Clvr.Tv

# Archive for December, 2011

This is a multi-part post on the science of economic growth.  Standard economic theory has failed miserably to define the source of economic growth, which means it is impossible for it to provide rational policies to restore economic growth.  This series of posts defines a scientific theory of the source of economic growth.

Part 1

Part 2

Part 3

Part 4

Part 5

Natural Laws of Invention

With this in mind I propose the following laws of invention.

Conservation Law of Invention:

All inventions are combinations of existing/known elements.

Conservation of matter (and energy) means that you cannot create something from nothing.  As a result, all inventions must be a combination of existing or known elements.  For those people who want to point to Americium (94), Curium (96), Berkelium (97), all these chemical elements are made of protons, neutrons, and electrons and all of these were existing elements.

Causality Law of Invention:

Invention precedes production, production precedes consumption.

In order to consume an item it first has to be produced.  Production may just be the act of finding food for a hunter gatherer, but this has to be done before it can be consumed.  With the possible exception of some very simple things, mother’s milk and air for instance, things have to be invented before they can be produced.

Set Law of Invention:

The number of potential inventions is infinite.

The total number of inventions may be limited by the total mass and energy of the universe and the laws of entropy that limit how many elements can be combined.  However, physics is pretty ambiguous on this point.  There may be multiple universes, there may exist energy and matter outside of our event horizon.

There are essentially an unlimited number of potential inventions.  Paul Romer, a professor of economics at Stanford uses the following example to illustrate this point:

On any conceivable horizon — I’ll say until about 5 billion years from now, when the sun explodes — we’re not going to run out of discoveries. Just ask how many things we could make by taking the elements from the periodic table and mixing them together. There’s a simple mathematical calculation: It’s 10 followed by 30 zeros. In contrast, 10 followed by 19 zeros is about how much time has elapsed since the universe was created.[1]

Someone might object that Paul Romer has overstated the number of possible chemical inventions, since not all elements are able to chemically bind to each other.  On the other hand, this calculation only includes one of each element.  Some of our most important chemical compounds contain long chains of carbon and silicon atoms.  In addition, the elements can bond to each other in multiple ways, ionic bonds, covalent bonds, polar covalent bonds and hydrogen bonds.  Elements may also have double, triple and quadruple bonds.  When you add in all these variations, Dr. Romer probably underestimated the number of possible chemical inventions.  This calculation is only for chemistry.  When you consider computer networks or electronic circuits with millions of transistors or nodes the number of different possible connection is n(n-1)/2 or easily equal to the number of combinations described for chemistry.  This does not begin to name all the possible number of inventions.  Previous inventions often are the basis of future inventions.  As a result, the development of an invention acts as node for additional inventions and increases the potential number of inventions rather than reducing the potential number of inventions.

Another example that Romer uses to illustrate the unlimited number of possible combinations is all the possible bitstreams you can turn into a CD-ROM.  The number is something in the range of 10 to the power of 1 billion, which virtually ensures that we will never run out of software to discover.  He notes that there is not enough mass in the universe to make that number of CDs.[2]

Rate Law of Invention:

The rate of invention is dependent on the number of inventors, the size of the set of elements the inventors can access, and the size of the set of goals.

Inventions are combinations of elements and connections, but an individual has to put together these combinations.  If more individuals are involved in the process of trying out combinations, then there is a greater likelihood they will find a useful combination or invention.  In a rough analogy, the more samples or children in an genetic algorithm, assuming they are diverse, the more likely or sooner you will find an acceptable solution.  Silicon Valleyoften creates many companies in a particular space, which function like a large population in a genetic algorithm, and results in an optimized solution (company) more quickly than only having a few companies in the space.  Individuals create these sample combinations and test them against a selection criteria.  If more people are creating these samples then you increase your probability of inventing a useful product of service.  The corollary is that you have more “failures” than you have success.

A successful solution to a particular selection criteria or fitness criteria has an increased probability if the creators (inventors) have access to the complete set of elements available in the world.  When the inventors are limited in their selection or application of existing elements, then it reduces the potential number of combinations.  It is possible in this case, that many solutions meeting the fitness criteria will not be part of the search space.  This deceases the probability of finding a solution.  When inventors’ freedom of action is restricted it will decrease their chance of creating something useful.

Inventors as a group will be more successful if each individual inventor is allowed the freedom to pursue their own invention goal.  There are at least two problems with restricting the goals of inventions.  One, the individual’s talents and interests may fall into a forbidden area.  Two, unexpected results may fall into a forbidden area and therefore not be pursued.

As a result, we see that freedom fosters invention.  This is consistent with both our academic institutions’ policies and with a free market.  Invention is not encouraged by plagiarism.  Plagiarism results in wasted resources, because the plagiarizer is reinventing the wheel and they erode the valve of the original inventor’s work.  This is one of the reasons for a patent system.  We do not want people to plagiarize, but inventing around a patent which creates a diversity of inventions is good.  The inventor is the first person to create a new technology because they add to the store of human knowledge.  Even innocent copycats do not add to the store of human knowledge.

Note that freedom as used herein applies to everyone.  Forcing someone to support your inventive activities, restricts their freedom.

A corollary is that invention is fostered by wide dissemination of the information on how to build earlier inventions.  Without this dissemination, individuals will waste time recreating technologies.  This is why patent systems require a description of how to practice the invention.

Commons Law of Invention:

Inventions are not subject to overuse.  The creation of inventions is subject to under investment without property rights in inventions.  The diffusion of inventions is subject to under investment without property rights in inventions.

Although there are unlimited number of potential inventions, this does not mean that creating them is free.  The U.S.spends over \$300 billion a year on research and development to discover inventions.[3]  Just like real property, conceiving inventions takes scarce resources.  The number of researchers, research facilities, and research equipment are all limited.  Each researcher’s ability to pursue various inventions and discoveries is limited.  It will always cost less for a copier to produce existing items than create their own inventions without property rights in inventions.  This will result in an under investment in the creation of inventions.

According to venture capitalists, most start-ups will spend 2-10 times the amount on marketing their inventions than on developing them.  If the distribution of ideas was free, not subject to scarcity, this would clearly be unnecessary.

University professors, doctors, lawyers, engineers, judges, marketers, sales people and computer scientists are mainly in the business of distributing or implementing known information.  Most of these professionals would be unnecessary if distributing information was frictionless.  Distributing information is extremely costly, especially new information.

Without property rights in inventions, most people and institutions will not spend the additional money required to create and distribute inventions.  This will result in an under investment in invention.

Income Law of Inventions:

The per capita income of a large group of people can only increase over the long term if their level of technology increases.

Real per capita increases in income can only be the result of inventions.  Adding capital without any inventions associated with the capital will result in elevating every worker to a certain efficiency level, however never above that level.  Once every worker has the all the capital resources they can use in their job they have hit a maximum output without inventions.

Conclusion

Every living organism has to overcome entropy to stay alive.  We defined entropy as biological entropy as opposed to absolute or energy entropy, because living organisms cannot necessarily extract all the energy shown by absolute entropy.  Maximum entropy for an organism was defined as when death occurs.  This setups up the competition between organisms and between species to extract energy to stay alive or the process of evolution.  The unique feature of man is that he invents new technologies to overcome biological entropy.  All economic growth is the result of increasing levels of technology.  Biological entropy implies diminishing returns.  In a technologically stagnant world, diminishing returns ensures that humans will be stuck or fall back into the Malthusian Trap.  A technologically dynamic world allows humans to escape the Malthusian Trap permanently and have ever increasing standards of living.  This economic growth is an endogenous process and property rights in inventions has been the major catalyst for increasing rates of invention and increases in our level of technology.  Perfect competition does not provide the resources or justification to invest in new technologies and is synonymous with a technological stagnant world.  The Industrial Revolution was an explosion in new technologies and happened first in England and was quickly followed by the United States because these countries provided the first property rights for inventions for large groups of people.  There are a number of natural laws of invention and these can be helpful guides in determining if an economic policy will result in economic growth.

[1] Bailey, Ronald, “Post-Scarcity Prophet: Economist Paul Romer on growth, technological change, and an unlimited human future”, Reason, December 2001.

[2] Kelly, Kevin, “Paul Romer: The Economics of Ideas”, http://www.versaggi.net/ecommerce/articles/romer-econideas.htm, viewed July 4, 2009.

[3] Kao, John, Innovation Nation: How America is losing its Innovation Edge, Why it Matter, and What We Can Do to Get it Back, Free Press, 2007, p. 39.

This is a multi-part post on the science of economic growth.  Standard economic theory has failed miserably to define the source of economic growth, which means it is impossible for it to provide rational policies to restore economic growth.  This series of posts defines a scientific theory of the source of economic growth.

