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Free Kindle Version of The Decline and Fall of the American Entrepreneur

Get your free Kindle version of the book that explains why the US has lost its innovation engine – The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation.   This offer is valid through Sunday, June 24th.   The book provides simple, inexpensive suggestions for how to rev up the US’s innovation engine.

This book explains how little known laws passed within the last decade have crippled America’s innovation.  This resulted in the stagnation in median family income that was a major contributor to the housing crisis.  The evolving sovereign debt crisis, which promises to make the housing crisis look trivial by comparison, is also being exacerbated by this dearth of innovation.  The book provides simple, inexpensive suggestions for how to rev up the US’s innovation engine.

 

What Reviewers are saying about The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation. 

 “Dale Halling’s Decline and Fall of the American Entrepreneur makes a compelling case for the need to reform regulatory and other policies that hamstring entrepreneurial innovation in our country. Everyone concerned about the decline in American innovation should read this book.”

David Kline, Coauthor of “Rembrandts in the Attic” and “Burning the Ships”

 

I do not review books on the Net unless I find them well-written and especially informative, which certainly applies to Dale B. Halling’s The Decline and Fall of the American Entrepreneur.

Nonetheless, I do have a criticism directed towards the publisher. My copy did not contain a vita of the author, which in this case is a major omission. Mr. Halling is a physicist, lawyer and an expert on patents and entrepreneurship, all of which comes through in his book. This author delivers the goods. A vita in subsequent printings would be useful.

Mr. Halling combines two topics — the impediments to entrepreneurship that have been created by theU.S. government as an unintended consequence of its pursuit of other goals and the systemic weakening of theU.S. patent system by the U.S. Supreme Court and the Congress.

The resulting technological stagnation is a major reason theU.S. has gone from producing 25 percent of the World’s Gross Product in the mid 1990s to about 20 percent today. The loss is significant – about $3 trillion of U.S. GDP in 2009 alone.

He demonstrates in clear terms the linkages between economic growth, productivity, and income. And he lays out how technological advancement has always been the American advantage in global competition, an advantage that theU.S. is squandering.

He explains how the Sarbanes Oxley Act cut off the waves of venture investment that did so much to stimulateU.S.growth in the 1980s and 1990s, and he also explains how shifts in accounting rules as per stock options directed many of our most creative people into less than innovative activities.

His final chapter contains some straight forward recommendations that involve no direct-cost regulatory changes that would once again stimulate more innovation, investment and job creation inAmerica. Amazingly, Congress is now considering a so-called “patent reform” legislation that would further diminishU.S.innovation. The author convincingly explains how this would damageU.S.innovation. He also explains the consequences of recent Supreme Court decisions on patent law. My observation is that theRoberts Courtis the most anti-patent set of Justices inU.S.history. Once Congress understands what the Court has done, their decisions need to legislatively overturned.

In sum, this is well-written, jargon-free, 137-page book that is a quick read. It evidences smart and practical thinking by an author with real world experience. I highly recommend it.

Dr. Pat Choate, economist, former Vice Presidential running mate of Ross Perot 1996, Director of the Manufacturing Policy Institute, Phd. Economics University of Oklahoma.

 

The Decline and Fall of the American Entrepreneur presents the issues facing technology start-up companies in today’s environment.  The book sheds light on the underpinnings of these issues and is enthralling.  Halling’s tight, accessible and personal style make this a fast and compelling read.  His book is a political clarion call that should be heard now.

Greg Jones

Former President Ramtron International (RMTR) and CEO Symetrix Corporation.  Both companies founded on IP.

 

This book conclusively establishes the link between innovation and per capita income, and shows that we have recently entered into a time in which innovation is under assault.  This assault has resulted in a predictable loss of income and contributed significantly to the economic woes we are experiencing right now.  The book’s sound policy recommendations suggest a way to turn the economic ship around to set a course for a return to prosperity.

