Posts Tagged ‘patent policy’
While the US continues to weaken its patent laws, Singapore is taking a different path. Singapore has just announced that it is developing a plan to be an Intellectual Property Hub, according to Channelnewsasia.com. They believe that intellectual property is a key part of the global economy and they want their country to be primed to take advantage of this trend. According to the article:
With well-developed legal and financial systems and a workforce comfortable with science and technology, Singapore is poised to ride on this trend. Still, the country has a small domestic market, but Singapore can get around this by becoming Asia’s IP Hub.
Mr Shanmugam said: “The committee will recommend strategies to develop Singapore as a marketplace of choice to transact IP, and attract international firms and professionals who provide IP transactional services. For example, licensing and brokerage. The committee will also incentivise the creation, management and exploitation of IP in Singapore.”
While Singapore is trying to encourage IP transactions our government and intellectuals are trying to kill them by disparaging inventors as trolls. The article also explains that Singapore will grow its court system in tandem with the growth of it intellectual property. They are focusing on training judges who are experts in patents. In the US we cannot even fully fund the Patent Office and now there is an effort to sideline the ITC, which is one of the few courts with real patent expertise.
Singapore’s emphasis on technology and intellectual property has faulted it past the United States in per capita income. Singapore ranks third in the world with a per capita income of $59,936, while the US lags with a per capita income of $48,147. Singapore’s per capita income keeps growing, because they are focused on the only thing that makes people wealthier – increases in our level of technology. In the United States we have a President and his economic advisors telling us that we will get wealthier by consuming more, or by transferring more wealth from productive people to people on welfare, or by giving free money to the largest Wall Street Banks and large corporations. If the US does not wake up it is likely that Singapore will have double the per capita income of the US by 2020 (see chart).
There are zillions of stories complaining about how some innocent multinational company is being sued for patent infringement by some evil company that does not even make a product. However, you never hear of the story of the start-up company that has filed for a patent, gotten the run around by the Patent Office and could not raise funding because their patent has not issued. Well here is one of these stories, which are much more numerous than the supposed lawsuit problem.
This company was founded in 2003 by a cardiothoracic surgeon and two engineers. Their invention is a product and service that could save the U.S. as much as a $1 Billion a year in heart related procedures. The inventors filed a patent in 2004 probably spending as much as $10K of their limited capital. They then performed various experiments including arranging animal trials with a major veterinarian university. The animal trials were overwhelming successful and most cardiothoracics surgeon would have thought their results impossible. In 2007, the company filed a continuation-in-part to incorporate their new information. The company waited two years for the patent office to finally examine their patent application. The patent office’s rejection showed that they did not understand the basic concept behind the invention. Despite numerous interviews with the examiner and the supervisor, they continued to cite even more outrageous prior art references that taught away from the company’s invention or were just plain irrelevant. A key insight of the invention is that it did not cauterize or damage the tissue near a puncture. Every other reference showed this feature. The patent office provided absurd definitions for words in order to reject the claims. For instance, they suggested the word “punch” meant rotation.
The company raised these issues with the examiner, the examiner’s supervisor, and the head of the group art unit. None of these people was willing to listen to reason. Finally, the company filed four affidavits. Two were from medical doctors who treat heart conditions, one was a veterinarian who performed the experimental surgery and one was from a professor of communications who specializes in technical and scientific communications. All the doctors stated that the company’s invention was revolutionary, was not at all like the prior art, and likely to lead to tremendous improvements in heart procedures. The professor of communications explained that the patent office’s interpretation of the terms in the patent did not pass the laugh test. Finally, the examiner relented and allowed four of the claims, while citing new prior art against the other claims. This new art was introduced after two years and five responses and one preappeal, which cost the company its start-up capital and lost time.
The human cost to this bureaucratic inefficiency (ineptitude) included the fact that one of the people the company hired to find financing died of a heart attack while waiting on the patent office. The surgeon-inventor’s daughter, who had helped out with the company, died in surgery while waiting on the patent office, and the surgeon had a couple of heart related procedures. If the surgeon could have substituted his invention for the standard treatments, he would not have had to undergo multiple procedures. However, this just scratches the surface of the cost of this bureaucratic nightmare. If this company had received its patent efficiently and timely, it would have created tens of hundreds of jobs and saved the lives of thousands of heart patients and saved millions of dollars spent on medical care.
This is just one example of the problems created by underfunding the patent office and politicizing the patent process. There are hundreds of thousands of these stories – at least ten times as many as the legitimate complaints about frivolous patent lawsuits. These cases are much more damaging to our economy, but the press and open source anarchists have captured all the attention. We need to focus on the real problems with the patent system, which includes underfunding the patent office and a non-objective standard for what is patentable. That is untold story of the Great Patent Debate.
This case, TEWARI DE-OX SYSTEMS, INC., v. MOUNTAIN STATES/ROSEN, L.L.C., in Texas shows the damage done by the publication rule for patents applied for a patent on a method of extending the shelf life of meat in a retail setting on May 8, 2003. The patent application was published on April 15, 2004 (earlier than 18 months because it was based on a provisional). In March of 2005 Tewari approached Mountain States on how they could increase the shelf life of meat products. Mountain States signed a Non-Disclosure Agreement (NDA) and Tewari explained how their process extended the shelf life of meat. Subsequently, Mountain States started practicing Tewari’s process. Tewari sued Mountain States for theft of their trade secrets. Mountain States claimed no trade secret existed at the time of the NDA because Tewari’s patent application had already been published and the court agreed.
If theU.S.had not adopted the publication rule, Tewari’s process would have been (probably) a trade secret. It is likely that Tewari eventually found that it was just too expensive to fight the “rejection equals quality” mentality of the Patent Office at the time they would have been arguing their case, although I did not examine the prior art. But, because of the publication rule Tewari did not have this choice. (If they did not foreign file, they could have opted out of publication, but the rules make this onerous.) As a result, Mountain States was free to steal Tewari’s trade secrets. This allowed a large company to free load off of the efforts of an innovative startup. Even if Tewari was legitimately denied a patent, it most likely would have had a defensible trade secret. Note that the Tewari’s patent application was published before they received their first office action. Tewari had no opportunity to determine if it was going to get a fair deal from the patent office before their invention was publicly disclosed to the world. The publication rules were sold under the theory that most patent application issue within 18 months. Now days the pendency time for the first office action is 25.2 months – seven months after the patent application is published.