Part 1

Part 2

Part 3

Part 4

Part 5

Perfect Competition vs. Monopolistic Competition

There has been a fear that technological progress, particularly when tied to a patent system, leads to monopolistic competition.  Monopolistic competition is supposed to be incompatible with Adam Smith’s invisible hand or perfect competition.  In perfect competition, no one producer or consumer has the ability to affect the market price and all producers and consumers compete for a homogenous product, driving down the cost of the product.  Commonly, individuals say this process is what makes us all wealthy in a free market economy.  Interestingly, Adam Smith’s example of the pin factory is supposed to describe the beginnings of monopolistic competition.  The specialization described by Smith is alleged to lead to greater scales of economy, which leads to more specialization firmly entrenching incumbent firms.  However, monopolistic competition is supposedly bad causing inefficiency resulting from a company’s ability to charge a price above its marginal cost.

This theory is at odds with the first rule in business – find a competitive advantage if you want to survive and prosper.  Any business that can only price its goods at its marginal cost is not worth investing in; since it will not provide a return on investment.  How can we reconcile this conundrum?

As proven earlier, the way in which we overcome entropy is by inventing.  While an invention may be used to produce an existing good at a lower price, it may also be used to create a new good to meet an unfilled demand.  Even if the invention is a way to make an existing good cheaper, the goal of the businessman is to maximize his profits.  In order to do this, he will have to charge a price above his marginal cost but below the price of his competitors.  The potential profits will be used by the inventor to attract or justify investment in the invention.  Without this investment, the invention will never be commercialized and the consumer will potentially be worse off, as will the inventor.  If the inventor’s idea can be easily copied, it might not attract investment, therefore, it will not be commercialized, to the detriment of both the inventor and consumers.

Perfect competition is the state at which it makes no sense to invest in any business, let alone new inventions.  Perfect competition in any economy leads to a technologically stagnant world and decline in real per capita incomes until humans are back in the Malthusian Trap.  It is the enemy of innovation, wealth, and human happiness.

Does this mean we want monopolistic competition?  It depends.  If the monopolistic competition is the result of property rights (including patents), then yes we do want monopolistic competition.  Only with the prospect of significant returns will people invest in developing and disseminating new technologies.  Without this incentive, entropy will take over and we will regress economically.

If the monopolistic competition is the result of government imposed restrictions to the market, then the answer is no.  How do we tell the difference between government protecting property rights and arbitrary barriers to the marketplace?  After all, a number of influential people, including Thomas Jefferson, have suggested that patents are a government granted monopoly and not a property right.[1]  In order to differentiate between property rights and arbitrary government grants, we need a definition of property rights and an understanding of their characteristics.

Property rights are a legal recognition of creation.  The first owner of anything is the creator.  This was explained somewhat inartfully by John Locke, as if you mix your labor with a natural resource it becomes your property because you own your labor.  Property rights are also freely alienable, meaning the owner has a right to sell, lease, subdivide, grant easements, etc. according to the owner’s needs and desires, without government approval.  Recording a transfer is not government approval, instead it is a process whereby government will enforce these private agreements.  A number of government regulations have impeded the right of alienation even on land, but in general, property in land is still alienable.  There are three simple questions to determine if a government action is a property right or a rent-seeking regulation.

1) Does the right arise because the person created something?

2) If someone else was the creator, would they have received the right in the creation?

This ensures that the right does not arise from political favoritism.

3) Is the right freely alienable?

If the answer to all three questions is yes, then the grant in question is a property right.  Patents and intellectual property rights arise because someone created something.  If another person had created the same thing, then they would have received the property right in the item and they are freely alienable.  Thus, patents meet all the tests of a property right.

Ideally, we want everyone involved in an enterprise that can be described as monopolist competition.  In a perfect economy, people would compete on creating and disseminating new technologies and not in producing products or services indistinguishable from their competitors.  People would then plow their profits back into creating even more inventions.  Wouldn’t this put the consumer at the mercy of every producer and would not the first mover end up dominating a market for eternity?

New technologies supplant existing technologies and make them obsolete.  An entrenched company in a present technology rarely has any special advantage over a new entrant in the marketplace with a new technology.  The book, The Innovator’s Dilemma, provides examples of why it is difficult to transition to the next technology for a market leading company in a current technology.  The conclusion from this is that a market based on property rights, but without government rules entrenching incumbent firms, is not going to become dominated by huge existing firms.  It will be a market dominated by new firms introducing new products.  The average Fortune 500 company today has a lifespan of forty years, and in the most innovative sectors, the turnover is much quicker.  One third of the companies listed as a Fortune 500 in the 1970s no longer exist.[2]

The supposed conflict between monopolistic competition and perfect competition is nonexistent.  Perfect competition is a technologically stagnant world in which humans regress back into the Malthusian Trap.  Only with the prospect of substantial profits can anyone rationally invest in new technologies that make us all wealthier.  This does not lead to a world dominated by incumbent companies, but to a dynamic market where new companies compete to make the next disruptive technology and company life spans are relatively short.

Industrial Revolution

One of the most important questions in economics is why did the Industrial Revolution occur where and when it did?  As pointed out by William Rosen, author of The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention, there are hundreds of theories on this, but most of these theories miss an obvious point- “… the Industrial Revolution was, first and foremost, a revolution in invention.”  According to Rosen, the Industrial Revolution was a perpetual invention machine.

This is not surprising, since inventions are the way that homo economicus creates wealth.  The Industrial Revolution represents the first mass escape from the Malthusian Trap by humans.  As pointed out above, the majority of history is consistent with the idea that the rate of new inventions is dependent on the size of the population until the Industrial Revolution.[3]  So why did this suddenly change in the 1800s inBritain?  Let’s first examine some of the standard explanations for how to create growth in the economy.

Does per capita income take off around 1800 because taxes suddenly get lower (or higher) around 1800?  Tax levels did not change significantly around 1800, in fact, they were lower than current levels until around 1900.  Taxes averaged 10% or less of GDP during most of history.  Did the size of government suddenly shrink (or grow) around 1800?  Government size did not change significantly around 1800; the size of government did not start to grow until around 1900.  Did any government put a mechanism to stimulate demand in place: the world’s greatest “cash for clunker program”?– Was Keynes correct in saying a government has to stimulate demand?  The period until about 1800 AD is called the Malthusian period, after Thomas Malthus.  During this period, our population expands until we are on the edge of starvation.  There certainly was plenty of demand during this period, at least for food.  Does income suddenly take off because we tinker with our money supply?  The tools for controlling the money supply around 1800 were crude at best.

The reason the Industrial Revolution starts in England, at the end of the 18th century, is because England created a property right in inventions – patents.  Patents are the only free market system for encouraging people to invest in inventions and technology.  Patents are the legal title to an invention.

The reason why the US overtakes Britain in the Industrial Revolution is that the US creates a better patent system than Britain.  The first patent statute in the USis passed in 1790.  The USbecomes the economic and technological leader of the world not because its citizens have some innate “yankee ingenuity,” but because of how the US designed a system that better protects an inventor’s right in their invention.  The United States is the first country in history to recognize an inventor’s property right in their invention.[4]

As pointed out in the section entitled Exogenous vs. Endogenous, the rate of inventing is influenced by market forces.  At the beginning of the Industrial Revolution, there were no big government sponsored research projects inEnglandor theUnited States.  The explosion of inventions at this time was driven by market forces and the ability to capitalize on such.

This is not to say that a patent system can create economic growth or technological growth in a vacuum.  If the government imposes a tax system that confiscates all income, then ownership in your invention has no value.  If the government imposes rules on the entry of new technologies to the market, then the value of your invention is severely curtailed.  The ability to exploit an invention once it is created and the inventor has legal title to his invention, is subject to essentially the same constraints and incentives as other business enterprises.

The reason the Industrial Revolution began in Englandin the late 18th century is that this is whenEngland and then theUnited States recognized a property right for inventions.

Given the importance of inventions to economics, it is amazing the lack of economic research in this area.  Jacob Schmookler’s groundbreaking econometric studies is one of the exceptions.[5]  He investigated whether the number of inventions is limited, whether market forces or scientific advances had a bigger impact on the number of inventions and the direction of inventions, the average value of a patent, the percentage of patents that find their way into commercial products, etc.  Interestingly, he found that over 50% of all patents are commercialized, despite the often repeated statement that only 1-2% of patents are ever commercialized.[6]

Zorina Khan and Kenneth L. Sokoloff examined the historical development of patent laws and their affect on the rate of invention.  Most of the endogenous growth theorists tend to consider invention too narrow in describing the causes of economic progress, while recognizing that economic growth is caused by increases in our level of technology and that incentives matter in the creation of new technologies.  This author’s opinion is the failure to define what a new technology is has resulted in GIGO syndrome.

A question that has not been investigated is whether there are natural laws of invention.  Many economists now consider natural laws in economics to be irrelevant.  As a physicist, I would respectfully disagree.  Natural laws have taken us to the moon and back, allowed us to manipulate individual atoms, created machines that can peer inside the human body without damaging tissue, etc.  Natural laws organize an area of knowledge and allow one to think conceptually about problems.  Following and categorizing logical results has led to some of the greatest discoveries in science.