Peter Meza, Patent Attorney – Counsel Hogan & Hartson, Attorney for Alappat –  In re Alappat

 

 

 

 
Trade Deficits, The Economy, and Intellectual Property

Donald Trump is fond of saying that China is stealing our economy from us and he attributes this to China manipulating its currency.  Here is an article, Counterfeit Chinese Parts in US Military Weapons, that would appear to support his point of view.  The article explains that counterfeit Chinese parts are found in U.S. military weapon systems and the implication is that this is happening even more widely in the US economy.  Pat Choate’s excellent book Hot Property: The Stealing of Ideas in an Age of Globalization, documented this problem.  Counterfeit products are not the result of currency manipulation but lax enforcement of intellectual property rights.  Our politicians talk a lot about protecting our intellectual property, but ten years ago they required U.S. inventions be published for all the world to see and steal at 18 months from filing a patent application.  They passed the America Invents Act this year which made it easier to challenge patents issued in the U.S. and effectively eliminated the one year grace period.  Congress is a bunch of hypocrites when it comes to intellectual property, they only want to protect Hollywood and software copyrights. They have done everything in their power to undermine our inventors, who are much more important to our economy than Hollywood.

The U.S does have a legitimate complaint with China, but it is not currency manipulation it is the theft of our Intellectual Property – particularly our inventions.  Here is what Congress should do to revive our economy and protect our inventors.

1) Repeal the publication requirement for patents

2) Demand that China and other countries require reciprocity for patents. This means that if you receive a patent in the U.S. it is enforceable in China and vice versa without the cost of filing a patent application in every country around the world.  The present situation with respect to patents is exactly the position that existed with respect to copyrights in the 1860s.  We realized that it made no sense for copyrights and it makes no sense for patents to only apply in each country.

3) Fully fund the Patent Office.  It now takes from 3 to 10 years to obtain a patent.  This is severely hurting our technology startup companies.  When combined with the publication requirement it has allowed China and the rest of the world to steal our technology.

4) Apply tariffs to those sectors of Chinese goods that have consistently violated U.S. intellectual property rights.

 

 
My Book: The Decline and Fall of the American Entrepreneur Now Available on Kindle

The The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation , is now available in Kindle format for only $7.99.

Book Highlights:

*New US laws since 2000 are killing US Innovation

*Explains why the venture capital model is dying.

*Innovation is key to creating high quality jobs

*Innovation is key to increasing real per capita incomes of Americans

*How to make the US the innovation leader of the world again

 

What others are saying about the book

Mr. Halling combines two topics — the impediments to entrepreneurship that have been created by the U.S. government as an unintended consequence of its pursuit of other goals and the systemic weakening of the U.S. patent system by the U.S. Supreme Court and the Congress.

The resulting technological stagnation is a major reason the U.S. has gone from producing 25 percent of the World’s Gross Product in the mid 1990s to about 20 percent today. The loss is significant – about $3 trillion of U.S. GDP in 2009 alone.

He demonstrates in clear terms the linkages between economic growth, productivity, and income. And he lays out how technological advancement has always been the American advantage in global competition, an advantage that the U.S. is squandering.

Dr. Pat Choate, economist, former Vice Presidential running mate of Ross Perot 1996, Director of the Manufacturing Policy Institute, Phd. Economics University of Oklahoma

 

“Dale Halling’s Decline and Fall of the American Entrepreneur makes a compelling case for the need to reform regulatory and other policies that hamstring entrepreneurial innovation in our country. Everyone concerned about the decline in American innovation should read this book.”

David Kline, Coauthor of “Rembrandts in the Attic” and “Burning the Ships”

The Decline and Fall of the American Entrepreneur presents the issues facing technology start-up companies in today’s environment.  The book sheds light on the underpinnings of these issues and is enthralling.  Halling’s tight, accessible and personal style make this a fast and compelling read.  His book is a political clarion call that should be heard now.

Greg Jones, Former President Ramtron International (RMTR) and CEO Symetrix Corporation.  Both companies founded on IP.

This book conclusively establishes the link between innovation and per capita income, and shows that we have recently entered into a time in which innovation is under assault.  This assault has resulted in a predictable loss of income and contributed significantly to the economic woes we are experiencing right now.  The book’s sound policy recommendations suggest a way to turn the economic ship around to set a course for a return to prosperity.

Peter Meza,Patent Attorney – Counsel Hogan & Hartson, Attorney for Alappat –  In re Alappat

 

 
Patent Reform Briefing to Senate Staff

There a number of youtube videos on the USBIC Briefing on Senate Consideration of House Patent Reform Bill H.R. 1249.  These videos provide invaluable insights into the America Invents Act.  Below I highlight some of the interesting points.

See http://www.youtube.com/watch?v=EPS9ORdD9DQ&NR=1

http://www.youtube.com/watch?v=As6bCYbp7d4&feature=related

 

Judge Michel, “I can guarantee you that if I went into private practice I could hold up any patent for almost a decade in post grant proceedings, it would never get to trial in the district court.”  The value of patents will plummet because of this, since they are not enforceable for almost a decade.

