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Archive for February, 2010


Ayn Rand on Intellectual Property

There seems to be a lot of confusion about Ayn Rand’s position on intellectual property both by her supporters and her detractors.  For instance, the Cato Institute  considers it almost a prerequisite to have read Atlas Shrugged to work there.  However their position on patents and copyrights  is in direct contradiction to Ayn Rand’s position. 

 The following quote from Atlas Shrugged, should give you a hint at Ayn Rand’s position on intellectual property:

“Man’s mind is his basic tool of survival. Life is given to him, survival is not. His body is given to him, its sustenance is not. His mind is given to him, its content is not. To remain alive he must act and before he can act he must know the nature and purpose of his action. He cannot obtain his food without knowledge of food and of the way to obtain it. He cannot dig a ditch––or build a cyclotron––without a knowledge of his aim and the means to achieve it. To remain alive, he must think.”  Rand 1992, p. 1012.

 Ayn Rand devotes a whole chapter, Chapter 11, in Capitalism: The Unknown Ideal to patents and copyrights.  The first sentence makes her position crystal clear.  “Patents and copyrights are the legal implementation of the base of all property rights: a man’s right to the product of his mind.[1]  “What the patent and copyright laws acknowledge is the paramount role of mental effort in the production of material values: these laws protect the mind’s contribution in its purest form: the origination of an idea.”[2]

 After pointing out that intellectual property is the source of all property rights, she clarifies the distinction between the idea and the physical embodiment.  “What the patent or copyright protects is not the physical object as such, but the idea that embodies it.  By forbidding an unauthorized reproduction of the object, the law declares, in effect, that the physical labor of copying is not the source of the object’s value, that the value is created by the originator of the idea.”[3]  “Thus the law establishes the property right of the mind to that which it has brought into existence.”[4]  She then points out that “patents and copyrights only pertain to the practical application of knowledge, to the creation of a specific object which did not exist in nature.”[5]

 Next, she tackles the whole question of whether a patent is privilege (in the modern sense of a gift)[6] or is a right.  According to Rand, the government does not grant a patent, in the sense of a gift, privilege of favor, but recognizes the originator of the idea and protects their rights in the idea.[7]

Rand has a very interesting take on the reason for limited terms of patents and copyrights.  She analogies a patent or copyright to a debt owed to the inventor/author by people that copy the inventor’s invention or author’s book.  Debts are not and cannot be perpetual, so this is why the term of patents and copyrights are limited according to Rand.  I will note that real property rights are actually time limited also.  A person only has a property right in real (personal) property during their lifetime.  How can someone who is not alive own something – this would be a logical absurdity.  However, real property is passed on to the person with the next best title to real property upon a person’s death.  In the case of intellectual property, no one person has better title to intellectual property than anyone else so upon the expiration of its term it becomes free for all mankind to use.  Or as Rand explains, real property “can be left to heirs, but it cannot remain in their effortless possession in perpetuity: the heirs can consume it or must earn its continued possession by their own productive effort.”[8]  In contrast, “Intellectual property cannot be consumed.  If it were held in perpetuity, it would lead to the opposite of the very principle on which it is based: it would lead, not to the earned reward of achievement, but to the unearned support of parasitism.”[9]

Rand seems to anticipate the patent thicket discussion and suggests that this is the reason for shorter terms of patents than copyrights.[10]  She also suggests that it is very difficult to correctly define the limits of a patent boundary.[11]  Here, she is mistaken.  There is no evidence of a patent thicket ever existing on a macroeconomic level, only evidence of people who do not want to compensate an inventor for using their technology.  The boundaries of patents are no more difficult to define than those of copyrights or land before GPS and title insurance.  However, patents will be more useful as the equivalent of title insurance for invention is created.  

 I will end this post with a particularly prescient quote from Rand: 

Today, patents are the special target of the collectivists’ attacks . . .[12]

 


[1] Rand, Ayn, Capitalism: The Unknown Ideal, Signet, New York, 1967, p. 130. 

[2] Id. 

[3] Id. 

[4] Id.

[5] Ibid. p. 131.

[6] See Adam Mossoff’s excellent paper “Who Cares What Thomas Jefferson Thought About Patents?