Tewari was denied the rights to their intellectual property because of the publication requirement. A large, lazy, non-innovative company was the benefactor of this theft. This undermines investment in start-up technology companies that create most emerging technologies and provide high quality, high paying jobs. The publication requirement should be abolished.
This is a guest post by David Boundy directed to fellow patent attorneys.
The bill tilts the playing field in favor of multinational corporations and market incumbents. The bill shifts from today’s emphasis on disclosure and disruptive innovation to favor trade secret and market incumbency, in the following ways.
- The § 102(a) grace period is totally repealed. Every inventor will be in a race against all other possible disclosures—no inventor will have the time to perfect and test an invention before filing. All companies will be forced to file before an invention is fully understood or tested. That will be expensive for your clients and trouble for you as an attorney, and reduce patent quality.
- Inventors, entrepreneurs, and startups use the grace period of § 102(a) to meet with investors, do the trial-and-error of R&D, and test their inventions. Under today’s law, the implied obligations of confidentiality in conversations with investors and early-stage partners give sufficient protection to permit these ordinary business activities. The bill repeals all these protections, and replaces them with a flimsy grace period that creates unacceptable risk of loss of patent rights, that no business can rely on—though adds strong protections for large companies that can raise all their financing, and do all their manufacturing and testing in-house. Inventors won’t be able to talk to investors without a patent, and won’t be able to file an application without an investor.
- The bill states that an inventor can recover patent rights if he can prove that all other disclosures originated with the inventor—but the bill neglects to create a procedural forum for showing derivation in cases where the leak is not embodied in a patent application, or where the leak neglects to attribute the original inventor. As a practical business matter, the bill leaves no commercially-feasible grace period, an integral part of U.S. patent law since 1839.—you will have to file every application as soon as possible, often long before the invention is ready.
- Today’s law gives Americans several advantages over foreign inventors (under the “Hilmer rule”). The bill removes these advantages, and instead places American inventors at a disadvantage to foreign inventors. Consider this fact pattern:
- A German inventor files a patent application in Europe, and later in the U.S. under a bilateral treaty
- Shortly after the German’s first filing, an American files a patent application in the U.S. on a similar (not identically the same) invention, and then under the same treaty in Europe
Under the proposed legislation, the German’s patent application will be prior art that blocks the American in the U.S. If we switch them around, so that the American files first, then the American does not block the German in Europe. The bill does not “harmonize” the law, and the difference disfavors Americans.
- The bill provides that all disclosures within and by a single company do not create bars. This is great for multinational companies, with large in-house staffs, but totally useless for a startup or small company that has to partner with outsiders. Startups use and need the options and protections of current law, but the new bill cuts them away.
- A single offer for sale or public demonstration one day before filing a patent application will irretrievably destroy patent rights, if the poorly-drafted language is interpreted literally.
- The § 102(b) grace period is cut back—it no longer protects against activities by third parties, but only the inventor’s own activities.
- A new “post grant review” procedure allows a competitor, at a time of his own choosing, to start a half‑million dollar proceeding against a patent holder that has threatened no one. Existing, more modest versions of this procedure have already put companies out of business.
- As a patent attorney, you will no longer have time to do a good job preparing a patent application, you’ll be “forced to file” prematurely. This will expose you to risks and destroy your weekends. Poor initial applications will drive up post-filing prosecution costs. The stricter and earlier filing deadlines will place you at a blocking point for many of your clients’ business activities, harming your client relationships. Where good patent attorneys are allies in creating value for businesses today, the bill will move you to being a cost—at a much lower billing rate.
The bill destroys commercial certainty and corrupts the incentives in the system:
- Various statutory requirements that an applicant act “without deceptive intention” are repealed—in the future, applicants will have incentive to act with deceptive intent.
- Key terms of art are redefined—you’ve spent a career learning the meaning of “on sale” and “public use,” but the legislative history fundamentally redefines these terms. It will take decades for courts to establish new precedent to provide any meaningful commercial certainty.
- The Metallizing Engineering “secret commercial use” bar is repealed—a company will be able to use an invention as a trade secret, and then spring a patent on the public years later. That favors market incumbents, but makes innovation harder for everyone else.
- The “best mode” requirement is reduced to a sham: a patentee will be permitted to disclose only a fictitious embodiment, while holding the best as a trade secret.
- The bill gives companies the right to patent and repatent inventions for years, to keep them locked up, neither using them nor permitting them to be used, for far longer than 20 years.
- Several aspects of the “first-inventor-to-file” provision—the ones that give patents to second inventors, and to companies that kept inventions in secret for years before filing patent applications—violate constitutional limits on Congress’ authority—years more litigation and commercial uncertainty.
- The Act allows Wall Street banks to attack “business method” patents that they are infringing. This doesn’t extend to any other industry, only business methods—another Wall Street giveaway.
The bill is out of committee—further amendments are unlikely. It is literally impossible to alter the bill to meet the needs of startups through an amendment strategy at this late date. The multinationals and their congressional allies smell victory. They see no reason to allow any weakening of their preferred bill through amendments favoring small businesses. The only option at this point is to vote it down.
Typical inventor activities that no longer “work”
Most startups, and many inventions at established companies, go through at least one of two “stories.” They’re reasonable commercial practice under today’s law, but not under the bill:
- An entrepreneur with nothing but an idea typically has to present his idea to dozens of venture capitalists and potential manufacturing or marketing partners, without formal confidentiality agreements, to get a company started. (VC’s never sign confidentiality agreements for first meetings.) This works under today’s law, because of the implied obligation of confidentiality and the protection of § 102(a), but under the bill, these conversations will create commercially-unacceptable risks to the investor and partner. U.S. inventors will be under the same “Catch-22” as European inventors—unable to talk to potential investors until a patent application is filed, but unable to file a patent application without an investor. Startups will die before being born.
- Companies that need a long “invention incubation” period—trial and error, conceive, test and discard, until finding the “magic combination” of techniques—use the § 102(a) grace period to do their R&D in confidence, and file patent applications only when it’s clear which inventions are valuable, and how they work. Under the bill, a company will have to file a continuous stream of patent applications, many directed to inventions that are dumped under current law. This will increase patent costs remarkably.
Almost every startup goes through one of these two, many through both, as new companies create new wealth and new jobs under today’s law. Inventors wait to file quality patent applications until they have quality inventions. America’s unique and strong right to file in the future, after the inventor and investor know whether the invention is valuable, makes business easy, and prevents wasted costs for inventions that prove worthless.