Judge Michel

The funding problem not being solved is the biggest problem.  The patent office will likely lose at least $100M next year.  The continuing resolution funding bill this years has killed the Patent Offices’ budget to hire examiners, fix their IT infrastructure, and create a satellite office.  It is inevitable that there will be another continuing resolution funding bill this year.  The 15% increase in Patent Office fees are going to be nothing but a tax on inventors.

First to file system: large corporations already act under this system.  But, this will hurt small companies and start-ups.  The advantages of first to file, if any, are more than offset by the funding issue and the post grant procedure.

The idea that this bill will create jobs is a joke.  If you want to create jobs, you need to clear the backlog of 1.2 million patent applications.  Passing this bill will slow down the process of granting patents, so it will not create jobs.

First purpose of patents is to disseminate technology information

Second purpose of patents is to incentivize investment.

Delays and backlog have increased during the time that Congress has been considering patent reform.

Fee diversion began in 1992.  In 2010 there was over $50M in fee diversion and in 2011 $85M, and it is likely that over $600M will be stolen from the patent office in 2012.  Without access to fees, the Patent Office will become a job killing agency, not a job creating agency.

The patent system isn’t broken, the patent office is broken because of the diversion of patent fees.

Fatal defects of the legislation includes section 18 (business method patent – Wall Street giveaway), section 14 (no patents on tax strategies), parts of section 5 (prior commercial use – trade secret protection system), parts of section 6 (post grant review).

Thomas Edison got his patent on the light bulb in 3 months.  It now takes on average over 3 years to obtain a patent and many patents 5-10 years to issue.

 

Gary Lauder

Small business, startups, and investors have not been heard on this issue.  Many Venture Capitalists are not aware of the changes that are occurring.

Every famous living inventor is against this bill, including Dean Kamen – inventor of the segway, Steve Perlman – inventor of quicktime.

The national venture capital organization, IEEE, National association of seed and angel funds is against the bill, all of which represent small companies and small company innovation and do not have the money for lobbying.

Kappos lobbied for these same changes when he was at IBM.  This is a violation of the administrations revolving door rules.

Misrepresentations of what the bill says or will do: Include we need first to file because small companies cannot afford interference proceedings.  Interference proceedings happen 0.01% of the time or less, but interference proceedings are replace by more expensive derivation proceedings.  These proceeding require you to present evidence that was stolen from you.  So if you got hacked, you have to prove you got hacked and who hacked you.  There is not right of discovery under this America Invents Act.

First-to-file’s worst effect is on companies between the ages of zero to one.  The derivation proceeding make it almost impossible for these startups to prevail, because of the time, expense, and lack of discovery.

The rest of the worlds patent systems do not work.  They do not encourage startups or individual inventors. The advice to startup is that they need to apply for patent before they talk to investors, but they need investment to afford to apply for patents and before they talk to customers and potential employees.  There is 10 times more angel and venture capital investors in the U.S. per capita than in Europe.

This bill is also going to an enormous boon to cyber criminals, because IP will be worth more money.

Venture capital has declined by an order of magnitude since 2000.  Since 2007 it has declined by a factor of four.  If this bill passes the shrinkage in venture capital will accelerate.

 

Pat Choate

Ph.d economist, former vice presidential running mate of Ross Perot.  Dr. Choate has written extensively on the theft of America’s intellectual property and is the foremost expert on this issue.

We have run out of policy tools.  The way we worked ourselves out the 1970s was inventing a new economy and that is how we are going to have to work our way of this economic downturn. The companies that create all net jobs are startups.  Technology is way increase real per capita income.  The fastest way to kill creative destruction is to kill the patent system.  This is a bill to Europeanize the American patent system.  This effort has been going on since 1980.  This patent bill was written by IBM and 14 corporations.  In Europe, individual inventors get 0.6% of all patents  This bill will choke off American innovation and this will be obvious within 2-3 years of passage.

http://www.youtube.com/watch?v=9zwqypPYXcQ&feature=related

 

Valerie Gaydos

Angel Investor and founder of CEO Growth Capital.  http://www.youtube.com/watch?v=r3Q8H3vuuN0&feature=related

 

There is much more on Youtube.

 

 
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.