Reevaluating the Patent “Privilege”, where he points out that historically a privilege is a right that can only be secured in society, essentially synonymous with what we would call a “civil right” today. http://www.pff.org/issues-pubs/ip/bulletins/bulletin2.2jeffersonprivilege.pdf

[7] Rand, Ayn, Capitalism: The Unknown Ideal, Signet, New York, 1967, p. 131. 

[8] Ibid. p. 131

[9] Ibid. p. 131

[10]Ibid. p. 133

[11]Ibid. p. 133

[12]Ibid. p. 133

 
Patent Reform and Independent Inventor

David Kappos and Gene Quinn argue that the present patent reform bill is good for independent inventors and small entities.  See Kappos Trying to Sell Patent Reform to Independent Inventors.

I disagree that patent reform is good for independent inventors or the US economy.

1) Damages – I believe that the patent reform bill still has the provision that reduces damages for infringing.  As long as this provision is in the patent reform bill it will damage small inventors and the US economy.

2) First-to-File:  I understand and have made the point that very few cases are won by the second to file.  However, a first-to-file system is a first step in eliminating the inventor from the patent process.  The next step will be to issue patents to entities, why name the inventors since we are not serious about the true inventors anyway.  A first to file system is a fraud.  It rewards not inventors but people who are skilled at gaming the system.

This is similar to the publication rule.  Most patent applications were being published at 18 months anyway and if you did not want to foreign file you could avoid publication.  But publication is a breach of the social contract between the inventor and society.  Society gets the benefit of disclosure but the inventor may never receive his part of the bargain.  Note that immediately after this breach pendancy times expanded and the allowance rate fell off a cliff.  Ron Katznelson has done a study showing that pendancy times always expand, usually by a factor of two, when a country adopts publication.

3) Publication:  I believe that the present bill requires the publication of all patent applications.  As stated above this is a clear breach of the social contract between the inventor and society.  Publication discourages people from inventing and filing for patents.  If an invention can be kept a trade secret, more people will chose this right to the detriment of everyone.  I have been advising more clients to consider trade secret protection.  We tried the trade secret route in the middle ages and the level of innovation was pitiful.  If an invention cannot be kept a trade secret, investors will be less willing to back a company whose inventions are known to the whole world before the company even gets protection in their own country.

Real Patent Reform

Here are my suggestions for real patent reform that would not only help small inventors but the US economy.

1) Repeal Publication: This would restore the social contract

2) Repeal KSR: A subject standard of patentability just increases costs and uncertainty associated with the patent process.  KSR makes bureaucrats the ultimate arbiter of what is patentable instead of logic.

3) Repay PTO:  Congress should repay the over $1B it stole from inventors with interest.

4) Regional Offices for PTO:  This would ensure steady funding of the PTO and increase examiner retention

5) Repeal eBay:  This decision is logical absurdity.  If a patent gives you the right to exclude, then if you win a patent infringement case you must be able to enforce your only right – the right to exclude

6) Eliminate “Combination of Known Elements”:  The fact that the Supreme Court does not understand that every invention in the history of the world is a combination of known elements is pinnacle of ignorance.  Have they ever heard of “conservation of matter and energy”?

7) Patent Reciprocity:  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.

 
Patents & Innovation

Tech Dirt has a post on Nathan Myhrvold recent article in the Harvard Business Review (http://hbr.org/2010/03/the-big-idea-funding-eureka/ar/pr), entitled Patent Attorney Highlights How Intellectual Ventures Syphons (Siphons) Money Away From Innovation.  The level of misunderstanding in this article is incredible.  First patents are legal title to inventions.  Stocks are legal title to a part of a company.  It is not surprising that patents have some of the characteristics of stocks.  If a secondary market is created for patents, this means that inventors who are not successful in commercializing their inventions will be able to obtain some return for their efforts.  Without a secondary market for stocks any purchase of a company’s shares would be locked up forever.  This would discourage investment in companies.  Similarly, a lack of a secondary market in patents reduces the investment in technology.