The “America Invents Act” revokes this historic right. Property rights turn on non-business legal technicalities created to satisfy bureaucrats, technicalities that will cost $1 billion annually. The bill requires a company to file premature, hasty, and expensive patent applications on every baby-step idea to preserve rights against third parties who are dabbling in the field without intent to develop a commercial product. The America Invents Act makes these two stories nonviable for startups—because the authors “didn’t think” about them, or didn’t want to.
In 2010, the Kauffman Foundation and Census Bureau released two studies on job creation. Both found that “net job growth occurs in the U.S. economy only through start up firms.” If creating new jobs is Congress’s Job One, then killing the America Invents Act is a good place to start.
The proponents’ arguments do not survive scrutiny
Proponents suggest that the bill does away with complex and costly interferences. That’s true, but irrelevant. Under 100 applications per year end up in interferences. In contrast, the change to today’s “§ 102(a)” grace period affects commercial decisions and raises costs for hundreds of thousands of inventions per year, during the time before filing, by giving inventors and patent attorneys time to get it right the first time. Because the Patent Office has no insight into the pre-filing process of invention, it simply hasn’t taken into account the realities of invention incubation and the costs of its proposal. Further, the proposed replacement, “derivation proceedings,” are the most costly disputes in patent law in those jurisdictions where they exist.
Second, proponents argue that provisional applications will be a cheap way to preserve rights. But that isn’t true under the new law. Under current law, a cheap provisional is useful to show conception and diligence. But under Patent Reform, a provisional application only provides legal benefit if prepared with full § 112 ¶ 1 care and completeness. For a typical startup invention, the cost in attorney fees and inventor time for a provisional application is $10,000 or more—a formidable barrier to an entrepreneur’s first conversation with an investor.
Third, proponents argue, “The bill locks in rights if you publish a disclosure of the invention.” But all companies rely on secrecy for their future plans. No company publishes its most sensitive and advanced technology years before introduction. This argument ignores business reality.
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
Steve Forbes, publisher of Forbes Magazine, was a strong defender of the US patent system. He followed in the footsteps of one of his hero’s, Ronald Reagan, who made strengthening the US patent system a major part of his economic reform. For more information see Reagan’s 100th Birthday.
Now Forbes (the magazine) pushes an anti-intellectual, anti-free market, anti-patent point of view as evidenced in the opinion piece Google’s Conundrum: Buy The Patents Or Pay The Lawyers? The author belongs to that Luddite group that wants to categorize patents as monopolies. Patents are property rights. Property rights derive from the act of creation or more specifically invention in the case of patents. Monopolies are the result of political calculations and have nothing to do with creation.
The author then goes on to state:
When Prime Minister Tony Blair and President Clinton suggested imposing restrictions on patents in the field of genetics, publicly traded bio-tech firms experienced a predictable mini-crash. The impact of their recommendation would not have been as violent if the patents had shorter lives than twenty years.
Of course if the property rights in one’s invention was weaker before you suggested making it even weaker, it would have less impact on the value of the companies owning these assets. This is like saying the value of a company will decrease less when nationalization is proposed if the tax rate were higher. For instance, if the tax rate were 100% then it would not affect the value of company at all if politicians proposed nationalizing the company. The author Reuven Brenner, is an economics professor at McGill University according to Wikipedia. You would think that a professor would not make these obvious logical errors – the sort of errors that would make even an undergraduate paper on the topic receive a C or lower.
As if this gaff were not enough the professor then asks:
What would happen if the life of patents was shortened?
Prices of patented goods would decline and there would be less piracy
Yes and the price of all goods would decline if we would just get rid of property rights. Of course, no one would produce anything and the same is true of weakening patents. Innovation will come to a virtual standstill. History shows that without secure property rights in inventions, innovation grows so slow that humans are stuck in the Malthusian Trap. See The Source of Economic Growth.
As for there being less piracy that is like saying there would be less car theft if we did not give people title to their cars. This is not Alice in Wonderland Mr. Brenner. Words have meaning and even if there is not a law against piracy, it is still piracy.
Mr. Brenner continues with his Socialist line of reasoning by arguing, “Phillips’ initial success in Holland and throughout Western Europe was due to copying Edison’s lamps without paying any royalties to the Edison interests.” Stealing always enriches the thief, but it does not create wealth it redistributes it and destroys it. How many invention was Edison or some other inventor unable to fund because Phillips stole Edison’s inventions?
Mr. Brenner should be aware that since Robert Solow’s famous paper on economic growth it is clear that all per capita growth is due to increases in technology. Most new technologies are created by start-ups that require property rights in their inventions (patents) in order to secure capital. (See SBA Study). In addition, all net new jobs in the US are created by start-ups according to the Kauffman Foundation. If the US wants to create high quality, high paying jobs it needs strong property rights for inventions.
This is a Press Release from American Innovators for Patent Reform and Eight Other Organizations Send Letter to Congress Stating Objections to House Version of America Invents Act:
Intellectual Property’s Great Fallacy,by Eric Johnson
This paper starts with a bold statement that the theoretical underpinning for intellectual property (patents & copyrights) “has been washed away.” Shortly thereafter it states “it’s hard to imagine big-budget Hollywood movies being made without copyrights. And many new pharmaceuticals would not have been brought to market without the inducement of the patent laws.” The paper never attempts to resolve this contradiction. But this is far from the only problems and errors with the paper.
Property Rights: Mr. Johnson does not seem to understand the basis of property rights or the difference between property rights and monopolies. He incorrectly states that patents and copyrights are monopolies. Patents and Copyrights are property rights and any definition of monopoly that includes patents also includes all property rights. This of course leads to the nonsense that all property rights are monopolies. For more information see The Myth That Patent are Monopolies.
Mr. Johnson tries to denigrate patents and copyrights by showing that their origin is from arbitrary government grants. In the case of patents this was reformed by the Statue of Monopolies. The exact same thing can be said of all property rights. All land was considered to be owned by the King and he arbitrarily gave monopolies over certain areas of land. This usually included the right to profit from the peasants on the land. If the noble who received this arbitrary grant of land crossed the King, the King could and did take back the grant. This practice continued at least until the U.S. Revolutionary War. For instance, most of the colonies were arbitrary grants of land and President Washington was given large tracts of land for his service in the French and Indian War. It was not until Locke that the theoretical basis for property was established, which is productive effort. Patents and copyrights are property rights given for the inventor’s or author’s productive effort. This theory of property rights acknowledges the reality that but for the creator the property would not exist and therefore the creator is the owner.