Assumptions

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 (www.uscourts.gov/ caseload2006/contents.html).” see http://www.manufacturingnews.com/news/07/0629/art2.html

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.” http://www.manufacturingnews.com/news/07/0629/art2.html

By every objective measure: R&D per patent, GDP per patent, and number of citations per patent patent quality is increasing.  See http://hallingblog.com/2010/01/07/patent-quality-nonsense/ and http://hallingblog.com/2009/08/18/patent-quality-myth/.

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”  http://hallingblog.com/2010/03/24/pat-choate-technology-theft-as-a-business-strategy/

Solutions

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 http://hallingblog.com/2009/09/18/in-defense-of-patent-trolls/ For more information see Jump Starting a Secondary Market for Patents http://hallingblog.com/2009/11/16/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 http://hallingblog.com/2010/01/19/ksr-supreme-ignorance-by-supreme-court-2/ )

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 http://hallingblog.com/2010/06/18/non-obviousness-a-case-study-in-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.

 
Are Patents Relevant?

The more fundamental question in economics is whether inventions have any economic impact.  There is no role for inventions in classical economics[1], which focuses mainly on disruptions in supply and demand.  Marxist believe that all economic value is a measure of physical labor, so there is no room in the Marxist tent for inventions either.  Despite this modern economics has grudgingly admitted that inventions are key factor in economic growth.  However, they are torn on whether inventions (advances in technology) are endogenous or exogenous.  The exogenous camp believes that inventions occur separate from any incentives or spending on inventions.  Economists that fall into the exogenous camp clearly do not see any reason for a patent system, since they believe that inventions occur separate from any market forces.

The first widely acknowledged chink in the Marxist and Classical economics armor against inventions was Joseph Schumpeter who argued that creative destruction, caused by innovation, is the key to economic growth.  The hero in Schumpeter’s world was the entrepreneur not the inventor.  Despite this Schumpeter also was a determinist who believed in “natural” cycles and believed in the exogenous theory of inventions.

The next step in the economic analysis of invention was by Robert Solow.  Dr Solow published a paper in 1956 on economic growth that stated that four fifths of US worker output was due to technological progress (inventions).[2] Robert Solow would go on to win the Nobel Prize in Economics for this point.  However, Solow believed that technological progress was exogenous and therefore occurred separate from economic incentives to invent.  As a result, he argued that all countries would converge in their economic growth rates and their level of technology.  There has been no evidence for Solow exogenous theory of growth.[3] The growth and level of technology, inventions, and economic growth of countries has not converged as Solow predicted.  It is not surprising that Solow, in the exogenous camp, is a fan of the anti-patent book Against Intellectual Monopoly, by Michele Boldrin & David K. Levine.[4]

The next big advance in the analysis of inventions and economic progress was the book Invention and Economic Growth by Jacob Schmookler in 1966.  Schmookler undertook the most systematic analysis of invention of any economist.  He analyzes the issue of whether invention is exogenous, as argued by Solow, or endogenous.  He clearly shows that invention is mainly endogenous.  Schmookler does not directly address the question of the utility of a patent system in encouraging inventions.  However, he hints that attacks on the patent system in the 1930s and 40s was the cause for the decline in the number of patents issued to US inventors during this time.

In general, most economists in this area now acknowledge that invention is endogenous – subject to market forces.  If you accept that the invention process is endogenous, then the next question is whether patents encourage invention – are patents relevant?

One of the leading economists in the area endogenous growth is Paul Romer.  Romer thinks that the creation of inventions (he would call them recipes) are clearly subject to resource limitation.  He points out that researchers and laboratory equipment are not free and therefore we need a system to encourage people to invest in new inventions.  However, he believes that once an invention is created it cost virtually nothing to disseminate.  The example he uses is oral rehydration therapy.  While there are a small number of examples of inventions that are so simple and so easy to understand they can be disseminated at virtually no cost, most new inventions and technology do not fit into this category.  For instance, calculus is a very useful branch of mathematics and it has been known for centuries and yet most of us who learned calculus paid someone to teach us.  There were no intellectual property laws requiring us to pay a teacher to learn calculus, so if inventions (recipes) can be spread at no cost why did we undertake the irrational step of paying someone to learn calculus.  If technological can be disseminated at no cost then there is no reason for professors, doctors, lawyers, engineers, and especially marketers and sale people.  Romer is ambivalent about patents.  However, his ambivalence is based on the false assumption that technology dissemination is free.

