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Archive for December, 2009

Larry Kudlow is Wrong!

Larry Kudlow is predicting a strong V shaped economic recovery in 2010.  His reasons for this prediction are a steep positive yield curve and the rising stock market.  While Mr. Kudlow is a top notch economist and I appreciate his optimism, here is why I believe he is wrong.

Yield Curve

A steep positive yield curve is not necessarily a good predictor of the strength of the economy.  As seen in the chart below, the yield curve was positive and above the 80 year average throughout the 1930s and this did not portend strong economic growth.

(Source: (12/24/09), An 80-Year Yield Curve and its Implications, Shaw, Richard, “Seeking Alpha.”

In the 1970s, the yield curve was positive and above the 80 year average for much of the decade and this did not portend strong economic growth.  The 60s saw the yield curve below the 80 year average and negative twice, which did not signal weak economic growth. 


Some people suggest that Venture Capital is just in a normal cyclical downturn.  Not a single venture backed company went public in second quarter of 2008.  This has not happen since 1978.  This was followed up by no venture backed companies going public in second and third quarters of 2009.  This is clearly not just a cyclical downturn.

Venture Capital is built on technology start-up companies whose main assets are inventions.  The value of these inventions is determined not just by their technical merit, but the strength of title to the invention.  If legal title to the invention is weak, then a great technical invention provides a very limited opportunity for the start-up company or its investors.  This clearly reduces the value of the company and the chances of return for it investors.  Since 2000 the U.S. has significantly weakened inventors’ title to their inventions.

A thriving Venture Capital ecosystem requires a viable exit market for start-up companies.  This provides returns for the Venture Capital investors, founders, and key employees.  While mergers and acquisition are one exit market, a viable public market is critical for start-ups to obtain reasonable valuations in M&A market.  As discussed above, the public market is essentially closed to start-up companies.

The book, The Decline and Fall of the American Entrepreneur, by Dale B. Halling,  explains:

How we have weakened inventors’ and start-up companies’ rights to their inventions;

How the capital markets have been foreclosed to technology start-up companies;

How the accounting rules have changed to limit start-up companies access to human talent; and

How these changes to our laws are killing the Venture Capital market.

Get your copy of The Decline and Fall of the American Entrepreneur today.  Available on




Dec 18, 2009 – The U.S. of the ‘90’s was a dynamic society filled with promise, high quality jobs, and the economic envy of the world.
Now the U.S. is a static corporatist society filled with political groveling worthy of a Dostoyevsky novel.
What has happened?  How did the U.S. go from endless possibilities to endless nightmares?

How did the U.S. go from endless possibilities to endless nightmares?   The book The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation, by Dale B. Hallling, will clearly explain-

That the 90s were more innovative than the decade of 2000-2009;

That innovation is the key to real per capita increases in income;

Why the venture capital model is defunct;

How little known laws have undermined the three pillars on which the innovation of the 90s was built; and

How the U.S. can regain its preeminence as the most successful and dynamic economy in the World.

This long overdue book is now available for $21.95 on

# # #

Dale B. Halling is a patent attorney, founder of several start-ups and author of the book “The Decline and Fall of the American Entrepreneur.”


According to, the Senate has voted for fee diversion from the U.S. Patent and Trademark Office.  This reprehensible practice is has done untold damage to U.S. innovation.  The Senate’s failure to fulfill their constitutional responsibilities will help to ensure that the present economic downturn is prolonged.  As Gene Quinn explains:

The Senate vote would re-institute fee diversion, which means that if the Patent Office were to collect revenues over and above the amount allocated by Congress those additional fees would not be able to be used by the Patent Office to improve operations, or even for just handling the increased work generated by additional filings.  Rather, fees received over and above the allocated amount would be stripped from the Patent Office and diverted into the General Treasury account.  That is plain and simple a National Innovation Tax, and it is an enormously bad idea.


It is quite common to hear that only 2% of all patents every make money.[1]  Apparently this myth has been around for a long time, because Jacob Schmookler in his 1966 book Invention and Economic Growth, he investigates this myth.  His survey show that over 50% of patents are commercialized.[2]  He states that “prevailing opinion has proved to be in serious error.”  He found similar results in Europe, based on the percentage of five year maintenance fees paid.  He states that even “many corporate officers who doubted the accuracy of the (commercialization rates) later found that their own companies’ experience confirmed the findings.”  He notes that most people are only able to perceive giant steps in an area of technology.  As a result, most people not skilled in the art deny the novelty encompassed by the average invention.  A recent survey in China finds that 70% of patents are commercialized in China.[3]


[2] Schmookler, Jacob, Invention and Economic Growth, Harvard University Press, Cambridge, Massachusetts, 1966, p. 49. 

[3] (12/16/09).


Jacob Schmookler, who conducted the most extensive econometric study of patents, estimated the mean value of a patent as $80,000.00 in 1966.[1]  Adjusting for inflation this would place the mean value of an issued patent at $506,000.00.  This estimate seems reasonable based on other data points.  For instance, Intel’s venture capital arm around 2000 would increase the valuation of any start-up they invested in by $1 million for each issued patent.  Of course, not all patents are created equal and the very illiquid market for patents means that the value of any particular patent will vary significantly.  If there were a strong secondary market for patents, we would not only have a better understanding of the value of an issued patent but also less variation.  For more on how to create a strong secondary market for patents see Jump Starting a Secondary Market for Patents. (

[1] Schmookler, Jacob, Invention and Economic Growth, Harvard University Press, Cambridge Massachusetts, p. 55, 1966.