[1] In the Supreme Court case Graham v. John Deere Co., the Court invokedJefferson’s words that the “embarrassment of an exclusive patent” was a special legal privilege justified only because these “monopolies of invention” served the “benefit of society.”

[2] Stephen, Ravikumar; Creating an Agile Organization through Outdoor

[3] Kremer, Michael, Population Growth and Technological Change: One Million B.C. to 1990, The Quarterly Journal of Economics, Vol. 108, No. 3. (Aug., 1993), pp. 681-716, http://links.jstor.org/sici?sici=0033-5533%28199308%29108%3A3%3C681%3APGATCO%3E2.0.CO%3B2-A.

[4] US Constitution, Article 1, Section 8, Clause 8.

[5] Schmookler, Jacob, Inventions and Economic Growth, Harvard Press, 1966

[6] Schmookler, Jacob, Inventions and Economic Growth, Harvard Press, 1966, p.50.

This is a multi-part post on the science of economic growth.  Standard economic theory has failed miserably to define the source of economic growth, which means it is impossible for it to provide rational policies to restore economic growth.  This series of posts defines a scientific theory of the source of economic growth.

Part 1

Part 2

Part 3

Part 4

Part 5

Exogenous vs. Endogenous

Robert Solow assumed that inventions were exogenous and therefore the most important factor in economic growth was essentially out of the reach of economic policy.  The exogenous model of growth has been refined by Michael Kremer[1] and more recently by Klasen and Nestmann.[2]  These models start with the assumption that inventors (brilliant or lucky) are randomly distributed through out population.  As a result, high population rates will lead to higher rates of invention, which will lead to increases in population (Malthusian Assumption).  This assumption works reasonably well throughout history, until the Industrial Revolution.  There have been attempts to refine the exogenous theory by adding population density.  However, none of these adjustments to exogenous theory can explain whyEngland was the epicenter of Industrial Revolution. France had a larger population by a factor of three and larger GDP and equally talented scientists.  Why did the U.S. overtake England’s GDP by the 1850s or why the overall GDP per capita and level of technology of the West grew so much faster than the East?  The one factor that is consistent is the rate of invention.

A number of economists have shown that inventors are motivated by financial return.  For instance, Jacob Schmookler, in Invention and Economic Growth, shows that demand or expected return is the biggest factor affecting the number of inventions in a particular industry.[3]  He also examined the role of scientific advances in the creation of new inventions and found that these had minimal effect on the number of inventions.[4]  His results were echoed by economic Historian Zorina Khan.[5]  She provides extensive evidence that the US patent system and economic forces affect both the level and direction of invention.  She shows that the US created the first modern patent system and the patent system provided the major incentive that caused the US to grow from an agrarian economy to a world economic and technology power in just 70 years.[6]  Note there was very little government sponsored research and development at the time.

Perhaps the best known endogenous growth theory economist is Paul Romer.  Romer makes the distinction between physical property, which is rivalrous, and ideas or recipes as he calls them, which are non rivalrous.[7]  He claims that:

With ideas, you have this tension: You want high prices to motivate discovery, but you want low prices to achieve efficient widespread use. You can’t with a single price achieve both, so if you push things into the market, you try to compromise between those two, and it’s often an unhappy compromise.[8]

Romer is ambivalent about patents for this reason.  He likes the incentive they provide for creating new inventions.[9]  However, he believes that it slows down dissemination of new technologies and results in monopolistic competition.

He further states: “Because everybody can use the idea at the same time, there’s no tragedy of the commons in the intellectual sphere.  There’s no problem of overuse or overgrazing or overfishing an idea.”[10]

This statement is misleading as applied to inventions and patents.  As soon as the invention is realized in a physical form, then the invention is subject to the same scarcity issues  as any other good or service.  The total market for an invention is limited (scarce) at a particular point in time and the goods and services necessary to realize an invention in its physical form are also scarce.[11]  When the infringer of a patent makes the invention, he reduces the market value of the invention to the inventor.  Patent law not only recognizes that ideas cannot be overused by too many people knowing about them, patent law actually encourages the spread of ideas.  A primary goal of a patent system is the spread of technical information.  Before modern patent systems, people and companies kept their inventions trade secrets, which inhibited the spread of information.  In theU.S., our patent system created a number of patent depository libraries to encourage the spread of technical information.  It is one of the requirements of patents that the information on how to “practice the invention” is part of the quid pro quo for receiving a property right in your invention.  Specifically, 35 USC 112 states:

The specification shall contain a written description of the invention, and of the manner and process of making and using it, in such full, clear, concise, and exact terms as to enable any person skilled in the art to which it pertains, or with which it is most nearly connected, to make and use the same, and shall set forth the best mode contemplated by the inventor of carrying out his invention.

Romer’s statement that ideas are not subject to the tragedy of the commons is misleading in another sense also.  One of the problems with commons is that when no one owns a resource, no one invests in the resource – or at the least they under-invest in the resource.  A system of limited term property rights for inventions is not the unhappy compromise that Romer suggests.  It encourages the spread of information about the invention and it provides incentives to both create new inventions and to invest in the dissemination of inventions.  Romer implies that it takes no resources to disseminate new inventions and others explicitly state this, but they are incorrect.  Inventing the electric light bulb did not allow instantaneous use by people throughout the World.  It required investment in manufacturing plants, distribution, an electrical power system, etc.  Without secure property rights in the invention, there would have been no incentive for anyone to invest in this dissemination of technology.  This was clearly shown in a study by Professor Hughes.  The study, British Electrical Industry Lag:1882-1888, examined how limitations on the rights (profits) of British companies attempting to provide electrical lighting resulted in the British lagging significantly behind the United States.[12]  Without the incentive of ownership, the British were unable to provide electrical lighting to their country.  Lack of strong property rights resulted in under-investment in the electrical industry inBritain.  Professor Hughes examines a number of other potential explanations.  Differences in technological talent between theU.S. andBritain? The British had more and better trained engineers.  The effect of economic downturns?  Both countries suffered economic downturn at the same time.  Interestingly enough, no other explanation  accounts for the difference in the dissemination rates of electrical technology in theU.S. andBritain.

Romer’s emphasis on scarcity and rivalrous vs. non-rivalrous goods, leads to a number of errors.  Entropy explains not only why goods are scarce, but why diminishing returns exist and why inventions are how humans overcome entropy and diminishing returns.  First, scarcity does not imply diminishing returns.  A scarce resource might be as easy to extract the first time as the last.  In this case, the resource’s cost would be exactly the same until we ran out of the resource.  Scarcity does not explain the ultimate struggle of all life – namely the need to extract more energy than one uses in order to stay alive.  Secondly, the nonrivalrous nature of ideas does explain how humans overcome diminishing returns.  The emphasis on rivalry leads to the idea that there is some sort of conflict between systems that encourage inventions but supposedly restrict the dissemination of inventions (production).  This conflict is also rooted in the idea that we want to maximize the production of goods today (existing inventions).  Humans’ long term struggle is to overcome entropy, not to maximize goods today.  In order to maximize goods today, we have to devote all resources to production and none to invention.  This means we are in a technologically stagnant situation.  As explained earlier, this is not sustainable because of diminishing returns and will result in a return to the Malthusian Trap.  Our ability to survive and thrive is based on maximizing inventions.  This results not only in more of the same goods in the future but a greater diversity of goods.  Diversity of goods may be more important than increasing the production of existing goods.  For instance, when we find that we are running out of coal we can switch to oil or nuclear power; when we find that one antibiotic is not effective against a new strain of bacteria, we can switch to a different antibiotic.  Diversity of goods allows us to withstand external shocks to our economy better than maximizing production of existing goods.

A system that only incentivizes inventions but not dissemination will result in  producers  that do not focus on either creating or disseminating new inventions.  Introducing an invention to the market is a huge risk.  Retailers do not know if the product based on the invention will sell.  The manufacturer often has to spend money establishing new channels of distribution and investing in new manufacturing facilities.  In fact, venture capitalists often estimate the cost of introducing an invention to the marketplace at ten times the cost of inventing.  It is always less cost and less time for a manufacturer to simply wait until a product is proven successful and then introduce a copycat product.  This allows them to freeload on the marketing, sales, distribution, and inventive efforts of the first mover.  There have been a number of business books on this exact point, see Getting to Plan B: Breaking Through to a Better Business Model, by John Mullins and Randy Kosimar[13] see also Copycats: How Smart Companies Use Imitation to Gain a Strategic Edge[14]  Without incentives for both creation and dissemination of new technologies, we will have underinvestment in dissemination.  Smart companies know that the cost of introducing a new product is expensive and fraught with risk.  This is why most large companies focus most of their research and development on line extensions.  A Small Business Administration study, An Analysis of Small Business Patents by Industry and Firm Size, found that most emerging technologies are developed by start-ups and individual inventors.[15]

Invention is an endogenous process that is heavily affected by policy decisions.  In theUnited States, our unique patent system provided an incentive to invent and to invest in the dissemination of inventions.  The patent system also encourages the dissemination of information on which other inventors can build.  Because of the high risk of inventing and marketing emerging technologies, most of this effort is undertaken by start-ups and individual inventors.  Direct government support for inventive activities in the United Statesin the 19th century was minimal.  Despite this, the US went from a mainly agrarian nation at the time of the American Revolution, to the leader of the Industrial Revolution by 1850.

