State of Innovation

Patents and Innovation Economics

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.

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February 24, 2010 - Posted by | Innovation, Patents | , , , , ,

11 Comments »

  1. I’m reading through your response here, and I’m astounded to read that it sounds like you honestly believe in stronger patent laws than what we have today. I don’t think you’ve responded to the concerns raised in the NY Times response (NPE’s and Non innovating entities siphoning money from tech firms != a thriving secondary market), but I do want to say a couple things I hope the few people that stumble across this read.

    (1) Feasibility: The way you paint this picture of intellectual property, you make it seem as if there are inventions, and they are defined, and they have boundaries, and it’s feasible for a firm to identify if their independently developed product infringes on existing patents.

    (2) Innovation and Progress: An invention, a concept is not an end game, it’s not even an end game to the concept itself. It’s the water that makes the clay that makes the brick that makes the wall that makes the house that becomes part of the city. If you have to pay a license fee for water, it makes it pretty damn hard to build a city.

    (3) Correlation: Our current system is bad, and it’s harmful, but it’s not harmful enough to stop a torrent of innovation spurred on by huge advances such as computers and the internet. Patent law is not the only governing factor of economic growth, I have a hard time believing that’s what you’re suggesting.

    Comment by Derek Bredensteiner | February 24, 2010 | Reply

  2. Derek,

    I am amazed that you can ignore the obvious evidence that patents promote innovation.

    1) Stronger Patent System: You cannot find a single country whose economy has been hurt because they have too strong a patent system, but you can find numerous examples of countries whose economies have been hurt because of weak patent systems.

    2) Feasibility: Land does not have boundaries and those boundaries are not obvious – just ask the American Indians. It is definitely feasible to determine if your product infringes someone else patents. You are either misinformed on this point or you do not want to take the time to determine if you are stealing someone else’s technology.

    3) Innovation and Progress: Tools are not the end game either. Power plants are not the end game either. Adam Smith showed that division of labor is key to economic progress. Today many brilliant inventors are stifled. Instead of inventing these brilliant engineers are forced to be managers to get a pay raise or forced to study marketing, sales, finance, etc to get paid for their efforts. Our economy will prosper if we provide property rights for our inventors and allow them to do what they do best, which is invent.

    4) Correlation: Occam’s razor says the simplest answer is probably right. Every bit of evidence shows that patents encourages innovation. You have not provided any contrary evidence. In addition, every property right has always encouraged improvement of the underlying property. Since you are suggesting the contrary, which is an extraordinary claim, you have to provide extraordinary evidence. See David Hume and Thomas Paine

    Comment by dbhalling | February 24, 2010 | Reply

  3. Dale,

    Here’s a HuffPo editorial on “innovation” that might pique your interests:

    http://www.huffingtonpost.com/ralph-gomory/the-innovation-delusion_b_480794.html

    snippet: “Balancing trade on ideas and R&D simply cannot be done. The most elementary analysis shows that the scale is entirely wrong. As one who spent many years as the head of research of a large corporation, I know how much R&D matters; I also know how small it is.”

    Comment by step back | March 2, 2010 | Reply

  4. Stepback,

    Thanks for the lead.

    Mr. Gomory makes some good points, but I do not agree with him on all points.

    1. Balance of Trade: A trade deficit can occur because foreigners are investing in your country. For instance, they may find it attractive to invest in your companies. If these investments are in the form of equity, then they never have to be paid back. The US has had a negative balance of trade throughout most of its history, according to Forbes. The exception was the post WWII timeframe. The reason for this was that the US was an attractive place to invest.

    2. Manufacturing: If the US is going to grow, we will have fewer people employed in manufacturing over time, much as if we have fewer people employed in agriculture today than 100 years ago. However, our agricultural output keeps growing and if the US is going to grow economically, we will need a growing output from manufacturing. The question is what will the rest of us do? Part of our balance of trade problem right now is our weak enforcement of intellectual property laws – see Pat Choate’s book Hot Property. Another component of our balance of trade issue is other country’s’ weak intellectual property systems, which means we are hemorrhaging our most important asset.

    3. Knowledge Economy: The US will have to evolve to a knowledge economy if we are going to increase our per capita incomes. This means that more and more of us will be involved in the creation of ideas. Note that most R&D is not done by large corporations; large corporations usually focus on incremental R&D. The goal of most corporations is to sell the stuff they have already developed and keep out competitors. Thus, the Patent Fairness Coalition pushes for weak patent laws so that they do not have to compete with upstart companies with new inventions. I am not surprised that Mr. Gomory, who appears to have spent his life inside a large corporation, underestimates the importance of inventions. As Nathan Myhrvold pointed out: invention is funded on a charity model right now, which means it is significantly underfunded. The book The Invisible Edge points out that our accounting system does not show any return for R&D. As a result, we underfund R&D (particularly in large companies). R&D can only be shown as an expense in their accounting systems.