The evidence that patents encourage innovation is overwhelming if you open your eyes.  Those countries with the strongest patent laws have the fastest rates of innovation and diffusion of innovation.  Those countries with weak or non-existent patent laws have the least innovation and technology diffusion.  Before patent laws became widespread in the western world, the rate of innovation was slow enough that the per capita income of the west had not changed in centuries.  Note that many of the other conditions of a free market, such as low taxes, property rights, etc existed for centuries before per capita income started to increase in Europe.  If you believe this is just correlation, the burden is on you to prove it since all the evidence is against you.

Clearly, our patent system has problems.  The average time it takes to obtain a patent is over three years.  If it took three years to obtain title to your house or shares in a company you would assume you were living in a third world country.  Patents need the equivalent of title insurance for real property.  Before title insurance you had to pay an attorney a lot of money to do a title search to make sure you were going to obtain clear title to your house or land. In addition, you had to pay a surveyor to determine the boundaries of your land.  The boundaries were not obvious at all and our ancestors were very litigious over the boundaries of their property.

Despite these problems, the US has strong economic growth when we have strong patent laws and systems and weak economic growth when we have weak patent laws.  Antitrust laws were used to weaken our patent laws in the 1930s and 1970s and we had extended economic downturns.  Our patent laws were strengthen in the 1980s and strong in the 1990s and we had strong economic growth.  The only way to increase real per capita income is by increasing our level of technology.  Patents clearly encourage advances in technology, which results in real economic growth.

 

Creating a Thriving Technology Start-Up Environment

Presented by: Dale B. Halling

Where: Colorado Springs Technology Incubator

Peak Venture Group

Thursday, February 25th, 2010

Presentation at 4:00 p.m.

Pink and Red Social to follow 5:00 – 7:00 p.m.

Location: Colorado Springs Technology Incubator

Petritz Foundation Conference Room

3595 E. Fountain Blvd., Colorado Springs, CO 80910

Creating a Thriving Technology Start-Up Environment

Presented by: Dale B. Halling

Mr. Halling is a physicist, lawyer and an expert on patents and entrepreneurship, all of which is revealed through his book, The Decline and Fall of the American Entrepreneur: How Little Known Regulations are Killing Innovation.

Mr. Halling is also the main author and moderator of the blog “State of Innovation,” hallingblog.com.

Space is Limited!   Register Early!!

RSVP to PVG at https://www.peakventure.org/Register.aspx

or directly to mary.fox@cstionline.org (719.685.7877 x100)

Directions:

  • From I25, take exit 139 (only heads east) on Fountain Blvd. for 2.5 miles. The Incubator’s two-story building is on the right side, just one block west of Academy Blvd., situated on the southwest corner of Fountain and Alvarado Drive, directly across from the US Post Office.
  • From the Airport, take Powers Blvd. north to Fountain Blvd. (US 24) west, cross over Academy Blvd. and turn left at the first traffic light on to Alvarado. Immediately turn right into CSTI’s parking lot.
 
The Next Big Thing

According to Nathan Myhrvold, invention is set to become the next software.  Nathan Myhrvold is the head of Intellectual Ventures, an invention capital firm.  Myhrvold states:

I believe that invention is set to become the next software: a high-value asset that will serve as the foundation for new business models, liquid markets, and investment strategies. The surprising success Intellectual Ventures has had over the past 10 years convinces me that, like software, the business of invention would function better if it were separated from manufacturing and developed on its own by a strong capital market that funded and monetized inventions.

He believes that we significantly under invest in inventions.  Inventions are generally funded under a charity model according to Myhrvold.

Rather than relying on the charity model and its overdependence on government-sponsored research, we should be looking for ways to harness the tremendous financial power of the private sector to fund invention. Consider this: Inflation-adjusted federal spending on academic research rose by 60% from 1983 to 2007. Meanwhile, investments in the business sector by the U.S. venture capital and private equity industries soared by 1,140% and 1,940%, respectively. The total $1.6 trillion (in 2008 dollars) invested by venture capital and private equity firms in this period is three times the $537 billion that the U.S. government spent on academic research.