[1] Kremer, Michael, Population Growth and Technological Change: One Million B.C. to 1990, The Quarterly Journal of Economics, Vol. 108, No. 3. (Aug., 1993), pp. 681-716, http://links.jstor.org/sici?sici=0033-5533%28199308%29108%3A3%3C681%3APGATCO%3E2.0.CO%3B2-A.

[2] Klasen, Stephan; Nestmann, Thorsten, Population, Population Density, and Technological Change, CESifo Working Paper Series No. 1209, 2004, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=558105.

[3] Schmookler, Jacob, Inventions and Economic Growth, Harvard Press, 1966, pp 104-164.

[4] Schmookler, Jacob, Inventions and Economic Growth, Harvard Press, 1966, pp 57-86.

[5] Khan, Zorina B., The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920, Cambridge  University Press, 2005, pp. 50

[6] Khan, B. Zorina. “Technological Innovations and Endogenous Changes inU.S. Legal Institutions, 1790-1920.” NBER Working Paper No. 10346.Cambridge,MA: March 2004.

[7] Romer, Paul M., “WHICH PARTS OF GLOBALIZATION MATTER FOR CATCH-UP GROWTH?”, p. 7, NBER Working Paper 15755, Cambridge, MA, February 2010, http://www.nber.org/papers/w15755.

[8] Bailey, Ronald, “Post-Scarcity Prophet: Economist Paul Romer on Growth, Technological Change, and an Unlimited Human Future”, Reason, December 2001.

[9] Romer prefers the word “recipes” to “inventions” perhaps because he believes the word invention implies all the complex definitions of patent law.  However, I believe this leads to confusion.  An invention that is never realized in physical form is meaningless.  Once it is realized in physical form it has at least some of the rivalrous features of physical property.

[10] Bailey, Ronald, “Post-Scarcity Prophet: Economist Paul Romer on Growth, Technological Change, and an Unlimited Human Future”, Reason, December 2001.

[11] Even software inventions are subject to scarcity.  It takes energy, transmission capabilities, and computers to recreated a software invention.

[12] Hughes, Thomas Parke, British Electrical Industry Lag:1882-1888, Technology and Culture, Vol. 3, No. 1 (Winter, 1962) , pp 27-42, http://www.jstor.org/pss/3100799.

[13] Mullins, John and Kosimar, Randy, Getting to Plan B: Breaking Through to a Better Business Model, Harvard Business Press,BostonMA, 2009.

[14] Shenkar, Oded, Copycats: How Smart Companies Use Imitation to Gain a Strategic Edge, Harvard Business Press,BostonMA, 2010.

[15] Breitzman, Anthony; Hicks, Diana, An Analysis of Small Business Patents by

Industry and Firm Size, Under contract no. SBAHQ-07-Q-0010, November 2008, http://archive.sba.gov/advo/research/rs335tot.pdf.

The phrase “I am my brother’s keeper” is used to explain a moral goal or imperative.  The word ‘brother’ does not mean your biological brother, but those people in your community, or country, or really every other human being in the world.  The word ‘keeper’ is used to mean that you have a moral responsibility to help every other human being in the world.  This responsibility means that you are to put their needs before your interests and your moral goal is that people exist to serve others.  In other words, the phrase ‘I am my brother’s keeper’ enshrines SLAVERY as a moral goal.  Slavery is the condition in which you have no right to exist for yourself, your only right to exist is to serve others.  Note that all slaves need a master and as a result it is no surprise that President Obama has used this phrase to explain his policies as he is an avowed socialist and wants to be our master.

Wherever this moral goal has been tried it has resulted in human suffering, misery, disease, famine, death, and torture.  North Korea is the country that most encapsulates this moral goal today and it is a living hell.  The Soviet Union and Communist China also tried to implement this moral imperative and it resulted in the largest genocides in the 20th century, resulting in the death of over 100 million people.  Attempting to following this moral code also resulted in the Dark Ages under the direction of the Catholic Church.  It is also why the Christian right is often ineffective at countering socialists arguments, since they accept the same moral goal.  These bad outcomes do not occur because the wrong people are in charge, they occur because slavery is immoral and this is the logical result of following an immoral goal.

The opposite moral imperative to ‘I am my brother’s keeper’ can be found in our Declaration of Independence – namely the RIGHT to Pursue One’s Own Happiness.

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

This right to pursue your own happiness is the exact opposite of slavery.  It states that no one has the right to enslave you (or anyone) morally or legally.  Wherever this moral ideal has been tried it has always resulted in human happiness, abundance, technological innovation, increasing life spans, increase health care, and yes fewer environmental problems.  There is no contradiction between what is moral and economic abundance and human happiness.  This has not occurred because the right people have been in charge, it is the result of pursuing that which moral, namely FREEDOM.

Why should a blog directed to patents and inventions care about such a subject?  Because this idea of ‘I am my brother’s keeper’ has been raised in the cases Association of Molecular Pathology v. USPTO (which was original called ACLU v. Myriad) and in Mayo v. Prometheus and it is used by opponents of patents.  They all argue that the inventor has no right to his invention and the only reason we allow them to invent is to serve their fellow man.  In the ACLU case this argument was re-crafted as property rights should not stand in the way of science.

Slavery is immoral and a moral goal of slavery, even if it is suppose to be voluntary, is immoral.  Those who push the moral goal of slavery are advocating human misery, death, famine, and genocide.

MERRY CHRISTMAS

Background

It has been two 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 – see Solyndra.  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 intellectual capital foundation has been undermined this year by the passage of the America Invents Act and the financial capital foundation has been undermined by the passage of the financial reform bill (Dodd Frank).  There has been no change on the human capital front.  There is mixed news on the intellectual capital front.

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.  In 2010, 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.

One change from last year is that all the Republican candidates have come out for repealing or curtailing Sarbanes Oxley and the Financial Reform Bill.  There may be hope that entrepreneurial companies will no longer be starved for financial capital if the Republican’s win the presidency.  It appears unlikely we will strengthen property rights for inventions or property rights generally or signficantly 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.

Optimistic Scenario (This is Unchanged from 2010)

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% (Note that it appears that government is determined to lie about the inflation numbers, so it will be hard to determine the real inflation rate), 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.

Pessimistic Scenario

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.

Caveats

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, increasing 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.

This is a multi-part post on the science of economic growth.  Standard economic theory has failed miserably to define the source of economic growth, which means it is impossible for it to provide rational policies to restore economic growth.  This series of posts defines a scientific theory of the source of economic growth.

Part 1

Part 2

Part 3

Part 4

Part 5

Homo Economicus, Entropy, and Invention

Homo sapiens also consume food and create shelter to overcome the effects of entropy.  Unlike other living organisms, homo sapiens organize their environment to minimize the effects of biological entropy.  For instance, humans have invented agriculture to increase their supply of food (energy).  Humans also harnessed the physical strength of animals, created internal combustion machines, electric lights, electricity, washing machines, tractors, computers, the internet, email, lasers, fiber optics, etc.  All of these are inventions.  Humans alter their environment by creating inventions.  This is different from every other animal.  For instance, our bison standing on coal will never be able to harness the potential energy in that coal unless the species evolves to eat the coal.

The distinguishing characteristic of homo sapiens is their ability to reason.  Man is a rational animal according to Aristotle’s classical definition.[1]  Man uses his reason to alter his environment (invent) and increase the energy available to him.  Note that I am not limiting myself to the arcane definition of invention provided by the law.  Anything that man creates to solve an objective problem is an invention.  If a device/service is not found in nature separate from man then it is an invention.  For example, the ability to create fire or harness it is an invention of man.  No other animal has the ability to create or harness fire.  Man did not have some sort of inherent knowledge of how to create or harness fire.

Diminishing Returns: Sustainability Isn’t Sustainable

Biological entropy implies diminishing returns.  For all species of life there is a limited supply of the resources (free energy) and conditions necessary to sustain a particular form of life at any point in time.  The concentration or ease of extracting these resources varies as a result of the non-homogenous nature of the universe.  A species of life thrives where it has a high concentration of resources (low biological entropy for the species) and as its population expands it has to expand to areas of low concentration of resources (high biological entropy), which results in diminishing returns.  The species are then constrained by the Malthusian Trap.