Extrinsic vs. Intrinsic Rewards: The main thesis of the paper is that creative activities do not need extrinsic rewards. In fact, the author argues that extrinsic rewards actually reduce the amount of creativity. His evidence appears to be survey data. However, survey data tends to be subject to a number of bias errors. The paper ignores the actual empirical evidence. The industrial revolution was an outpouring of new inventions. As explained in the book The Most Powerful Idea in the World “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 England and the US that equation changed. Michael Kremer published a study (Population Growth and Technological Change: One Million B.C. to 1990) that argued that inventive talent and motivation are randomly distributed throughout the population. His model works well until the industrial revolution. Then England and other common law countries significantly out invent the rest of the world and their GDP per capita also grows much faster than the other countries in the world.
Mr. Johnson also repeats the myth of the First Mover Advantage. Even the author of the seminal paper on the first mover advantage has admitted that he overstated the case. There are numerous business books that have argued that it is better to be a copier, including In search of Excellence and more recently Copycats: How Smart Companies Use Imitation to Gain a Strategic Edge. For more information see More Evidence that Stealing Invention is a Business Strategy. My post Invention – A Financial Analysis, show that an inventor is always disadvantaged compared to a copier without property rights in his invention.
The paper argues that R&D managers at large corporations believe there are plenty of incentives for companies to invent aside from patents. First of all this survey data is selective. There are plenty of studies that show patents are critical for the success of start-ups. See Patent Signaling, Entrepreneurial Performance, and Venture Capital Financing . Once again Mr. Johnson’s data is selective at best. Large corporations are not highly inventive. According the SBA most emerging technologies are created by individual inventors and startups. See An Analysis of Small Business Patents by Industry and Firm Size.
Free Markets and Patents
Mr. Johnson makes a number of statements like “While intellectual property entitlements are conceded to be modes of interfering in a free market, they are nonetheless understood to be necessary to address a problem of “market failure.” This statement is based on the “Efficient Market Hypothesis.” This hypothesis has been an major excuse for interfering with markets and property rights by statists, while pretending to support free market capitalism. For instance, it is used to justify government involvement in education, labor markets, and limiting property rights through antitrust laws. Free market capitalism is not based on the efficient market hypothesis. It is based on property rights and contracts and the right of individuals to exercise these rights without government interference.
Value of Patents
Mr. Johnson makes the outrageous and completely unsupported statement that, “Patents have turned to be largely worthless to own, and, even worse, costly to defend against.” As shown above Patents (property rights for inventions) were essential for humans in escaping the Malthusian Trap. Patents have been shown to be critical for startups, see Patent Signaling, Entrepreneurial Performance, and Venture Capital Financing. IBM makes over $3B a year from licensing fees. Once again Mr. Johnson’s assertion is selective at best and perhaps purposely misleading.
Mr. Johnson argues that the low cost of inventing has opened up opportunities for most people to be inventive and they are doing so in increasingly large numbers. Again his data is selective at best if not outright misleading. Since the advent of the open source and anti-patent movement the U.S. has faded from the clear technological and innovation leader of the world to being a second tier country according to most observers. People in the US are not talking about the explosion of innovation, but the implosion. Mr. Johnson seems to live in an academic fantasyland.
This paper may pass for an academic paper in today’s world, but it is not science. At best is a selective survey of existing research in this area. It does not add any new data, informatio, or conclusions. If it were a patent application, it would not pass the novelty test. However, this appears to be the norm for most of what is considered academic research today.
Intellectual Property’s Great Fallacy, by Eric Johnson
 Rosen, William, The Most Powerful Idea in the World”: A Story of Steam: A Story of Steam, Industry, and Invention, Random House, Kindle Version, location 258-264, 2011.
 Rosen, William, The Most Powerful Idea in the World”: A Story of Steam: A Story of Steam, Industry, and Invention, Random House, Kindle Version, location s64-270, 2011
Kremer, Michael, Population Growth and Technological Change: One Million B.C. to 1990, Quarterly Journal of Economics, Vol 103, p. 681-716, 1993.
The situation in Egypt is reminding me of the Iranian situation in 1979. The reason the situation in Egypt is occurring is because the world economy has fallen apart and the people of Egypt are facing declining economic prospects. Egypt is a socialist country, so the economic prospects have been mediocre at best, but with the decline in the world economy the prospects for the average person in Egypt have plummeted. Already there is a Google executive missing in Egypt and I see the situation evolving along the lines of Iran in 1979. Is this just random coincidence or is something more going on. In 1979 we had a progressive (they should be called regressives, socialists, communists, Marxists, statists or just plain freedom haters) president who ruined our economy and apologized for America around the world. Today we have a freedom hating president (progressive) who has spent the first two years apologizing for the U.S. During the 1970s progressives (yes Nixon was a progressive – see wage and price controls) had spent the decade destroying the U.S. and world economy. During the last decade progressives (yes Bush was a progressive – see Medicare Prescription Drug Program the biggest entitlement since Medicare) have spent the decade destroying the U.S. and world economy. Luckily for the U.S., the Reagan revolution occurred and the U.S. had two decades of strong economic progress, won the Cold War, and pushed back socialism (freedom hating) around the world. Unfortunately, it now appears that all the progress of the Reagan Revolution has been undone. Here are the analogies between the U.S. before Reagan and presently.
Weak Patent System
It is a little known fact that a major part of Reagan’s economic plan included strengthening our patent system. He started a process where our patent system was strengthened by a number of initiatives over the next 17 years. Another little known fact is that we have consistently weakened out patent system since 2000. We broke the social contract with inventors in 2000 when we agreed to publish patent applications at 18 months from filing even if the patent had not issued. The social contract for patents is that in return for telling the public how to practice the invention the inventor receives a limited term property right. By publishing how to practice the invention without having granted a patent, the public is receiving the benefit without fulfilling it side of the bargain. Before 2000 patent applications were secret until they were allowed. If an inventor felt he was not receiving adequate protection for his invention, he could withdraw the application and keep his invention a trade secret. There have been a number of other changes to our patent laws that have weakened inventor’s property rights in their inventions. This is exactly the situation the U.S. was in before Reagan became president.