In his article in the Harvard Business Review, he states that patents are not given the respect they deserve.  For instance,

In affluent nations, product companies too often see inventors and other patent holders as adversaries, and vice versa. But product companies should see inventors as wellsprings of innovation and should trust them—and invention capitalists—enough to tell them what new technology the companies actually need. Inventors, for their part, should see manufacturers and invention capitalists as customers and should trust them to pay fair prices for the ideas they use. We aspire to be a trustworthy matchmaker that helps make this happen.

Interestingly, Intellectual Ventures obtains a significant number of patents from individual inventors.

One significant source of patents is the archetypal solo inventor. Many such inventors have no interest in writing a business plan or building a company; they prefer to just hand off their invention to a licensee and move on to the next great idea. Investment firms like ours spare them the work of tracking down and negotiating with lots of potential licensees separately, and we can almost always give them a fairer deal. We’ve paid about $315 million so far to individual inventors, making us one of their largest sources of new capital.

This is additional evidence that Congress needs to make sure that our patent laws are friendly to individual inventors.  Congress is considering changing our patent laws so that they are less friendly to individual inventors, by converting our patent system from a first to invent system to a first to file system, weakening the penalties associated with stealing other people’s patented technology, and requiring all patent applications to be published at 18 months.

As the US moves from a manufacturing economy to a knowledge economy more people will be involved in the business of inventing.  We need strong patent laws and an efficient Patent Office to facilitate this transition.  We also need entrepreneurs, like Mr. Myhrvold, to create an efficient market in patents.  Many people do not remember that before title companies, buying real property required expensive title searches and determining the boundaries of your land was expensive and uncertain.  In the 1800s lawsuits over title and land boundaries were extremely common.  No one suggested that we should not have real property rights in the 1800s because of these problems.  The same evolution will occur with respect to patents, if we allow the market to work and maintain strong patent laws.

 
President’s Day and Patents

President Lincoln

Abraham Lincoln received Patent No. 6469 for a device to lift boats over shoals on May 22, 1849.  The invention was never manufactured. However, it did make him the only U.S. president to hold a patent. Abraham Lincoln whittled the model for his patent application with his own hands out of wood. It is on display at the Smithsonian Institution National Museum of American History.

The invention consisted of a set of bellows attached to the hull of a ship just below the water line. After reaching a shallow place, the bellows were filled with air that buoyed the vessel higher, making it float higher. The invention was never marketed, it was discovered that the extra weight the device added increased the probability of running onto sandbars, defeating the purpose of the invention.

Abraham Lincoln’s View on the Patent System

Abraham Lincoln called the introduction of patent laws one of the three most important developments “in the world’s history,” along with the discovery of America and the perfection of printing.  Lincoln declared that “The patent system added the fuel of interest to the fire of genius.”

George Washington and the First Patent Act

Washington urged the First Congress to enact a patent statute as expressly authorized by the U.S. Constitution and wisely advised that “there is nothing which can better deserve your patronage than the promotion of science . . .” Washington was perturbed that Congress had delayed this important legislation until their second session.

In 1790, the first patent statute initiated the transformation of the United States from an importer of technology to a world leader in technological innovation.

It is reported that Washington’s interest in a patent statute was fueled by his encounter with James Rumsey at an inn where both were staying. Rumsey showed Washington a model of his invention: a mechanical boat that could propel itself upstream by grappling on the bottom. Washington wrote a letter of recommendation for Rumsey. Rumsey used Washington’s letter to obtain patents and support for his inventions from various state legislatures. However this process required so much labor that it sparked Washington’s interest in supporting inventors. Washington pushed for both the patent and copyright clause to the Constitution and urged Congress to pass the First Patent Act.

 
National Inventors’ Day

Ronald Reagan proposed National Inventors Day at February 11 in 1983.  February 11 was chosen because it is Thomas Alva Edison’s birthday.  Reagan’s proclamation was

Almost two hundred years ago, President George Washington recognized that invention and innovation were fundamental to the welfare and strength of the United States. He successfully urged the First Congress to enact a patent statute as expressly authorized by the U.S. Constitution and wisely advised that “there is nothing which can better deserve your patronage than the promotion of science . . .” In 1790, the first patent statute initiated the transformation of the United States from an importer of technology to a world leader in technological innovation.