The way this is expressed in economics is that the use of any one resource results in diminishing returns for that resource.  The question of limited human resources has been the subject of Economics since Malthus and David Ricardo.  I will explore the idea of diminishing returns and its relationship to invention, by examining the idea of sustainability.  Sustainability is an attempt to overcome or at least manage diminishing returns.  There are numerous and conflicting definitions of what sustainability means.  However, most sources point to the World Commission on Environment and Development (WCED), also known as the Brundtland Report.  According to the 1987 Brundtland Report, sustainability is: “Meeting the needs of the present generation without compromising the ability of future generations to meet their needs.[3]  This definition is not testable and is incredibly vague.  What are the “needs” of the present generation?  Do we need the Internet, satellites, SUVs, etc.?  How do we know if this will compromise future generations ability to meet their needs?

Since this is not a productive path of inquiry, let’s take the word “sustainable” literally.  A sustainable technology would be one that can be used indefinitely by humans without side effects and without any diminution in its effectiveness.  This definition violates the laws of physics.  According to the second law of thermodynamics, entropy always increases in a closed system.  As a result, any use of technology at least produces waste heat – a side effect.  Sustainability taken literally is an attempt to create a perpetual motion machine.  Even the Sun’s energy will not last forever and it is not infinite.  This is true whether we are talking about absolute entropy or biological entropy.  Is the sustainability movement unrealistically optimistic?

A key issue for the sustainability movement is the use of so called non-renewable resources, such as the use of fossil fuels and the using up of other natural resources (diminishing returns).  The way this is often phrased today is Peak Oil, Peak Water, Peak _____ (Pick Your Favorite Resource).  Peak Oil (natural resource) occurs when the amount of oil that can be extracted reaches its maximum or the point at which we reach the maximum net energy output from oil.  The alternative definition takes into account that even if we can extract more oil, this is irrelevant if it takes more energy to extract the oil than we receive from the oil.  The supposed solution for our Peak Oil problem is to develop renewable energy resources.  The Clean Energy website provides the following definition “Renewable energy is natural energy which does not have a limited supply.  Renewable energy can be used over and over again, and will never run out.”[4]  What is a natural energy?  Either all energy is natural, comes from nature, or only animal muscle power is natural.  The natural qualification is complete nonsense – unless they really want us to go back to animal muscle only.  The “never run out” qualification violates entropy.  All energy resources will run out.  All energy sources, fossil fuels, solar, hydroelectric, tidal, biomass, hydrothermal, fission, fusion, etc are solar or at least stellar.  For instance, hydroelectric energy is the result of the Sun heating the oceans or other large bodies of water.  As the water evaporates and then condenses in the form of rain or snow on land masses it is collected in dams.  The dams convert the gravitation force of the water into electric energy.  Fossil fuels are created by plants converting sunlight into biomass (including animals).  The biomass is trapped underground by sea sediment and the pressure and heat converts the biomass into oil, coal, natural gas, etc.[5]  Fission is the process whereby heavy elements, generally Uranium, are split into lighter elements and energy is released.  These heavy elements were created in a star that has long since expired.  Thus, all energy is Solar or at least stellar.  The Sun will not last forever and does not provide unlimited energy.  The concept of renewable energy that “will never run out” and “can be used over and over again” is false.  So was Malthus correct?  Are humans doomed by entropy to eventually return to the Malthusian Trap or worse?  Is the defining characteristic of economics that diminishing returns (entropy) will always force humans back to the point that we are on the edge of starvation?  If so, will evolution pass humans by and humans will become extinct?

This concept of peak resources is not new.  You can find numerous examples of “Peak Oil” historically.  For instance, the fertilizer crisis of the 19th century.  In 1830 it was discovered that bat guano was an excellent fertilizer.  Population exploded, as guano was used in Europe because of the additional food (energy) produced as a result of this excellent fertilizer and mechanization.  The best sources of guano began to run out fairly quickly.  People predicted the equivalent of “Peak Guano.”  The question was not whether we would have “Peak Guano,” but Peak Fertilizer.  In other words, we did not have a guano problem we had an invention problem.  The Haber-Bosch process was invented in 1909, which allowed fixing nitrogen in air and solved the “Peak Guano” problem.[6]

Reason magazine in the article Peak Everything? discussed how logical, scientific projections showed we would run out of lithium, neodymium, and phosphorus.[7]  Peak lithium was going to limit the batteries necessary for electric cars.  In fact, we would run out of lithium faster than we would run out of oil.  The solution is a new invention that replaces lithium with zinc air batteries.  Note the solution was not a better way to extract lithium, but to make the supply of lithium irrelevant.  New invention creates a paradigm shift.  Peak neodymium is going to limit our ability to build the electric motors of hybrid cars as well as other products.  Interestingly, neodymium magnets were invented to overcome the problem of peak cobalt.  In the area of permanent magnets, it appears that a new induction motor will eliminate the need for permanent magnets.  Peak phosphorus is a repeat of Peak Guano.  Peak phosphorous threatens our ability to provide enough fertilizer for our agricultural needs.  One solution is to expoit human waste.  Phosphorous is a byproduct of human urine.  The phosphorous can be recycled using a no mix toilet.

Paul Romer has observed, “Every generation has perceived the limits to growth that finite resources and undesirable side effects would pose if no new recipes or ideas were discovered.  And every generation has underestimated the potential for finding new recipes and ideas.  We consistently fail to grasp how many ideas remain to be discovered.  The difficulty is the same one we have with compounding: possibilities do not merely add up; they multiply.”[8]

The computer industry has also been beset by predictions of impending doom, when it could no longer achieve Moore’s law of doubling the number of transistors every eighteen months.  Ray Kurzweil has shown that if you restate Moore’s law as computational power, every time a technology reaches its limit to improve computational power a new technology takes over.  Using this he shows that computational power has been growing exponentially since 1900.  The first computational devices were electromechanical.  When these devices reached their limit, they were replaced with relay devices; these were replaced with vacuum tubes, then transistors, and finally integrated circuits.[9]  However, if you trace the speed of machines beginning with the invention of the steam engine, it peaks at around supersonic flight.  It is hard to determine if this is an economic/technological limitation or political limitation.

Diminishing returns for a given natural resource in a technology static scenario occurs because high order areas of the natural resource are exploited first.  It takes more energy to extract lower order areas (high biological entropy).  For instance, man first exploited gold nuggets picked up from the ground.  Eventually, man dug for the gold or panned, which required more energy because it was less ordered.  Note that even this change required new (additional) technologies – a shovel and pick or a tin pan.  Modern techniques of gold mining, e.g., cyanide leaching, have allowed formerly unprofitable mines to be reopened.  This is because the new technology allows us to exploit even lower order areas of gold.  Diminishing returns only apply in a technology static environment.  These diminishing returns can be modeled as a decaying exponential.

Are Inventions Subject to Diminishing Returns?

Every invention is a combination of known elements – you cannot create something from nothing.  This follows from the natural law conservation of matter and energy.  As a result, every invention opens up the possibility of more inventions by building on earlier inventions.  Creating these inventions takes energy, but the number of potential inventions we can conceive of increases with every invention we create.  As a result, the number of potential inventions grows factorially.  There are four ways in which inventions could be subject to diminishing returns: 1) the number of inventions are limited, 2) the inventions in a narrow area of technology are limited 3) the returns on devoting more resources, as a percentage of total resources, to inventing declines, and 4) the cost of creating the next invention in any technology could increase.

The number of potential inventions, however,  is not subject to diminishing returns.  In fact, the opposite is true.[10]  The number of potential inventions grows factorially as new inventions are created.

Inventions in a narrow area of technology are subject to diminishing returns.  Early inventions would appear to provide the greatest return and latter inventions appear to provide more limited returns.  Ray Kurzweil has studied this and found that new technologies appear to follow an S-curve with the greatest return in the middle of the S and eventually declining in return.[11]  Cross pollination between the primary area of technology and other areas of technology appears to prevent diminishing returns in a narrow area of technology, similar to how substitute resources prevents diminishing returns for natural resources.[12]

Would it logically follow, if a greater and greater percentage of a country’s or the world’s resources were devoted to discovering inventions you would hit a point of diminishing returns?  The answer is no country has ever come close to testing this hypothesis.  Countries throughout history have under invested in inventions and provided little or no incentive for inventors.  Those countries that have devoted the most resources to inventing, have seen the greatest economic returns.  The U.S. has historically devoted the most resources to invention.  It has historically had the strongest laws protecting the rights to inventions, which has resulted in greater resources being devoted to invention.  England had some of the strongest laws protecting inventors at the beginning of the Industrial Revolution and it was the hotbed of invention at that time.  The Italian city states of the 15th and 16th centuries had some of the first laws protecting inventors and they had a much higher standard of living.  Among their inventions were modern glass making techniques and a modern banking system.  There is a minimum amount of resources that must be devoted in a country to agriculture and maintenance just to keep up with the decline due to human biological entropy.  If inventive activity were so large as to crowd out those activities necessary to overcome biological entropy, you would have to assume that there are diminishing returns at that point.