Gregory Clark, an economist at UC Davis,  has written an interesting book in this area, entitled A Farewell to Alms.  In this book he states that the most important question in economics is explaining why

after millennia of per capita income being stagnant it takes off around 1800 in the West.  He provides an interesting answer.  The first part of his answer is that rate of technological progress increased at the beginning of the industrial revolution.  The second part of the answer is why the rate of technological progress suddenly increased.  He suggests that the industrial revolution takes of in Britain because of environmentally induced evolution.  Specifically, he suggests that the downwardly mobile society of Britain resulted in thrift and hard work being genetically selected in Britain.  These traits resulted in the industrial revolution taking off in Britain.  Clark appears to be part of the exogenous camp.  As a result, he does not think that patents are important in encouraging advances in technology or economic progress.

B Zorina Khan is another economist who has studied this issue.  She is author of the book, The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920.  She provides extensive evidence that the US patent system and economic forces affect both the level and direction of invention.  She shows that the US created the first modern patent system and the patent system provides the major incentive that causes the US to grow from an agrarian economy to a world economic and technology power in 70 years.

The economic literature on patents is littered with misunderstandings of the basic rules of the US patent system.  For instance, many economists do not understand that the patent system is designed to spread information.  In the US we did this by setting up patent depository libraries, so that all people could take advantage of the knowledge associated with an invention.  You will read many economists that believe patents inhibit the spread of information.  This is clearly incorrect.  They do inhibit practicing of the invention without the payment of a royalty, but the underlying information is free for all people to learn from.

Economists are also generally ignorant of the history of patents.  They do not realize that patents are designed to encourage people to disclose the information associated with their invention.  The alternative to patents is trade secrets and no government can force people to disclose their trade secrets.  Before patents people protected their economically important inventions by keeping them a secret.  This limits the area’s where people will invest in new technologies to those that can be kept a trade secret.  It also means that the public does not benefit from the knowledge of the invention.  Most economists do not understand the unintended consequences of their anti-patent position.

Economists generally want to model patents as a government granted monopoly instead of a property right.  This is logically incorrect.  In economics, a government-granted monopoly (also called a “de jure monopoly”) is a form of coercive monopoly by which a government grants exclusive privilege to a private individual or firm to be the sole provider of a good or service.  Since a patent does not even provide the holder the right to sell or practice their invention, it clearly does not grant an exclusive privilege to a firm to be the sole provider of a good or service.  Most economists do not understand this basic principle of patent law – a patent does not give the holder the right to produce or sell their invention.

It is straightforward economic analysis that investing in new technologies is an economic disadvantage for a company if there is no intellectual property protection.  The company’s research and marketing costs in creating a new product and new market clearly increase its cost of doing business over its competitors who do not spend money on new product development.  Their competitors just copy the new product and sell it into the markets the inventor created.  The inability of economists to grasp this simple point is mind boggling.  The only explanation I can come up with is that most of the economists who write about patents have not worked in the technology start-up market.  If they had, they would know that incredible additional expenses incurred not only in creating a new product, but in marketing and selling a new product.  This is particularly true the more unique the product.  It is always easier to sell a me-too product, since you do not have to explain how it works and why someone would want it.  This is why invention in most large companies is limited to line extensions.

Economists cannot provide meaningful input or commentary on the patent system unless they actually understand the patent process, the rights obtained with a patent, and the basic history of patent systems.  Ms. Khan and Pat Choate are some of the few economists who have a strong understanding of the patent system.  Unfortunately, Khan does not differentiate that patents are property rights, not a monopoly.


[1] However Adam Smith did mention inventions as one of three ways to increase the wealth of a nation.  “some addition and improvement to those machines and instruments which facilitate and abridge labor”, Smith, Adam, An Inquiry into the Nature and Causes of the Wealth of Nations, Edited by Edwin Cannan, New York, Modern Library, pp. 373-374.

[2] http://en.wikipedia.org/wiki/Robert_Solow 8/3/10.

[3] http://www.ecomod.net/conferences/ecomod2003/ecomod2003_papers/Ulku.pdf 8/3/10.

[4] http://reason.com/archives/2003/03/01/creation-myths 8/3/10.