Today, just as in George Washington’s day, inventors are the keystone of the technological progress that is so vital to the economic, environmental, and social well-being of this country. Individual ingenuity and perseverance, spurred by the incentives of the patent system, begin the process that results in improved standards of living, increased public and private productivity, creation of new industries, improved public services, and enhanced competitiveness of American products in world markets.

In recognition of the enormous contribution inventors make to the nation and the world, the Congress, pursuant to Senate Joint Resolution 140 (Public Law 97 – 198), has designated February 11, 1983, the anniversary of the birth of Thomas Alva Edison, one of America’s most famous and prolific inventors, as National Inventors’ Day. Such recognition is especially appropriate at a time when our country is striving to maintain its global position as a leader in innovation and technology. Key to our future success will be the dedication and creativity of inventors.

Now, Therefore, I, Ronald Reagan, President of the United States of America, do hereby proclaim February 11, 1983, as National Inventors’ Day and call upon the people of the United States to observe this day with appropriate ceremonies and activities.

In Witness Whereof, I have hereunto set my hand this 12th day of Jan., in the year of our Lord nineteen hundred and eighty-three, and of the Independence of the United States of America the two hundred and seventh.

Ronald Reagan

While Reagan’s economic plan is generally thought of as just reducing taxes, he was a strong supporter of policies that encourage invention.  He strengthened the patent system by creating the Court of Appeals for the Federal Circuit.  All patent appeals were consolidated into the (CAFC) created in 1982. A number of the initial Judges on the CAFC were former patent attorneys and the court brought consistency to patent appeals.  The court also took seriously the idea that issued patents are presumed to be valid.  These changes signaled a more favorable atmosphere for patents in the 1980’s.  Before the CAFC patents were treated differently in each of the federal court circuits.  Some circuits had not upheld the validity of a patent in decades.  The new court brought a sense of stability to patent law.  The 1980’s saw a restoration of America’s economic and technological dominance in the world.

As Reagan’s quote above shows, he understood the connection between a strong patent system and a strong economy and more generally a strong U.S.  Today 96% of Americans believe innovation is critical to the success of the US as a world economic leader.  Zogby Poll, January 2010.  If America wants to be great again, then we have to protect the rights of our inventors.

 
Public vs. Private Action: Jobs Bill

The Obama administration is proposing a jobs bill or stimulus II bill. The fundamental question is whether the government should create jobs directly or pursue policies that allow private companies to increase employment. If the government were to spend its entire budget on jobs, it could only spend $3.5 trillion. If you eliminate “mandatory spending” which includes Social Security, Medicare, Medicaid, and interest expenses then you are left with only $1.3 trillion. This is essentially the amount of the projected deficit for 2010. Public action could result in $1.3 trillion spending on jobs at best. This spending is unsustainable since it is based exclusively on borrowed money.

 How much money could be invested in jobs if the U.S. were to pursue policies that encourage investment in job producing enterprises? The U.S. has a $14.0 trillion economy. If you assume that the U.S. earns 10% on capital, then there is $140 trillion in capital in the U.S. The U.S. represents 20% of the world economy, so there is at least $700 trillion in capital in the world. If the U.S. were to pursue policies that encouraged private investment in the economy, then it would not be surprising if it attracted 1% of the worldwide capital or $7.0 trillion. This would dwarf the $1.3 trillion that the government could spend on jobs. Private investment would create self sustaining jobs unlike government spending. In addition, the government would save the $1.3 trillion it would have otherwise spent so the country would be $8.3 trillion better off. These numbers are not exact but it clearly illustrates the point that private action is much more powerful than public action.

What policies would encourage this avalanche of private investment? The right policies would encourage investment in technology, since the only reason we are wealthier now than in the past is because of our level of technology. New technologies are capable of exponentially increasing our standard of living and create high quality, high pay jobs. The top three policies that would encourage private investment in new technologies are: 1) strengthening our patent laws (intellectual property), 2) repealing Sarbanes Oxley, and 3) repealing the capital gains tax. Patent laws are the method of obtaining title to technology. If a company cannot own its technology, then investors and inventors are unlike to invest in developing new technologies. Property rights (patents) are critical to attracting investment. Sarbanes Oxley makes it almost impossible for companies to go public. Access to public markets is critical for investors to monetize their returns. Capital gains reduce the return to investors and are a form of double taxation. The higher the capital gains the lower the level of investment.