The idea that the cost per invention could increase to the point of diminishing returns, seems to have credence if we look at a narrow technological area.  For instance, the cost of improving the aerodynamics of airplanes is extraordinarily expensive.  However, modern electronics allow us to improve the aerodynamics of planes by putting in control systems that allow a plane to be unstable aerodynamically.  Commercial supersonic flight was not feasible economically in the 1970s because of aerodynamic drag.  This problem can be solved today fairly inexpensively with electronic control systems.  The cost of inventing in electronics grew tremendously with the advent of the integrated circuit.  The advent of personal computers and software have driven down the cost of inventing in electronics and a wide variety of other areas.  There is evidence that the cost of inventing is decreasing over time, if we do not limit inventing to a narrow area of technology.

Diminishing returns can be modeled as a decaying exponential.  Inventions across all areas of technology are not subject to diminishing returns.  Potential inventions grow factorially, which is much faster than diminishing returns shrink.  Thus, it is entirely possible to grow our technology faster than the limitations of diminishing returns.  However, it is not foreordained that humans will invent.  Humans are volitional beings and they can choose not to invent.  There is plenty of evidence that when humans choose not to invent then they become subject to diminishing returns and their society declines or becomes extinct.  For example, Jared Diamond’s book Collapse[13] argues that many societies collapsed because of environmental problems.

In a technologically stagnant society, entropy and diminishing returns will prevail and that society will become extinct.

It appears that the sustainability movement is overly optimistic, in a technologically stagnant society.  However, if humans choose to invent in broad technological areas, then they can escape this fate.  Invention is the key to escaping the Malthusian Trap and growing real per capita income.  This is consistent with Robert Solow’s paper “Technical Change and the Aggregate Production Function” paper and the subsequent work in this area of economics which shows all real increases in per capita income are due to increases in technology.[14]  It is also consistent with groundbreaking econometric studies of Jacob Schmookler, in chapter V, “Productivity Advance: A Case of Supply and Demand” of his book Invention and Economic Growth.[15]

In a technologically dynamic society, inventions will result in growth that outstrips entropy and diminishing returns.  People will escape Malthusian Trap and their per capita income will grow.

The question about whether humans are doomed to a Malthusian existence, where economic growth cannot keep up with population growth, has been one of the most vexing questions since the beginning of economics.  Malthus was clearly correct for all of human history other than the last 200 years.  Even since then he has been correct for the majority of humans until the last 40 years or so.  On the other hand, critics of Malthusian theories have pointed to the West’s ability to overcome all predicted population bombs and resource limitations during the last 200 years.  Critics often point to the famous bet between Paul Ehrlich and Julian Simon over the price of commodities.  The reason this debate has been so contentious and has not been resolved is clear.  There is no predetermined answer.  It depends on whether large groups of people decide to invent fast enough.  I say large groups because Matt Ridley has shown in his book, The Rational Optimist, that small population groups cannot even sustain their initial level of technology.[16]  The book provides numerous examples of how various groups of humans regressed technologically because of inadequate population densities to support specialization, such as Tanzania.  The book summarizes the lessons by quoting economist Julian Simon “population leading to diminishing returns is fiction: the induced increase in productivity is scientific fact.”[17]

[2] Some animal trade like items across time.  If I have extra wheat, I give it to someone who does not have enough and they return the favor later.  Usually this only occurs between family members in other species.

[3] Brundtland Commision, Wikipedia, http://en.wikipedia.org/wiki/Brundtland_Commission, 11/7/10.

[5] Note that have been some alternative explanations proposed for how oil is produced that does not involve this biomass conversion

[6] Mark Ridley had numerous “Peak Oil” examples in his book The Rational Optimist: How Prosperity Evolves, Harper Collins, 2010, New York, pp 121 -156.

[7] Bailey, Ronald, Reason.com, Peak Everything?, April 27, 2010, http://reason.com/archives/2010/04/27/peak-everything, 10/16/10.

[8] Bailey, Ronald, Reason.com, Peak Everything?, April 27, 2010, http://reason.com/archives/2010/04/27/peak-everything, 10/16/10.

[9] Kurzwiel, Ray, The Singularity is Near: When Humans Transcend Human Biology, Penguin Books, 2005, p 67.

[10] If there is a limited amount of matter and energy in the Universe, which is open to debate, there may be a limitation to the number of potential inventions.  However, this limitation would be so large as to be meaningless for all practical purposes.

[11]  Kurzweil, Ray, The Singularity is Near: When Humans Transcend Human Biology, Penguin Books, 2005, p 44.

[12]  Kurzweil, Ray, The Singularity is Near: When Humans Transcend Human Biology, Penguin Books, 2005, p 44.

[13] Diamond, Jared, Collapse: How Societies Choose to Fail or Succeed, Penguin Group,New York, 2005.

[14] Solow, Robert M, Technical Change and the Aggregate Production Function, The Review of Economics and Statistics, Vol. 39, No. 3 (Aug., 1957), pp. 312-320

[15] Schmookler, Jacob, Inventions and Economic Growth, Harvard Press, 1966, pp 86-103.

[16] Matt Ridley in his book The Rational Optimist shows that self sufficiency is an economic dead end.  Only large groups of humans can afford to have people specialize so some or all their time is devoted to inventing.

[17]  Ridley, Matt, The Rational Optimist: How Prosperity Evolves,Haper Collins,New York, 2010,p. 83.

This is a multi-part post on the science of economic growth.  Standard economic theory has failed miserably to define the source of economic growth, which means it is impossible for it to provide rational policies to restore economic growth.  This series of posts defines a scientific theory of the source of economic growth.

Part 1

Part 2

Part 3

Part 4

Part 5

Introduction

Since economics is the study of how man meets his needs, the paper will first examine the nature of man.  Man is like other life forms in that he is subject to laws of evolution.  Evolution is the result of entropy.  However, it is not absolute entropy but what is defined herein as biological entropy that controls life forms.  The paper starts with an examination of biological entropy.

Every species has unique features that allow it to compete in its evolutionary struggle.  Homo Sapiens ’ unique feature is their ability to use their rational mind to alter their environment or invent.  If humans did not invent, then the study of economics would be the study of human evolution.

The defining condition of most life is that it exists in the Malthusian Trap, which is the forcing function of evolution.  An important question is whether humans can escape the Malthusian Trap.  The Malthusian Trap is the result of biological entropy, which implies diminishing returns.  Escaping the Malthusian Trap requires humans to overcome diminishing returns.  Whether humans can invent their way out of diminishing returns is explored.

The paper shows that the answer to this question is that it depends.  If large groups of humans invent quickly enough, then humans can permanently escape the Malthusian Trap.  However, it is clear that in a technological stagnant environment, humans will eventually fall back into the Malthusian Trap.  This leads to more mainstream economic questions, such as whether inventing is endogenous or exogenous?  The paper shows that it is clear that inventing is endogenous.  Another more mainstream economic question that is examined is whether dissemination of new technologies is inhibited by property rights in inventions?  This question logically leads to the question of whether perfect competition or monopolistic competition encourages economic growth?  The paper shows that incentives are not only necessary for the creation of new technologies, but for the dissemination of new technologies and that perfect competition destroys technology creation.

These ideas are then applied to an understanding of the Industrial Revolution, which was the first time that large groups of humans escaped the Malthusian Trap.  It is shown that the Industrial Revolution, which was really a constant invention machine, occurred because of specific incentives for ordinary people to invent.

Finally, given the central role of invention to economics the paper examines whether there are any natural laws that apply to inventions.  Six natural laws of invention are presented.

How Does Entropy Apply to Life?

Life requires energy to exist because of entropy.  Otherwise a living organism could just not expend energy and it would live forever.  This setups a struggle between organisms and between species for energy sources, which forms the basis of evolution.  According to Peter A. Corning in “Thermoeconomics:

Beyond The Second Law” the idea that evolution and entropy are related has been long recognized.[1]  This connection has been espoused by Jean Baptiste de Lamarck, Herbert Spencer, Ludwig Boltzmann, Alfred Lotka, and Erwin Schrödinger, in his book What is Life?[2]  However, Corning warns us about confusing energy entropy, information entropy, and physical order.  Keeping this in mind, we need to define entropy in a consistent manner.  As used herein entropy does not mean information entropy or physical order or strictly energy entropy, which I will call absolute entropy.  Entropy means biologic entropy or the ability of an organism or a species to extract useful energy from their surroundings.  While this is related to absolute entropy in that it is about extracting useful energy, what matters in biology is the organism’s ability to extract energy from its environment to sustain its life not the absolute amount of useful energy available.  For instance, a buffalo (Bison) standing on a vein of coal in an open pit mine is surrounded by useful energy or low absolute entropy.  However, the buffalo cannot turn the coal into useful energy for itself and if there is not any grass or sage around, it is an area of high biological entropy for a buffalo.  Let’s explore this idea of biological entropy in more detail.  When a bison dies it has not reached a point of maximum absolute entropy, its carcass may still provide useful energy for vultures, mountain lions, and people.  Despite this, the bison’s biological entropy has reached a maximum, meaning its biological entropy has increased to a level that it no longer is alive.