 
Still Subsidizing Banks and Wall Street

The TARP bailout of Wall Street may be over but we are still bailing out the millionaires on Wall Street.  The Federal Reserve has purposely set the fed funds rate to zero in order to “recapitalize” (bail out) Wall Street and the big banks.  This is nothing more than crony capitalism, where middle class Americans are forced to bail out multimillionaires.  As if this were not bad enough the bankers on Wall Street are acting like they are genius because they can borrow money from the federal government for zero percent interest and loan it back to the government at three percent interest.  This transfer of wealth from the rest of America to the politically connected in Wall Street is not moral and it is not good for the country.  An excellent video on this point is   Huge, Ongoing Wall Street Subsidy Allows Banks to Coin Money Every Day at Savers’ Expense .

Pat Choate’s book “Saving Capitalism”  points out that middle America has bailout Wall Street at least nine times since 1980.  Many of these bailouts are framed as bailouts for a country such as Greece today or Mexico in the early 1990s, however the bailout funds are not used to help the people of Greece or Mexico they are used to pay back big banks that made bad loans.

The finance industry and Washington have conspired to steal all the wealth generated from hard working Americans.  If we want our country to be great again and our economy to grow again Wall Street has to be allowed to fail and Washington’s budget needs to be cut in half.

 
Pat Choate: Technology Theft as a Business Strategy

Dr. Patent Choate has an excellent article in the Huffington Post, please read the full article, that shows that patent reform is really about patent theft by some of the largest technology companies.  As Dr. Choate explains:

America’s largest big tech corporations are now using a business technique called “efficient infringement,” which means that they calculate the benefits of stealing someone else’s patented technology against the possibility of getting caught, tried in court and being forced to pay damages and penalties. If the benefits exceed the costs, they steal.

The sad thing about the large technology companies cited in the article is that they all grew faster in the 90s when we had strong patent laws than in this decade.  Their desire to weaken the patent laws dooms them and the rest of the country to slow or nonexistent growth.  Ultimately, their actions will result in technological stagnation in the US.

Dr. Choate then give the specific example of how the large financial services companies conspired to steal a start-up’s, DataTeasury’s, patented technology.  Then they used their lobbyists to get a clause inserted into the so called “Patent Reform” bill that would have given all the defendants in the DataTreasury case immunity.  As the article explains:

Bank of America, Wells Fargo, and about a dozen other banks refuse to deal with the little company. Instead of paying up, those remaining banks have played dirty. In 2007, Washington lobbyists working for the banking industry had an amendment inserted into a pending patent-reform bill that would have granted legal immunity to all of DataTreasury’s defendants. The amendment died on the floor of the U.S. Senate after the press exposed the story.

As Dr. Chaote’s excellent book “Hot Property” vividly points out, lack of enforcement of intellectual property rights destroys innovation.  I particularly enjoyed his example of how Mexico’s failure to enforce copyrights has ensured that Mexico does not and will not have a recording industry – music or movies.  Theft always looks like a quick way to wealth, but it ultimately destroys the source of wealth creation.  These high tech companies would rather destroy America’s wealth than have to compete in the market on the basis of the technology they can develop.

 
Hot Property

Hot Property by Pat Choate

This excellent book by Pat Choate will both frighten and upset you.  For instance, Dr. Choate relates the shocking tale of a woman from Alabama who received a counterfeit antibiotic for a routine infected ingrown toenail and almost died.  Counterfeit medicines kill and injure people every year.  The U.S. is not immune to counterfeit medicines entering our market as the story of the woman from Alabama shows.  Counterfeiting medicines has become a major criminal enterprise.  The reason for this, according to Choate,  is  the risk of getting caught counterfeiting legitimate medicines is significantly less than distributing and selling illegal drugs.  In addition, the margin for counterfeit medicines is often higher than the profits obtained selling illegal drugs (and less dangerous).

The pharmaceutical industry is not unique in dealing with counterfeits.   According to a FAA report,  176 aircraft accidents were the result of counterfeit parts between 1973-1996.  Almost every industry in the U.S. is under attack by pirates making counterfeit products.  The tales of counterfeit music, software, and movies are well known, but there isn’t a personal harm component.  It is past time that we deal with piracy issues effecting our citizens’ security.

A number of these pirates operate with the tacit or even explicit support of their governments.  Dr. Choate documents the long history of state supported industrial espionage.  Often foreign governments target certain technologies that both increase their commercial and military might.  Our government has not prioritized stopping commercial pirates or industrial spies and the United States citizens are all poorer for their negligence.  In some cases, there is even domestic industry that profits from the pirates’ activities at the expense of our long term future.  These domestic industries lobby hard for inaction on the part of our government.  For instance, the retail industry often turns a blind eye to trademark and copyright violations and other forms of counterfeit products.

