideas were a kind of propertyThis notion is as consequential as any idea in history.” (emphasis added)

The United States went on to create the first modern (non-archaic) patent system that was considerably more democratic (this is small d democrat) than England’s.  This was a major reason why the U.S. became a world economic power in less than 100 years.  Unfortunately, the U.S. is presently considering legislation, the America Invents Act (aka Patent Reform), that will again make inventing undemocratic and the province of the wealthy.

The book explains the history of patent law, the history of the science of steam (thermodynamics) as well as the history of the technology and economics of steam engines.  The writing style is easy to read and very informative.  Despite the bold initial statements in the book, it really focuses on the story of the Industrial Revolution instead of supporting its thesis.

The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention, by William Rosen.

April 12, 2011 Posted by | -Economics, -Philosophy, Innovation, Patents | , , , , , , , , , | Leave a comment


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