On an individual organism level I define maximum biological entropy as the point at which the organism dies.  Many things can cause the entropy of an individual organism to reach it maximum and organisms use a variety of mechanisms to overcome biological entropy.  Plants create useful energy by photosynthesis.  They convert carbon dioxide into sugars (energy) using light.  They use this energy to reduce their biological entropy.  Animals eat plants or other animals and use the energy to reduce their biological entropy.  Note that when animals eat plants or other animals, they are increasing the biological entropy of the plants and animals they eat.  Thus, there are two general mechanisms that increase the biological entropy of life forms: internal and external.  Internal mechanisms are those that result from the failure to consume enough calories (energy) and aging.  Animals require oxygen, water, and food, in that order, to survive.[3]  Without oxygen, the animal cannot oxidize enough sugar (fat, protein) to survive – overcome biological entropy.  Without water, the animal’s cells are unable to absorb energy and expel wastes.[4]  Aging is a process of increasing biological entropy.  This is caused at least in part by disorder in genetic information.[5]  This genetic disorder results in the organism not being able to create enough useful energy to survive or increasing the amount of energy necessary to survive.  External mechanisms include being eaten or attacked by other living organisms, diseases, accidents (for animals), and the elements.

In general, living organisms use energy to overcome biological entropy first and then to increase their size.  However, some animals also create simple shelters or seek shelter to ward off the biological entropy increasing effects of the elements and predators.  Rain, sun, hail, snow, heat, and cold all contribute to the increase in biological entropy of living organisms.  Life has two main methods of overcoming the effects of the biological entropy: 1) food (energy) consumption and 2) shelter creation (inhabitation).

A species of life becomes extinct when the species as a whole reaches a certain level of biological entropy either because it cannot consume enough energy or because external mechanisms increase its biological entropy to reach the extinction level.  The biological entropy level at which a species becomes extinct is the maximum biological entropy for the species.  A species reaches the Malthusian Trap when increases in population of the species results in the total required energy (food) to support the population being greater than the supply of food.  Most life forms exist in the Malthusian Trap, most of the time, including humans until the Industrial Revolution.

Evolution

It is widely known that Malthus’s Essay on the Principles of Population influenced Charles Darwin and shaped his ideas on evolution.  Darwin himself recorded in his 1876 autobiography the following:

In October 1838, that is, fifteen months after I had begun my systematic enquiry, I happened to read for amusement ‘Malthus on Population’, and being well prepared to appreciate the struggle for existence which everywhere goes on from long-continued observation of the habits of animals and plants, it at once struck me that under these circumstances favourable variations would tend to be preserved, and unfavourable ones to be destroyed. The results of this would be the formation of a new species. Here, then I had at last got a theory by which to work.[6]

Evolution is then a way of selecting species or variations on species that have low biological entropy and causing those species with high biological entropy to go extinct.  The limited amount of food (energy) for each species ensures that evolution is a dynamic ongoing process.  The variations are the result of sexual recombination of the parent’s genes and mutations in the organism’s genes.  The unique feature of humans is that they alter their environment to fit their needs, they do not just rely on genetic variations that allow them to better adapt to their environment.  The way humans do this is by inventing, which will discuss more in the next section.

[1] Corning, Peter A., Thermoeconomics:

Beyond The Second Law, Journal of Bioeconomics, Journal of Bioeconomics, Vol. 4, No. 1. (1 January 2002), pp. 57-88, p. 58.

[2] Ibid

[3] There are few exotic life forms that do not need oxygen, but all require energy to overcome entropy.

[4] BNET, Physiological Effects of Dehydration: Cure Pain and Prevent Cancer, http://findarticles.com/p/articles/mi_m0ISW/is_2001_August/ai_78177228/, 10/6/10.

[5] Hayflick, Leonard, Entropy Explains Aging, Genetic Determinism Explains Longevity, and Undefined Terminology Explains Misunderstanding Both, PLoS Genetics, http://www.plosgenetics.org/article/info:doi/10.1371/journal.pgen.0030220, 10/7/10.

[6] The Autobiography of Charles Darwin, location 680-686, by Charles Darwin (Mar 17, 2006) – Kindle eBook

William W. Cochran and Christopher R. Benson & Michael C. Elmer have put together a superb paper on the history of patent damages.  If you want a copy, please contact Bill Cochran.

The paper discusses how the statutory language of awarding damages has changed over time and the evolution of injunction relief.  Below I will quote the historical statutes from the paper.  But before I do that I want to point out three problems with the presently available relief for patent infringement.

1. Injunctions Are Optional Upon a Finding of Infringement

2. No Enhanced Damages for Purposeful Negligence.

3. Reasonable Royalties are Never Adequate Compensation.

1. Injunctions Are Optional Upon a Finding of Infringement

The patent right is the right to exclude.  It is the height of absurdity to win a patent lawsuit and not obtain an injunction.  If I win a lawsuit then I should be able to enforce my right, which is the right to exclude.  You cannot exclude someone from trespassing on your property in the past.  Thus the right to exclude means the right to exclude in the future or an injunction.

Unfortunately, this bit of illogic is brought to you by the statute 35 USC 283, which states that injunction may be granted in accordance with the principles of equity.  This means in theory that you can win a patent lawsuit and still not be able to enforce your right to exclude.

The law should be changed so that an injunction should issue as part of any suit in which a patent is found to be infringed.

2. No Enhanced Damages for Purposeful Negligence.

The treble damages provision for patent infringement is only for ‘willful’ infringement.  This means that companies can practice purposeful negligence and the worst case outcome for this is to pay the patent holder the damages they caused.  See point 3 below.  In addition, the In re Seagate Techs., LLC, 497 F.3d 1360 (Fed. Cir. 2007) (en banc) overturned the longstanding principle that an infringer must exercise a duty of due care.  As a result, the enhanced damages provision has become meaningless.  An infringer has no duty of care to not infringe and can then defeat any charge of willfulness by purposeful negligence.  The threat of enhanced damages is now almost meaningless and provides no deterrent effect to keep people from infringing patents.

The law should be changed so that enhanced damages should be available in the case of negligent infringement.  This is the only way to protect our inventors for technology thieves.

3. Reasonable Royalties are Never Adequate Compensation.

In any lawsuit there is a non-zero chance that you will win even if you are guilty.  If the damages are found to be a reasonable royalty, then the logical choice is always to negligently infringe a patent.  In the worst case the infringer will only pay what they would have had to pay the patent holder if they had negotiated a license and there is a chance they may win the lawsuit incorrectly and pay nothing.  Now, you may object that if they are forced to pay lost profits as damages this is a real deterrent.  This is true, but the reality is that it is very hard to prove lost profit and the patent holder must show that ‘but for’ the infringing activity they would have made the sale.  In the case of a large company infringer and a small company patent holder, the patent holder is likely to end up with even less damages under the lost profits calculation.  As a result, many large companies pursue a policy of efficient infringement.  This policy is morally reprehensible, but it does make economic sense.

The law should be changed so that the minimum damages is reasonable royalty plus some percentage amount such as 20% to provide an adequate protection for America’s inventors.

Below are some of the interesting highlights from the excellent paper PATENT DAMAGES by Bill Cochran.

Act of 1790

The first patent act, the Patent Act of 1790 provided that an infringer must:

…forfeit and pay to the patentee such damages as should be assessed by a jury, and moreover, to forfeit to the person aggrieved the infringing machine.

Act of 1793

Three years later, this was changed in the new Act of 1793, §5.  It was a significant departure from the Act of 1790, and a significant departure from the common law of torts.  This new Act (§)5 provided:

That if any person shall make, devise, and use or sell a thing so invented, the exclusive right of which has been secured to any person by patent, without the consent of the patentee . . . the person so offended shall forfeit and pay to the patentee a sum that shall be at least equal to three times the price for which the patentee had usually sold or licensed to other persons the use of said invention.

Act of 1800

The Act of 1800 removed the requirement that the patentee had to be selling a product and recognized the value of maintaining exclusivity and not just liability.  Thus, the new Act of 1800 returned to the concept of damages, requiring the infringer to:

…forfeit and pay to the patentee a sum equal to three times the actual damages sustained  by such patentee.

The Act of 1819 §(c) read:

. . . that the Circuit Courts of the United States shall have original cognizance, as well in equity as at law, of all actions, suits, controversies, and cases arising under any law of the United States, granting or confirming to authors or inventors the exclusive right to their respective writings, inventions, and discoveries; and upon any bill in equity, filed by any party aggrieved in any such cases, shall have authority to grant injunctions, according to the course and principles of courts of equity, to prevent the violation of the rights of any authors or inventors secured to them by any law of the United States, on such terms and conditions as the said courts may deem fit and reasonable

This appears to be the first instance that an “injunction” could be obtained against an infringer.