    The bottom line is that if the US wants to grow real per capita incomes (which I am not sure the present administration cares about at all), and then we have to become more inventive – produce more knowledge. However, this will be meaningless if the second we disclose our knowledge we lose all rights to it. Therefore, we need strong intellectual property laws if the US wants real economic growth.

    Comment by dbhalling | March 2, 2010 | Reply

  5. DB,

    I’m sorry to say you’ve been drinking too much of your own Kool Aid lately:

    “2. However, our agricultural output keeps growing …”

    No tree grows to the sky and beyond. To believe so is to be insane.

    “3. The US will have to evolve to a knowledge economy …”

    I think Leo DeCaprio found a ‘knowledge economy’ on Shutter Island. All thought and no cattle doesn’t deliver the beef at the end of the day.

    Comment by step back | March 3, 2010 | Reply

  6. stepback,

    Knowledge is limitless and wealth is just knowledge applied to a tangible form. So our wealth can grow to the sky and beyond – this is sane.

    Comment by dbhalling | March 3, 2010 | Reply

  7. DB,

    Actually, the knowledge possessible by human beings is limited.

    I think this U-tube lecture by AstroPhysicist Neil Tyson might cover the issue:

    (or it could be another one. Look for his talk about your pet dog Fido grasping trigonometry 🙂

    As for “wealth”, that is a complex word symbol and I don’t think you have done a deep dive into it. Let’s say you are a maximally knowledgeable college professor (English professor) but you have terminal cancer. Are you “wealthy”? Do you have well being thanks to your possession of “knowledge” about English literature?

    p.s. My comment was about the supposed, unlimited growth of US “agriculture”. Not sure how tuned in you are to issues about soil erosion, water shortages, fertilizer availability, etc. The good news is that your knowledge is growing. 🙂

    Comment by step back | March 3, 2010 | Reply

  8. Stepback,

    Tyson’s 1% argument is an interesting mind experiment, but is likely incorrect. Chimpanzees have more than a 1% difference in their DNA than dogs, but there is not the same corresponding difference in intelligence between dogs and chimpanzees and chimpanzees and humans.

    There may be things that humans cannot know (the exact location of an electron at an exact moment) but the amount that is knowable is still infinite.

    Output: You are confusing physical output with value. The physical output of agriculture is limited (although nowhere near being reached) by certain physical parameters, such as land, sun, water, etc. But the value is not limited. What is the value of fungus resistant strain of wheat compared to a non-fungus resistant strain. The physical output may be the same, but the value of the fungus resistant strain is significantly higher since there will be less waste. As technology increases we may grow pharmaceutical products or industrial products these will have higher value than just food products for cows and pigs. So I disagree that there is any such limit in agricultural output.

    p.s. the bad news is that this knowledge makes it more clear than ever that the US is on the wrong path – assuming we are discussing increasing the value to humans living in the US.

    Comment by dbhalling | March 3, 2010 | Reply

  9. Dale:

    Here is scoop tip to add to your knowledge base (check out the comments by the public i.e. the system is “broken” =a 2 year old’s language):

    http://bits.blogs.nytimes.com/2010/03/04/an-explosion-of-mobile-patent-lawsuits/ 😉

    Comment by step back | March 4, 2010 | Reply

  10. Stepback,

    This article is an example of subtle anti-patent propaganda. First, the number of patent lawsuits has not grown significantly – there are several studies on point (e.g., see http://271patent.blogspot.com/2007/05/patent-litigation-statistics.html). Second, the issue of overlapping patents has been around since at least the sewing machine in the mid 1800s. The industry solution was to create a patent pool where all the manufacturers contributed their patents to the pool, all paid royalties to the pool and collected a portion of the royalties based on their contributions. Unfortunately, the government has used anti-trust laws to outlaw these patent pools. This destroyed the knowledge built up to deal with these overlapping patent rights issues. Today the semiconductor industry has used Standards Setting Committees to solve some of these issues. Last, we want companies to compete on technology. We do not want companies making me-too products. So the statement “Companies should compete based on providing quality products and services to the consumer. Using the patent system for purposes of extortion is contrary to the purpose of the patent system and does not meet the goal of competition based on quality and customer service” is just wrong. The only way we increase real per capita income is by increasing our level of technology. So we want companies competing based on better technology more than on customer service and certainly more than on me-too products.

    Comment by dbhalling | March 5, 2010 | Reply

  11. Dale,

    All these me-too mobile device companies are so yesterday.
    I’ve already placed my order for the Pomegranate Phone:
    http://www.pomegranatephone.com/

    😉

    Comment by step back | March 6, 2010 | Reply


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