Reagan significantly lowered our marginal tax rates, unlike the very minor changes made by President Bush. In exchange for lowering the marginal tax rates the tax code was simplified and most deductions were eliminated. Now we have a very complicated tax code, where the alternative minimum tax (AMT) now hits many middle class families. Our marginal tax rates appear low, but the phasing out of deductions makes it much more onerous than it first appears. Finally, the complexity of the tax code has grown to being even more burdensome than in the 1970s.
The ads on TV for “tax fixing” firms remind us that our government is at war against its own citizens. In a truly free country, there would be no market for these firms.
Much like the 1970s we now are being bombarded by tort lawyers looking to get rich off of other people’s misery. In the 70s it was plane crashes, diving boards, ambulance chasers, and perceived environmental concerns. Today it is “bad drugs”, ambulance chasers (some things never change), and asbestos. In the 70s these lawyers killed off diving boards, killed off the nuclear (not nucular President Bush) power, and almost killed off the private aviation business.
Before Reagan unions were draining the life out of our corporations. They received oversized pay checks and imposed productivity killing rules. Today public sector unions have pay packages that are much larger than their private sector workers who are paying them. The retirement packages are outrageous paying retirees six figure pensions to people who have committed felonies and are in prison.
The Reagan Revolution has completely undone. Are we better off today now that Reagan’s agenda has been completely subverted? Will regressives (freedom haters) admit the damage they have done to the world, freedom, and the US?
President Obama in a Wall Street Journal op-ed piece said that he has directed federal agencies to eliminate job killing regulations. According to Obama the Executive order requires “a government-wide review of the rules already on the books to remove outdated regulations that stifle job creation and make our economy less competitive.” As an example he points out:
For instance, the FDA has long considered saccharin, the artificial sweetener, safe for people to consume. Yet for years, the EPA made companies treat saccharin like other dangerous chemicals. Well, if it goes in your coffee, it is not hazardous waste. The EPA wisely eliminated this rule last month.
The fact that it has taken a severe economic recession and the lagging poll numbers of a president to make this changes shows how heavy handed our government has become and how Bzyantine our regulatory environment is. I have suggested that the US needs a Regulatory Bill of Rights to provide citizens protections from excessive and contradictory regulations. The Bill of Rights (first ten amendments) do not protect citizens from regulatory rules. With just a few exceptions, if the governmental designates something a regulatory law or civil penalty then it can completely ignore the Bill of Rights. I doubt that this is what the Founding Fathers intended when they passed the Bill of Rights.
If President Obama really wants to get rid of job killing regulations here is a list in order of importance:
1) Repeal Sarbanes Oxley
Sarbanes Oxley has effectively killed the IPO market and the better part of the equity market in the US. See Sarbane Oxley Obstructing Innovation
2) Fully Fund the US Patent Office
Congress has stolen about $2B in user fees from the US Patent Office over the last two decades. This has hurt innovation, job growth, and the economy. See Restore Patent Funding to Create Jobs.
3) Repeal all Securities Laws
Every econometric study of our securities laws shows that they provide no benefit for investors. See Liu, Tung, Santoni, Gary J., Stone, Courtenay C., Federal Securities Regulations and Stock Market Returns. This paper surveys several papers that have studied the effects of securities laws all of which show no meaningful change in investor outcomes.
4) Pass a Regulatory Bill of Rights
This would provide ordinary citizens the tools necessary to require the federal government to only implement regulations that achieve their purpose in a cost efficient manner. See Regulatory Bill of Rights.
5) Eliminate the Income Tax
The income tax is not designed to generate revenue for the federal government. It is designed to punish certain people who have committed no crime (violation of the due process clause of the 5th Amendment) and to allow Senators, Congressmen and the President to sell tax favors to the wealthy. The income tax system should be replaced with a system with the sole goal of providing the federal government the revenue it needs. A flat tax or a national sale tax would both work.
6) Repeal ObamaCare
This is a job killing piece of legislation that we cannot afford.
7) Reform Social Security and Medicare
The best reform is to make them defined contribution programs instead of defined benefit programs.
If President Obama were to implement these five simple changes, the U.S. would see above 7% growth for the next two decades.
In a January 2, 2011 column (Needed: A science stimulus) in the Washington Post, George Will points out that the US is suffering from a lack of innovation. He makes a token node to the patent system in the article and then he focuses on government spending on science and engineering and does not mention the patent office is underfunded. George reflects Washingtons and the elitists attitude that government spending is what drives the economy. He just believes government spending should be directed to science. In addition, he repeats the elitist comment that most of the science is done by the elite and us peasants don’t really contribute much.
The late Nobel laureate Julius Axelrod said, “Ninety-nine percent of the discoveries are made by 1 percent of the scientists.”
This elitist attitude contradicts all the available evidence. As the book, The Most Powerful Idea in the World, discussed in Georges’ article points out, sustained economic growth does not happen until property rights for ideas (patents) are enacted. This releases a flood of inventions, not by the elite, but by ordinary citizens. It was the democratization of the inventing process that lifted the masses out of the Malthusian Trap.
From President Bush’s 1000 points of light to President Obama’s biblical argument “aren’t we our brother’s keeper?” for government charity programs it appears everyone agrees that charity is good for our country and may even strengthen our economy. We are bombarded with the message that “we must give back to our community.” This discussion even spilled over to Bill O’Reilly and Stephen Colbert where they both agreed that charity was good but disagreed on the extent and implementation of charity.
First, let’s examine the logic of the “give back” mantra. In order to give something back you must have taken something. If you live in a free and just society the only people who can “give back” are those people who are thieves. The statement is complete nonsense, meant to associate anyone who is successful financially with thieves morally.
Yes, but we don’t want to see our fellow human beings dying in the street for lack of food do we? About 200 years ago humans in the Western world first escaped the Malthusian Trap. The Malthusian Trap is when humans are like every other animal, their population expands until they are on the edge of starvation. This means that until 200 years ago some people did starve to death and it was a real threat for all but the wealthiest people. This could not have been solved by using charity to redistribute food to those people starving. There just was not enough food for all the people on Earth. Even today there are parts of the World where people starve to death. This problem will never be solved by charity. While there may be enough food to feed all the people on Earth today, the problem is purposeful manipulation of food supplies in countries for political purposes.
People did not escape the Malthusian Trap because of charity. The only reason people escaped the Malthusian Trap is because we increased our level of technology. The only way to increase our level of technology is by inventing and then disseminating these invention. This occurs when we have strong property rights, particularly for inventions (patents), and free markets. Why don’t we celebrate people and companies that create and disseminating new technologies instead of charity? If you truly want to help the “poor,” then you should support free markets and strong property rights, particularly for inventions. For more information see Source of Economic Growth.