The Act of 1836, §14, read as follows:

Whenever in an action for damages for making, using, selling the thing patented . . . a verdict shall be rendered for the plaintiff, it shall be in the power of the court to render judgment for any sum above the amount found by the verdict as the actual damages sustained by the plaintiff, not exceeding three times the amount thereof.

Act of 1870

. . . and the court shall have power, upon a bill in equity filed by any party aggrieved, to grant injunctions according to the course and principles of courts of equity, to prevent the violation of any rights secured by patent, on such terms as the court may deem reasonable; and upon a decree being rendered in any such case for an infringement, the claimant [complainant] shall be entitled to recover, in addition to the profits to be accounted for by the defendant, the damages the complainant has suffered thereby, and the court shall assess the same or cause the same to be assessed under its direction, and the court shall have the same powers to increase the same in its discretion that are given by this Act to increase the damages found by verdicts in actions upon the case…

The Patent Act of 1922 stated:

. . . and upon a decree being rendered in any such action for infringement the complainant shall be entitled to recover, in addition to the profits to be accounted for by the defendant, the damages the complainant has sustained thereby, and the court shall assess the same or cause the same to be assessed under its direction.

If on the proofs it shall appear that the claimant has suffered damage from the infringement or that the defendant has realized profits therefrom to which the complainant is justly entitled, but that such damages or profits are not susceptible of calculation and determination with reasonable certainty, the court may, on evidence tending to establish the same, in its discretion, receive opinion or expert testimony, which is hereby declared to be competent and admissible, subject to the general rules of evidence applicable to this character of testimony; and upon such evidence and all other evidence in the record the court may adjudge and decree the payment by the defendant to the complainant of a reasonable sum as profits or general damages for the infringement…

The Act of 1946 reads as follows, now being numbered as 35 USC §70:

[after authorizing injunctions, the first paragraph continues] …and upon a judgment being rendered in any case for an infringement the complainant shall be entitled to recover general damages which shall be due compensation for making, using or selling the invention, not less than a reasonable royalty therefor, together with such costs, and interest, as may be fixed by the court.  The court may in its discretion award reasonable attorney’s fees to the prevailing party upon the entry of judgment on any patent case.

The court is hereby authorized to receive expert or opinion evidence upon which to determine in conjunction with any other evidence in the record, due compensation for making, using, or selling the invention, and such expert or opinion evidence is hereby declared to be competent and admissible subject to the general rules of evidence applicable thereto.

The court shall assess said damages, or cause the same to be assessed, under its direction and shall have the same power to increase the assessed damages, in its discretion, as is given to increase the damages found by verdicts in actions in the nature of actions of trespass upon the case; but recovery shall not be had for any infringement committed more than six years prior to the filing of the complaint in the action.

This is the first statement about reasonable royalties.

Act of 1952

Section 284 states:

Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.

When the damages are not found by a jury the court shall assess them.  In either event the court may increase the damages up to 3 times the amount found or assessed.

The court may receive expert testimony as an aid to the determination of damages or of what royalty would be reasonable under the circumstances.

However, the decision in In re Seagate overturned a longstanding principle that an infringer must exercise a duty of due care.

Present statute

§283.  Injunction

The several courts having jurisdiction of cases under this title may grant injunctions in accordance with the principles of equity to prevent the violation of any right secured by patent, on such terms as the court deems reasonable.

As stated by the Federal Circuit in Smith International, Inc. v. Hughes Tool Co., 718 F.2d 1573 (Fed. Cir.), cert. denied, 464 U.S. 996 (1983):

Without this injunctive power of the courts, the right to exclude granted by the patent would be diminished, and the express purpose of the Constitution and Congress, to promote the progress of the useful arts, would be serious undermined.  The patent owner would lack much of the “leverage,” afforded by the right to exclude, to enjoy the full value of his invention in the market place.  Without the right to obtain an injunction, the right to exclude granted to the patentee would have only a fraction of the value it was intended to have, and would no longer be as great an incentive to engage in the toils of scientific and technological research.

In eBay v. MercExchange, L.L.C., 547 U.S. 388 (2006) , the Supreme Court made it clear that obtaining injunctions in patents is no different from obtaining an injunction is any other civil matter relying upon equitable relief.  The plaintiff must prove four factors:

1. The Plaintiff will suffer irreparable harm without an injunction.
2. The remedies at law, which are money damages, are inadequate to compensate for the injury.
3. Considering the balance of hardships between the plaintiff and the defendant, an injunction is warranted.
4. The public interest would not be disserved by issuing an injunction.

According to US News.  Newt Gingrich is proposing to repeal Sarbanes Oxley and Dodd Frank on his inaugural day.  SOX has killed innovation by making it impossible for technology startups to get funding.

At his speech at the Republican Jewish Coalition’s 2012 Republican Presidential Candidates Forum this afternoon, Gingrich urged attendees to help vote a large Republican majority into the House and Senate in 2012 so Congress could immediately pass repeals of the Affordable Care Act and the financial regulations Sarbanes-Oxley and Dodd-Frank.

This would be an excellent start, now we just need him to repeal the America Invents Act and roll back spending to 2007 levels.

PatentlyO reported the following hypothetical.

In Mayo v. Prometheus, the Supreme Court is again addressing patentable subject matter. During oral arguments, Justice Breyer came-up with a hypothetical invention to help him draw the line on patentable subject matter.

JUSTICE BREYER: Suppose I discover that if … someone takes aspirin … for a headache and, you know, I see an amazing thing: if you look at a person’s little finger, and you notice the color [indicates that] you need a little more, unless it’s a different color, you need a little less. Now, I’ve discovered a law of nature and I may have spent millions on that. And I can’t patent that law of nature, but I say: I didn’t; I said apply it. I said: Look at his little finger.

MR. SHAPIRO: Sure.

JUSTICE BREYER: Okay? Is that a good patent or isn’t it?

MR. SHAPIRO: No … Well, because you — you’ve added to a law of nature [to] just a simple observation of the man’s little finger.

First of all taking aspirin is not a law of nature.  The law of nature would be how the body reacts to aspirin, but the process of taking aspirin is not a law of nature.   If you use this information to observe whether someone is taking too much or too little aspirin, then you have applied that “law of nature” to a human problem.  Namely, how to know how much aspiring one should take for a headache.

The Supremes struggled to find a hypothetical to understand 35 USC 101 according to the reports.  Here is a simple 35 USC 101 test that even they should be able to apply correctly.

Anything that man creates to solve an objective problem is an invention.  If a device/service is not found in nature separate from man then it is an invention.  For example, the ability to create fire or harness it is an invention of man.  No other animal has the ability to create or harness fire.  Man did not have some sort of inherent knowledge of how to create or harness fire, so creating fire is an invention.[1]

Applying this information to the above hypothetical, aspirin is created by man.  It does not exist separate from man, so this hypothetical is clearly within 35 USC 101.  Taking aspirin is not a part of nature.  Observing the effects of taking aspirin is not a part of nature.

Mayo’s argument in this case boils down to patents should not exist, or at least should not be apply to Mayo.

[1] However, it is no longer novel and therefore you could not patent for creating fire.

The USPTO just issued new rules for ex-parte Appeals.  These changes appear to be an honest attempt to reduce the unnecessary paper work and formalities associated with Appeals.  They also attempt to deal with Examiner’s introducing new grounds of rejections during appeals.  However, they do not deal with the churning of Appeals where the PTO decides to reopen prosecution and this process repeats itself several times with no resolution for the applicant.  Here are the notable changes according to the USPTO:

The notable changes to the rules are: (1) The Board will presume that an appeal is taken from the rejection of all claims under rejection unless cancelled by an amendment filed by appellant (final Bd.R. 41.31(c)); (2) the Board will take jurisdiction upon the filing of a reply brief or the expiration of time in which to file such a reply brief, whichever is earlier (final Bd.R. 41.35(a)); (3) the requirements to include statements of the status of claims, status of amendments, and grounds of rejection to be reviewed on appeal and the requirements to include an evidence appendix and a related proceedings appendix are eliminated from the appeal brief (final Bd.R. 41.37(c)); (4) the Board may apply default assumptions if a brief omits a statement of the real party-in-interest or a statement of related cases (final Bd.R. 41.37(c)(1)(i) and (ii)); (5) for purposes of the examiner’s answer, any rejection that relies upon Evidence not relied upon in the Office action from which the appeal is taken (as modified by any advisory action) shall be designated as a new ground of rejection (final Bd.R. 41.39(a)(2)); (6) an appellant can await a decision on a petition seeking review of an examiner’s failure to designate a rejection in the answer as a new ground of rejection prior to filing a reply brief (final Bd.R. 41.40) and thereby avoid having to file a request for extension of time in which to file the reply brief; and (7) the examiner’s response to a reply brief is eliminated.

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