Private action is significantly more effective at creating jobs and stimulating the economy. We need policies that encourage investment in technology, because advances in technology are the only way we increase real per capita income. These policies include strengthening our patent laws and repealing Sarbanes Oxley and capital gains taxes.

 

Mr. Halling did an interview about his book, The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation, and jobs with Political Chick, Lisa Chase.  Here the whole interview at http://chataboutit.com/political-chick-employment-and-the-anywhere-revolution-episode-24/ .

 
John Clemens Show – USA Radio

Dale Halling is on the John Clemens show on USA Radio Network which is syndicated around the country.  The transcript of the show is provided below.

With a nine-point-seven percent unemployment rate, many Americans are asking, “where are the jobs?”  Business-policy expert, entrepreneur, patent attorney and author Dale Halling says politicians should begin to look at where the real jobs can be created.  John Clemens reports.

3:00 Standard close

Dale Halling is the author of the book, “The Decline and Fall of the American Entrepreneur.”  Halling writes if Washington wants to create real jobs, they should look at technology where 70 percent of  new jobs will be found.

:20   “advances in technology”

He says entrepreneurs have been stifled by legislation over the last two decades.

:11   “number of entrepreneurs”

Dale Halling says over the last decade foreign countries have made great advances in technology, while the number of American patents issued has been flat.

:26   “to their inventions”

Dale Halling has a four step plan to get America back on track.

:30  “stock options”

It has been both legal rulings as well as legislation that has placed  road blocks in front of many potential entrepreneurs and with that the loss of potential jobs for Americans

:26   “to grow”

Dale Hallings is doing his best to get the attention of not only politicians but those Americans witnessing the Decline and Fall of the American Entrepreneur.

:13    “Halling b l o g-dot-com”

This is John Clemens.

 
International Patent Filings Drop

According to the UN the number of international patents fell for the first time since 1978.  This provides additional evidence that the US and the world are not advancing our state of technology.  The number of US patent issued to US inventors has been flat over the last decade see Foreigners Receive More Patents than U.S.

The World Intellectual Property Organization, or WIPO, received about 155,900 international patent filings last year, a drop of 4.5 percent compared with the nearly 164,000 filings received a year earlier.

The last time we had a downturn in the number of patent issued to US inventors was the 1970s.  The time before that was the 1930s.  The only way to increase real per capita income is to advance our level of technology.  This is more bad news that we are in for an extended economic downturn.

 

I (Dale B. Halling) will be appearing on the Mancow Radio Show Monday, February 8th, between 6-6:30AM, MST.  Mancow and Cassidy can be heard around the country including on AM 890 WLS.   I will be discussing how to create high quality jobs.

 

An excellent article, by Allan Sloan, of Fortune states that the next bailout will be Social Security.  The article, Next in Line For a Bailout: Social Security,  states

Social Security hasn’t been cash-negative since the early 1980s, when it came so close to running out of money that it was making plans to stop sending out benefit checks. That led to the famous Greenspan Commission report, which recommended trimming benefits and raising taxes, which Congress did. Those actions produced hefty cash surpluses, which until this year have helped finance the rest of the government.

 
Patent and Antitrust Law

Historically there has been a conflict between antitrust law and patent law.  Periods of aggressive antitrust enforcement have coincided with the courts’ disfavor of patents.  Is there any economic justification for using antitrust law to limit the strength of patents?

The goal of antitrust law is to ensure competition in the production and sale of goods.  The reason why we want to have competition is to reduce the cost of goods to consumers.  If there is just one company selling a good, then they can charge almost any price they want.  If there are just a few companies selling a good, then they will not compete for customers as vigorously on price to attract consumers as when there are many companies selling a good.  The ideal for antitrust is to have “perfect competition” for all goods.  Perfect competition is the situation where no buyer or seller can effect the price of a good.  A company’s return on a product in a perfectly competitive market will approach zero.

