Patents are bad for innovation and the economy, more often being a substitute for innovation than an incentive for it
Free-market economists don't normally believe that monopolies are good for society - except where intellectual property (IP) is involved, where they argue that some temporary monopolies are worth permitting to provide an incentive for innovation, which is good for all as it it is a major source of improved productivity. This makes some logical sense: If you were powerless to prevent copying of your ideas, you might not have much incentive to invest in creating those ideas. I would certainly have bought that idea before doing some research into it.
Logic, however, isn't enough in the real world and it would be good to see some empirical evidence. I was surprised to find that there is significant evidence that patents and other forms of IP are counterproductive from society's point of view. That is, they inhibit innovation rather than promoting it. The full case end evidence is laid out in the book Against Intellectual Monopoly
by Michele Boldrin and David K. Levine (Free PDF, Hard Cover).
Their book summarises the case they make thus:
It is common to argue that intellectual property in the form of copyright and patent is necessary for the innovation and creation of ideas and inventions such as machines, drugs, computer software, books, music, literature and movies. In fact intellectual property is a government grant of a costly and dangerous private monopoly over ideas. We show through theory and example that intellectual monopoly is not necessary for innovation and as a practical matter is damaging to growth, prosperity and liberty.
Their work has influenced the work of Terence Kealey (see chapter 16 of his book Sex, Science and Profits), an iconoclastic British scientist who is well known for arguing against government funding of science. He argues that most patents are bad outside the pharmaceutical industry, where government restrictions on what can be sold create an enormous barrier to innovation that only patents can fairly compensate.
While no answer here can adequately cover the breadth of evidence in either of the references, some specific stories can give a flavour of the key issues. Several examples come from how major modern industries were initially held back because of patent disputes and only started to bring rapid innovation and general social benefits when the initial patents were broken or subverted: this is true for aircraft, cars, movies and steam engines (all the examples are summarised from much more detailed accounts in the Boldrin and Levine reference and all quotes are form their book).
Henry Ford had to fight a monopolistic patent on the car before he could bring mass production to motor vehicles.
The Wright Brothers were granted a broad patent on flying machines and, instead of inventing anything new, devoted many years of effort and investment to preventing anyone else in the USA from making aircraft. (The issue was aggravated because the government had invested about 70 times more than the Wright brothers in design without producing a working craft). US aviation only really took off as an industry when the government effectively revoked their patent rights in 1917 as a war measure, forcing all firms in the industry to pool their IP). The key message, though, was that there was a lack of further innovation by the original inventors once they had a patent.
Movies didn't become successful in California because of the sunlight (they were mostly shot indoors!) They moved because the key firms wanted to escape Edison's very restrictive patents on cinema technology (which is particularly ironic given the way the industry lobbies for IP protection now).
Even the industrial revolution might have happened faster if the patents awarded to Watt and Boulton in 1769 (expired 1800) had not been awarded. Watt's monopoly relieved him of the need to innovate further and the power and design of engines changed little until the patents ran out at which point there was a steep change in the rate of improvement of engine efficiency as the patent no longer inhibited the use of other's innovations.
Other comparisons that strongly suggest that patents are not required involve either natural experiments where the rules are changed or comparisons among countries with different rules. Both Switzerland and the Netherlands spent a large part of the 19th century not enforcing patent laws: neither notably lacked innovation or industrial success compared to their European neighbours with strict laws.
The USA has changed the rules on the patenting of biologicals and software relatively recently. Both provide a sort of natural experiment for the logic of patents. Yet studies on the economic benefits of patents on plants show:
...private sector investment in wheat breeding does not appear to have increased. Moreover, econometric analyses indicate that the PVPA (the Plant Variety Protection Act which, ultimately led to the patentability of plants) has not cause any increase in experimental or commercial wheat yields.
On software patents:
... the increase in the number of patents in the US economy was not accompanied or followed by any visible increase in TFP [total factor productivity] or in any other measure of effective innovation or productivity. ...patenting if found to be a substitute for R&D, leading to a reduction of innovation.
In short we have evidence and examples that show that patents may actually deliver the opposite of their intent: they lower the incentive to innovate and increase the cost of competition.
Update
The authors quoted above have a recently published paper in The Journal Of Economic Perspectives which provides a good summary of their argument:
The case against patents can be summarized brielfy: there is no empirical evidence that they serve to increase innovation and productivity, unless productivity is identified with the number of patents awarded—which, as evidence shows, has no correlation with measured productivity.
Another update
A recent edition of the Economist has summarised the debate well. In their words (my emphasis):
The public-good position on patents is simple enough: in return for registering and publishing your idea, which must be new, useful and non-obvious, you get a temporary monopoly—nowadays usually 20 years—on using it. This provides an incentive to innovate because it assures the innovator of some material gain if the innovation finds favour. It also provides the tools whereby others can innovate, because the publication of good ideas increases the speed of technological advance as one innovation builds upon another.
This sounds plausible. But is it true? There is much room for doubt. The evidence that the current system encourages companies to invest in research in a way that leads to innovation, increased productivity and general prosperity is surprisingly weak. A growing amount of research in recent years, including a 2004 study by America’s National Academy of Sciences, suggests that, with a few exceptions such as medicines, society as a whole might even be better off with no patents than with the mess that is today’s system.