Charity takes (gives) money from a productive person and gives it to someone who has not produced anything. Since everyone has to consume to live, charity results in a decrease in total wealth. In addition, the money given to charity is not given (spent) on someone who is productive. If you really wanted to maximize the “pay it forward” value of your charity, you would give it to the person who was most likely to do the most good with it. This means you would give it to a person who is productive, which is what generally happens in a free market.
When people donate their time to charities it also destroys wealth. When engineers, lawyers, architects, doctors, etc spend time preparing meals or hammering nails, they are trading time worth $100-$1000 per hour for labor worth $10 per hour. This does not help the poor, it just reduces the total wealth created.
Does charity have any value? I have been both the recipient of charity and have given charity over the years. I am appreciative of the charity I have received and have no regrets about the charity I have given. Charity is like manners. It makes civil society more pleasant, when it is private charity. Government charity is not charity it is theft. Even when there is too much private charity it is destructive. How much is too much charity? When more than 10% of the people in a country receive charity it is too much. I remember a United Way pitch I was forced to sit through where they said 40% of the people in our area benefited from the charities the United Way supported. If that was the case, why didn’t we just pay for these things directly rather than paying United Way to take a cut and redistribute our money?
Here is what Ayn Rand had to say about charity.
My views on charity are very simple. I do not consider it a major virtue and, above all, I do not consider it a moral duty. There is nothing wrong in helping other people, if and when they are worthy of the help and you can afford to help them. I regard charity as a marginal issue. What I am fighting is the idea that charity is a moral duty and a primary virtue. (emphasis added)
“Playboy’s Interview with Ayn Rand,” March 1964.
Note that Ayn Rand believes that charity requires judgment, specifically the judgment of whether the recipient is worth of help and the giver can afford the expense.
People who push charity as a moral issue are immoral and are not helping the “poor.”
It has been a year since I published my book The Decline and Fall of the American Entrepreneur: How Little Know Laws and Regulations are Killing Innovation. The book explains that the only way to increase real per capita income is by increasing our level of technology. This can be accomplished by capital equipment purchases, which upgrade plant and equipment with newer technologies or by creation of inventions. Since the United States is a leader in technology, we do not have the choice of just upgrading to new technologies produced in another country. So we must create new technologies if we want our economy to grow. There are two ways to encourage the creation of new technologies; government funding or private investment in inventions. Government spending on research and development is not nearly as effective as private spending for all the same reasons that government spending is always wasteful. A study by the Small Business Administration shows that most emerging technologies are invented by small entrepreneurial start-ups. Unfortunately, since 2000 the U.S. has undermined the three foundations on which technology start-ups are based. Those three foundations are intellectual capital, financial capital, and human capital. We weakened the intellectual capital foundation by weakening our patent system, we weakened the financial capital foundation with the passage of Sarbanes Oxley, and the human capital foundation was weakened by the accounting rules that required the expensing of stock options.
Since my book was published the financial capital foundation has been further undermined by the passage of the financial reform bill. There has been no change on the human capital front. There is mixed news on the intellectual capital front. The good news is that David Kappos replaced the incompetent and traitorous Jon Dudas as the head of the Patent Office. The bad news is that Supreme Court again illustrated their utter incompetence in the Bilski decision. For more information, see The US Economy and the State of Innovation.
These problems are being exacerbated by the budgetary issues associated with aging baby boomers. The Obama and Bush administrations compounded these problems by expanding Medicare to prescription drugs and the passage of Obama Care. Presently, Medicare/Medicaid and the Children’s Health Insurance Program (CHIP) represent 21 percent of the federal budget. Social Security represents about 20 percent of the federal budget and interest payments represent about 8 percent of the federal budget. It is estimated that about 10,000 baby boomers will go on Medicare per day for the next twenty years. However, about 5000 seniors are dying per day. Each Medicare recipient costs about $10,500, so Medicare costs will expand by $185 billion dollars (today’s dollars) or another 5% of the federal budget. Roughly, the same calculation applies to social security. So Medicare and Social Security will consume approximately 50% of the U.S. federal budget by 2020. In addition, the interest payments are likely to consume around 30% of the U.S. federal budget. This means that 80% of the federal budget will be spoken for. This does not include any additional costs for Obama Care. It is unlikely that the federal budget as a percentage of the economy can grow, since the U.S. had to borrow one third of the federal budget in 2010.
Here are my predictions for the next decade based on this background. I provide an optimistic, most likely, and pessimistic scenarios. Note these scenarios are based on what I believe is most likely to occur, not what I believe is the best that could be done or the worst that could be done to the U.S. economy.
Predictions Common to all Scenarios
Properties rights of all kinds will continue to be weakened. It appears that you can get a PhD. in economics (or even win the Nobel Prize) without understanding even the most basic ideas of property rights and how they affect a free economy. Even so called free market economists forget that Reagan not only cut tax rates, he strengthened property rights. Particularly he strengthened patent rights – for more information click here. He also strengthened property rights by weakening regulations and weakening the power of unions. A number of so-called free market economists do not understand that property rights are based on productive activity. As a result, they have joined in an all attack on property rights for inventions – patents. For more information see Scarcity Does it Prove Intellectual Property is Unjustified.
There does not appear to be any meaningful ground swell against Sarbanes Oxley and the Financial Reform Bill. As a result, entrepreneurial companies will be starved for financial capital. Because it appears very unlikely we will strengthen property rights for inventions or property rights generally or strengthen our capital markets so they work for start-up companies, the most optimist scenario is limited to subpar growth.
The growth of the Internet will result in a continued decline in commercial real estate values under all scenarios. Commodity prices are likely to increase, inflation adjusted, under all circumstance. Growth in China and inflation will drive this increase in commodity prices.
This scenario assumes that the U.S. faces up to its budgetary problems, repeals Obama Care, and rationalizes it tax structure. This scenario assumes that Obama is not elected for a second term. Government spending will grow slightly as a percentage of GDP. Supply Side economists would probably consider this enough to create vigorous economic growth. However, it does nothing to really encourage investment in new technologies. As a result, real inflation adjusted GDP growth over the decade will probably be around 2%. Median household family income after taxes will be stagnant. This will be two decades during which median household income has not grown in the U.S. I believe that will be the first time in the history of the U.S. this has occurred.