The goal of patent law is to promote invention.  Patent laws were created as part of a country’s industrial policy.  Countries used patents to gain access to inventions in other countries and to encourage the development of inventions.  Modern patent law is only used to promote the development of inventions.  The ideal of patent law is to have everyone developing new technologies that lead to new products and services.

What incentives do these laws provide in the marketplace?  Lets look at how these laws would operate in the case of Ford’s Model T car.  Under an aggressive antitrust policy the goal would be to create competition for the Model T.  The ultimate result of antitrust law would be to have so many competitors that the Model T is free.  However, this would kill any incentive to innovate since any innovation would be hit with an antitrust policy to force competition on the innovator until there was no profit in making the innovation.  So while we would have relatively cheap cars, we would be stuck with a Model T.  Patent law on the other hand would prevent competitors, for a limited period of time, from copying any of the innovations associated with the Model T.  As a result, the potential competitors of the Model T would be forced to innovate.  When they saw that Ford was making strong profits because of his innovations, they would be motivated to invent.  This would lead to a virtuous cycle of inventors creating enclosed cars, cars with starters, cars with four wheel drive, airplanes, jets, etc.  The long term advantage is in encouraging invention instead of encouraging competition.  Antitrust encourages commoditization which not only discourages innovation it discourages production.  Whenever there is a conflict between patent law and antitrust, patent law must rule.

 
Keynesian Economics

I received the following question:

So is Keynes right or wrong?

You can make up for lack of private sector spending after a panic, thus maintaining demand.

OR

You can’t make up for lack of private sector spending after a panic, because the money is just borrowed, which causes inflation, or is taken from the private sector and just redistributed, not increasing demand in the aggregate.

My answer is:

If you actual follow what Keynes states, which is run a budget surplus during good times and spend the surplus during bad times you can moderate the economic cycle.  Note the moderation will include dampening the upside.  In addition, this substitutes government decision making for private decision making, which always results in less growth over time.

The way Keynesian economics works in practice is that it is an excuse to spur demand by deficit spending, usually by programs like cash for clunkers or tax rebates to people who do not pay taxes.  In these cases they are stimulating consumption (mainly).  No one ever got rich by consumption or stimulating the economy by consumption.  Think of a farmer eating his seed corn, this stimulated demand but he is likely to starve to death.  The other common example is to suggest that we break everyone’s car window.  This increases demand and consumption, but are we any wealthier?  No, all we have done is transfer money from the rest of the country to the auto glass industry.  When Keynesian policies result in the country having to borrow money to spur demand, then it does lead to either inflation, higher borrowing costs, or higher taxes or a combination of all three.  This reduces future economic activity and usually the amount of economic activity is not conserved but subject to entropy.  I think you can sum up Keynesian economics in practice as consumption creates wealth, which is clearly nonsense, no matter how many PhD trained ivy-league economist professors repeat it.

I think of my chart on page 11(reproduced here) as showing the boundary layer condition for wealth.  In engineering and physics we look for boundary layer conditions to check and setup our answers to problems.  The income per capita chart clearly shows that the only way to grow income per capita is by changing our level of technology.  Look at the major suggestions on how to spur our economy.  Keynes: consumption equals wealth creation.  This is clearly complete nonsense.  Supply side economics: this normally focuses on reducing taxes and regulatory burdens.  When an economy is running at less than its optimum point this will cause economic growth, but without inventions we will eventually stagant.  Now regulations and taxes can reduce the incentive to invent, so there is overlap.  Monetarists: If we just manage the money supply appropriately we will create economic growth.  Money is just a medium of exchange and a medium of measurement.  While screwing with the money supply messes up the functioning of the economy, even if the money supply is stable it will not create anything that makes us wealthy.  Invention-side economics is the only way to increase our wealth over time – it is the boundary layer condition.  An interesting example from the book is Eli Whitney’s invention of the cotton gin.  The US was producing just 4000 bales of cotton per year before the Whitney’s invention.  Ten years later in 1801 we were producing over 100,000 bales of cotton per year, more than a 50x increase.  “But for” (as lawyers like to say) Whitney’s invention the output of cotton would have hardly changed.  Inventions are game changers in the economy.  The other approaches are just tinkering around the edges at best.


 

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