There appears to be considerable confusion differentiating property rights, possession and objects in the economics including academic papers. Property rights are a moral and legal concept. Historically, the moral reason for property rights is based on the natural rights concept that you own yourself and therefore you own the product of your labor, both physical and mental. Property rights in an object mean that you have a legal title to an object, which gives you the right to exclude others from using the object in which you have title. This is exactly the same whether the property right is in the object of land, chattel, inventions, or writings.


This book explores the business strategies of patents in the context of Microsoft’s attempt to remake its image this decade. The authors of the book are Marshall Phelps, the architect of IBM’s successful patent licensing program, and David Kline, the author of Rembrandts in the Attic – the standard against which all books on patent business strategy are measured.

The book describes how Microsoft used its patent portfolio to build relationships with its customers, like Toshiba. The vehicle for it to accomplish this goal was patent cross licensing deals. However, before Microsoft could make any progress in these deals they had to drop their non-assertion of patents clause. Microsoft had invented this clause in order to compensate for their weak patent portfolio in the 90s.


The authors of Against Intellectual Monopoly in an editorial in the Christian Science Monitor suggest ending the patent system.  The number of errors in such a short editorial is staggering, especially considering the authors are distinguished professors at a major university – Washington University in St. Louis.  Each of the major errors are discussed below.


Levine and Boldrin constantly describe a patent as a monopoly in their editorial.  A patent gives the holder the right to exclude others from making, using or selling the invention.  35 USC 154.  It does not give the holder the right to make, use or sell their invention.  According to Wikipedia “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; potential competitors are excluded from the market by law, regulation, or other mechanisms of government enforcement.”  Since patents are clearly “government granted”, then this is the appropriate definition.  Since a patent does not even provide the holder the right to sell their invention, it clearly does not grant an exclusive privilege to a firm to be the sole provider of a good or service.


Is Sarbox Constitutional?

The Supreme Court is reviewing whether the Public Company Accounting Oversight Board created by Sarbanes Oxley is Constitutional.

According to Yahoo Finance,

“A small Nevada accounting firm and an anti-tax group brought the challenge to the 2002 Sarbanes-Oxley law, arguing that the board created by the law violates the Constitution’s separation of powers mandate because the president cannot appoint or remove its members.”

“The board wields too much, unchecked power, Michael Carvin, the challengers’ lawyer told the court.”

I have discussed the untold damage Sarbanes Oxley has caused to U.S. innovation.  For more information see Sarbanes Oxley – the Medicine is Worse than the Disease and Sarbanes Oxley – the Medicine is Worse than the Disease-2 .

The Supreme Court in recent history has rarely found that there has been an unconstitutional delegation of power.  It is possible that Board may violate the Administrative Procedure Act, but I do not believe that this is the issue before the Supreme Court.  Even if the Supreme Court were to rule that the Board is unconstitutional, this is unlikely to significantly reduce the damage caused by Sarbox.  The good news is that Sarbox seems to be under attack on a number of different fronts.


President Obama travels to the climate conference at Copenhagen this week.  How would limiting CO2 emissions effect innovation?  The president has promised that:

U.S. emissions in 2050 will be 83 percent below 2005 levels. If so, 2050 emissions will equal those in 1910, when there were 92 million Americans. But there will be 420 million Americans in 2050, so Obama’s promise means that per capita emissions then will be about what they were in 1875.[1].

In order to achieve this goal will require significant advances in technology or significant restrictions on the activities of U.S. residents.  The argument that limiting CO2 emission will increase innovation are based on the idea that government mandates stimulate innovation by businesses to meet the directive.  The problem with this argument is that it ignores the innovation that businesses did not undertake because they had to spend their research and development budgets to meet a government directive.  Since it is unlikely that the U.S can achieve these goals without also limiting the activities of its residents, the CO2 emission goals set by the President will limit economic activity.  According the Rate Law of Innovation, any limitation on the goals or means of innovation reduces the rate of innovation.  A weaker economy is also likely to reduce the number of innovators slowing the rate of innovation. 


For engineers and scientists it is easier to understand the major concepts of patent law from the perspective of natural rights, since it is consistent with their scientific training.  Natural rights and science share the assumptions that the world is comprehensible and that reason plus observation can be used to understand how nature operates.  A third assumption needed for this analysis is that a person owns themselves.  This assumption is consistent with John Locke’s conception of natural rights.

Real Property

Property law results from the analysis that if a person owns themselves, then they own the product of their labor.[1] An example from United States history is the Homestead Act.  The concept behind the Homestead Act is that land is not owned by anyone until it is improved by a person’s labor.  Once the person has improved the land, then they are the owner.  Similar concepts are used to define who owns a wild animal.  Once a person owns property they can trade if for other property and this is the basis of a market economy.


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