The housing market is likely to be stagnant since family incomes will be stagnant. Inflation is likely to run 4-6%, but this will not be enough to cause appreciation in housing prices. In fact, inflation adjusted housing prices will likely decline.
The best economic opportunities will be in government related jobs or businesses. Commodity based business will also prosper. Technology entrepreneurs will be few and far between. Unemployment numbers will hover between 7-9% throughout the whole decade – this will be the new normal. The U.S. will no longer be the largest economy in the world and based on per capita income among large countries the U.S. may fall below the top ten in the world. The U.S. will also be one among many equals in technological and scientific leadership. All social ills will increase slowly including crime, number of welfare dependents, and black market transactions.
Most Likely Scenario
This scenario assumes that the U.S. will not face up to its budgetary problems and Obama Care will not be repealed completely. Under this scenario, the U.S. will go from financial crisis to financial crisis. Each financial crisis will be meet with a short term band-aid solutions. Federal government spending will grow to at least 30% of GDP and total government spending will be 50-60% of GDP. Inflation will grow to 10-14% by the end of the decade. Despite this, housing prices will not keep up with inflation. Median household family income after taxes will decline by 2-7%. Official GDP numbers will show slightly negative growth, but this will over state the actual growth rate.
The best economic opportunities will be in government related jobs or businesses. Commodity based business will also prosper. The financial differences between those who are in the government’s favor and those who are not will be huge. Technology entrepreneurs will be almost nonexistent. The brain drain from the U.S. will be apparent and a cause for anxiety. Unemployment numbers will hover between 9-15% throughout the whole decade. The U.S. will no longer be the largest economy in the world and based on per capita income among large countries the U.S. will fall well below the top ten in the world. The U.S. will also be a declining power in technology and science. All social ills will increase moderately including crime, number of welfare dependents, and black market transactions. The chance of a major war in the world will be moderate.
The U.S. will not face up to its budgetary issues even to get through a crisis. The U.S. will either literally default on its debt or inflation will be over 20% or both. Multiple states will go bankrupt and be bailed out by the federal government. Tax burdens will skyrocket as will the black market. Housing prices will decrease significantly except in extremely exclusively neighborhoods. Social order will collapse. The pretense that the U.S. is a nation of laws or that the Constitution has any meaning will be completely destroyed. There is a possibility (15%) that there will be a military coup. Alternatively or in combination there is a possibility that the U.S. will break up into a number of separate countries. Many parts of the U.S. will decide that it no longer makes sense to support Washington, Wall Street and parts of California that have become use to crony capitalism and government handouts. The brain drain from the U.S. will be well known and huge. This may be the driver for politicians and voters to demand real reform. China and India will dominate the world economy. Unfortunately, neither will likely fill the U.S.’s shoes and become a technological and scientific leader. Singapore will likely be the richest country in the world on a per capita basis by a large margin. They will be the major center of technological and scientific research. The chance of a major war in the world will be probably.
The best reason to be more optimistic is that the U.S. has never had two bad decades in a row. In the late 1930s and late 1970s there was no reason to suppose that the U.S. would right itself economically. We pulled out the 1930s because Roosevelt realized that he had to adopt pro-business policies if the U.S. was to have any chance of winning World War II and so did the voters. In the 70s, there was little hope that the U.S., let alone England, would pull out of the inflationary spiral, increase unionization, increased regulation, increasing government spending and entitlements. However, there was the glimmer of Ronald Reagan and a surge of free market economists such as Milton Friedman, who still understood property rights. Unfortunately, I do not see a Ronald Reagan on the horizon and many of today’s free market economists are overly focused on the detrimental effects of Federal Reserve and high marginal tax rates. Very few seem to understand the importance of strengthening property rights, particularly for inventions or the need to free up our capital markets from regulation. I hope I am wrong and there is a politician who understands property rights, particularly for inventions, and the need to free up our capital markets, while having the strength to stand up to government unions and special interests.
I cannot decide if we are seeing the collapse of Western Civilization under the weight of the welfare state (socialism) or if we are seeing the last hurrah of the welfare state.
 Ron Paul and Newt Gingrich have advocated eliminating SOX.
A good friend pointed this case out as an example of why software patents do not result in innovation. Here is my response:
Let’s unravel a number of issues:
1) Is this lawsuit frivolous?
3) What is the empirical evidence of whether strong or weak patents for software result in more funding, more products, and more employment?
1) Is this lawsuit frivolous?
I have not studied this case in enough detail to know the answer. The outrage over the Amazon one click patent was complete misplaced. The Amazon one click patent was a real invention, there was not a mountain of prior art that the critiques claimed, and it was copied and much more successful than previous techniques. The one click patent not only simplified the ordering process, it was more secure, and customer preferred it. The level of outrage about lawsuits is more about politics than about logic. By the way all Barnes and Noble had to do to avoid the patent was put in two clicks. I have heard no outrage about how lazy they were to not even write code that had two clicks.
Unfortunately the software industry has the habit of rewriting code, which is inefficient, instead of buying previously developed code. Despite the open source communities attempt to wrap themselves in the innovation flag, much of what they do is rewrite code that has already been written. This is not innovation, it is not productive, it is narcissism. In addition, many companies follow the policy of purposeful ignorance. Meaning they purposely do not have their engineers look for prior art to supposedly avoid willful infringement. We should not reward purposeful ignorance and we should not encourage people to reinvent the wheel.
Note that when Fritz Haber invented the process of fixing nitrogen the competitor of Bosch said he should never have received a patent. He went one to win the Nobel Prize in Chemistry and this invention is the main reason we are not presently starving. Again, the level or outrage is a tactical decision, it is not a reasoned argument.
2) Is the present system for litigating (obtaining) patents an intelligent way to resolve these issues?
There are a number of problems with the way our patent system is implemented. Why do we have judges who do not understand patent law and do not understand the underlying technology (facts) deciding this cases. They are ignorant on the law and the facts. In addition, we have made it so expensive to litigate in federal court that justice is secondary (tertiary) to the cost of litigation. Many large companies use this fact to pursue a policy of efficient litigation. You should not confuse the problems with the system of adjudicating the conflict with the value of the underlying property right. My clients have been the victims of this absurd lottery system. But. they have also been the victims of big companies who believe in efficient infringement.