Perhaps most maddening though,  is our government’s policy of giving away our technology.  For instance, Dr. Choate shows that during the Clinton administration and continued in the Bush II administration,  we failed to protect the technologies of our domestic inventors.  Our government gave away many of the most important safeguards in our patent system to the Japan and  Europe and received almost no concessions from them.  For instance, we now publish our patent applications at 18 months for the whole world to see and providing the opportunity to steal our technology.  We fought hard in the GATT trade negotiations to require other countries to strengthen their intellectual property laws and enforcement.  In return, we significantly reduced our tariffs on textiles and apparel.  This has decimated our textile and apparel industries; but these countries have not come into compliance with the requirements for strengthening their intellectual property systems.  We could bring suit against these countries in the WTO (World Trade Organization) and force compliance, but for some reason we seem uninterested or unwilling to require these nations to uphold their part of the bargain.  I am a strong believer in free trade, but stealing intellectual property is not free trade-  it is just theft, pure and simple.   Theft of real property results  in underinvestment in real property.  It follows that  theft of intellectual property results in underinvestment in technology,  making  us poorer in the US, which in turn makes the whole world poorer.

An interesting point that becomes clear in Hot Property,  is  the Reagan Administration took intellectual property rights, particularly patent rights, more seriously than any subsequent administration.  Reagan understood that our technological innovation has always been the key to our wealth.

 
Book Review By Pat Choate: Understanding How to Get the U.S. Economy Moving Again

This is a copy of Pat Choate’s review of The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation.  Dr. Pat Choate, economist, former Vice Presidential running mate of Ross Perot 1996, Director of the Manufacturing Policy Institute, Phd. Economics University of Oklahoma.

I do not review books on the Net unless I find them well-written and especially informative, which certainly applies to Dale B. Halling’s The Decline and Fall of the American Entrepreneur.

Nonetheless, I do have a criticism directed towards the publisher. My copy did not contain a vita of the author, which in this case is a major omission. Mr. Halling is a physicist, lawyer and an expert on patents and entrepreneurship, all of which comes through in his book. This author delivers the goods. A vita in subsequent printings would be useful.

Mr. Halling combines two topics — the impediments to entrepreneurship that have been created by the U.S. government as an unintended consequence of its pursuit of other goals and the systemic weakening of the U.S. patent system by the U.S. Supreme Court and the Congress.

The resulting technological stagnation is a major reason the U.S. has gone from producing 25 percent of the World’s Gross Product in the mid 1990s to about 20 percent today. The loss is significant – about $3 trillion of U.S. GDP in 2009 alone.

He demonstrates in clear terms the linkages between economic growth, productivity, and income. And he lays out how technological advancement has always been the American advantage in global competition, an advantage that the U.S. is squandering.

He explains how the Sarbanes Oxley Act cut off the waves of venture investment that did so much to stimulate U.S. growth in the 1980s and 1990s, and he also explains how shifts in accounting rules as per stock options directed many of our most creative people into less than innovative activities.

His final chapter contains some straight forward recommendations that involve no direct-cost regulatory changes that would once again stimulate more innovation, investment and job creation in America. Amazingly, Congress is now considering a so-called “patent reform” legislation that would further diminish U.S. innovation. The author convincingly explains how this would damage U.S. innovation. He also explains the consequences of recent Supreme Court decisions on patent law. My observation is that the Roberts Court is the most anti-patent set of Justices in U.S. history. Once Congress understands what the Court has done, their decisions need to legislatively overturned.

In sum, this is well-written, jargon-free, 137-page book that is a quick read. It evidences smart and practical thinking by an author with real world experience. I highly recommend it.

 

The first step in build a market dominating patent portfolio is to undertake a survey of the patent landscape in your marketplace.  For more information on how to perform a prior art survey please see Competitive Analysis and Patent Portfolios .  This analysis will show you where there are gaps in the prior art that can be exploited and also help stimulate your thinking about design options.  Gary Boone, the inventor of the microcontroller, explains the advantage of surveying the prior art this way.  “Most engineering design groups do not feel there is much to learn by reading patents.  I feel that’s unfortunate, because there is a huge amount to learn from the accumulated five million issued patents, just picking up the U.S. patents alone.”

 

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