In my opinion, we need a set of special courts that hear patent cases. The amount of discovery should be significantly limited, because this is the big cost of these lawsuits. Perhaps we should implement a loser pays system. The timeframe should be significantly limited, such as one year to the end of trial. We should also limit the number of issues. For instance, only infringement and prior art validity should be considered. Arguments by the defense of inequitable conduct are mainly made to increase the cost to the patent holder and to allow the defense to go on a fishing expedition. The threshold for inequitable conduct needs to be much higher. Many of the things claimed to be inequitable conduct are not, they are excuses to steal other people’s inventions.
Patents on software also suffer from a couple of problems. One is that we decided not to allow patents for software back in the 70s. As a result, the patent office does not have a good base of prior art. This means they are going to make more mistakes in both allowance are rejecting these kinds of inventions. Second, the time (4-10 years) that it takes to get a patent, particularly one on software, through the patent office causes all sorts of problems. These problems are not inherent to software. They are the result of purposeful decisions. Why has Congress taken (stolen) a billion dollars of user fees from the patent office? If it took 2-10 years to obtain title to your house and the risk of losing your property in court was high, would you say that we should not have property rights in real property? Or would you say the process of obtaining and defending these rights flawed. The problem is not with the property right it is with the implementation.
3) What is the empirical evidence of whether strong or weak patents for software result in more funding, more products, more employment?
Every study on this issue is overwhelming. It shows that software investment, products, and employment all took off as it became clear that you could obtain a patent on software –see the 1990s. When the open source began to successfully attack software patents, the number of product stagnated, the number of software employees stagnated, and investment in software stagnated – see this decade.
If a lack of patents was the key to software innovation, then North Korea, Libya, Nigeria should all be bastions of software innovation. The anti-software patent crowd argument is about emotion not logic.
I went to an excellent talk by Professor Gary Wolfram, of Hillsdale College, at the Pikes Peak Economic Club last night. He explained that free market capitalism is associated with the wealthiest nations in the world and centrally planned economies are associated with the poorest nations of the world. Free markets are based on property rights and the rule of law, not the rule of man. The freest nations economically have the longest life spans. The poorest ten percent of the population in the freest countries have a greater share of the total wealth than in non-free countries. A poor person in the wealthiest/freest countries is likely to live in a house they own, the house is generally a three bedroom house, and most likely has air conditioning.
Professor Wolfram explained that the way you get rich in a free society is to provide goods and services that large numbers of people want. He stated that we should celebrate people and companies that make large profits, because they have made a large number of people happy. A big reason why free market countries are so wealth is because they provide an incentive to innovate. He pointed out how many products that we use today did not exist 30 or 50 years ago.
In the question period of the talk, I pointed out to Professor Wolfram that there is a strong relationship between economically free countries and those that have strong property rights for inventions or patents. The most innovative countries in the world are those with the strongest patent systems. Those countries that first escaped the Malthusian Trap were those with strong patent systems. Vice versa those countries with weak patent systems or non-existent patent systems are poor, not innovative, and are often still mired in the Malthusian Trap. I then asked why so many “free market” proponents want to weaken or eliminate property rights for inventions (patents).
He rejected my premise that many free market proponents were anti-patent. He went on to explain that some inventions deserve patent protection that had shorter periods of time and that other inventions deserved longer periods of protection according to a perfect theoretical model of economics. For instance, inventions that would have been discovered by someone else shortly thereafter should receive shorter terms than “truly novel” inventions. He also suggested that patents inhibit the diffusion of new technologies. Finally, he implied that the way we increase our wealth is by driving down the profits associated with products and services. Reducing the profit margin in goods and services increases the availability of these goods and services. It is common for free market proponents to see the market process of reducing the profit and cost of goods and services as the major way free markets increase wealth.
Several people pointed out that his proposal for different lengths of patent protection seemed to contradict his idea that capitalism is based on the rule of law, not the rule of man. The implication was that someone would have to decide which inventions would receive which term length. As a result, this would be an arbitrary rule of man decision. In fairness, Professor Wolfram pointed out that this was not true as long as the standard was objective. While I disagree that we should have different terms for different inventions, Professor Wolfram is clearly correct that this is not necessarily subjective.
The empirical evidence does not support the suggestion by the Professor that patents inhibit the diffusion of inventions and technology. Those countries with the strongest patent rights also have the greatest technology diffusion. A major goal of modern patent systems is to spread the information associated with inventions, so that other inventors can build on the work of previous inventors. There is also no empirical evidence for the idea that inventions would occur without property rights for inventions. Those countries without strong patent systems do not produce inventions. The suggestion that, in a free market system, inventions will just occur is at best speculation and the evidence we have shows the opposite. When the US has weakened its patent system, our innovation has suffered as well as our economy. For instance, in the 1970s we weakened our patent system and the US started to technologically fall behind Japan. For more information see Foreigners Receive More Patents Than US!
The most troubling part of Professor Wolfram’s response was the implication that wealth is created in a free market economy by driving down profits. Professor Wolfram seemed to imply that there was a “correct” or “optimal” amount of return an inventor should receive for a patent. Shouldn’t we celebrate inventors who create something that everyone wants? If an inventor creates something very few people want, how does that hurt technological diffusion? More importantly, is it really true that wealth is created in a free market by driving down the profit margins of manufacturers (or inventors)?
The idea that the real power of the free market to create wealth is in its ability to foster competition (for the same product) and therefore drive down profit margins is incorrect. If we were able to obtain every product available in 1900 at its cost or even free, we would not be nearly as wealthy as we are today. Wealth is mainly created, not by cost or profit reduction, but by the creation of new inventions, i.e., technology. We do not want people/companies competing to produce me-too products, but competing based on inventions. Shortening the length of patents will encourage competition on me-too products instead of creating new products. While the optimal length for patents may be difficult to determine, shorter terms will discourage innovation. There is no evidence that the present length of patents are inhibiting innovation or the economy.
The idea by free market economists that the power of free markets is there ability to reduce the cost of existing products also leads to fallacies about antitrust law (now rebranded as competition law). This cost reduction theory suggests that we should aggressively apply antitrust law to create competition. However, the empirical evidence shows that periods of aggressive antitrust enforcement result is low levels of invention and weak economic growth. For more information see Foreigners Receive More Patents Than US!
Wealth in a free market is mainly created by the invention of new technologies. It is a failing of economists to suggest that the power of a free market is its cost reduction of existing products. This fallacy results in an anti-property right policy towards inventions and an aggressive application of antitrust laws. The empirical evidence shows these policies do not create wealth.
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