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In a recent judgement Europe's highest court ruled that Stem Cells derived from human embryos cannot be patented (see BBC story here). This provoked many scientists to argue that both research and the european economy would suffer as a result. The BBC report sums up the view of scientists like this (my emphasis):

Scientists were concerned that the ruling would threaten the future of medical research, saying companies in Europe would be less likely to invest in research to develop therapies using embryonic stem cells.

The basic claim here is that an inability to protect the results of their research will discourage investment in that research and harm the development of useful treatments.

The standard idea behind patents is that governments agree a tradeoff with inventors: the inventors disclose how their invention works (so others can build on it for future social benefit) and, in return, they get a temporary monopoly on the invention so it is worth their while investing in it. The alternative view (often articulated by the open software movement (good summary on Wikipedia) is that patents inhibit innovation and are therefore a net economic loss to society.

What research is there to analyse the overall economic cost vs. benefit of the patent system in the modern day?

The specific claim that I hear is that patents are economically beneficial, that is, that benefits by and large outweigh the costs to the world's economy.

  • Now that the question is about innovation - this is a possible duplicate: skeptics.stackexchange.com/questions/4176/… (The question is different, but the accepted answer covers this question too.) – Oddthinking Oct 21 '11 at 2:49
  • Having thought some more about this, what I really wanted to know about is whether anyone has studied all impacts of a patent system vs non-patent system, while quantifying each measure looked at. A bit like the studies I linked in this question. @Oddthinking do you reckon another major rewrite of this question would be acceptable? – RomanSt Oct 21 '11 at 11:23
  • No-one seems happy with it at the moment, so sure! Go for it! (I think it is a reasonable question now, but it is a duplicate.) I'm not entirely sure it will achieve much given you already have an answer: a researcher saying that there isn't enough evidence to make any conclusions. – Oddthinking Oct 21 '11 at 12:05
  • I think "beneficial" is vague; one useful function of patents is public disclosure and retention of inventions. China is renowned for having been the source of many inventions that were subsequently lost to the ages. – Brian M. Hunt Oct 21 '11 at 16:39
  • @Oddthinking On the duplicate issue: I think there are two questions, one broad (this one) and one narrow (the software patent one). I think it is worth asking both as the answers might be different for software. However, this question might be framed too narrowly by the innovation word. We might want to use a broader phrase like boost economic growth. – matt_black Oct 22 '11 at 0:44
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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.

  • Do you have any citations for your bullet point examples? – Sam I Am Apr 10 '12 at 14:26
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    @P_S The examples I quotes in the answer are evidence. The detail behind the claims can be found in the references but I hope I showed enough to illustrate the outline and nature of the key arguments. If that's not enough detail, read the Boldrin and Levine reference: that's a whole book worth of evidence. And we shouldn't reject argument because they are not widely held but on the quality of the evidence (an real observation trumps theory here when conventional views are driven entirely by theory). – matt_black Aug 17 '14 at 13:47
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    @P_S The evidence I quote is not anecdote but summarised history. I could quote a lot more but it would make the question as long as the books/references which would be futile. I quoted enough to demonstrate the key evidence exists. If you doubt the facts then your only option is to go to the detail in the linked references. – matt_black Aug 18 '14 at 0:28
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    Thinking rationally, none of this should be surprising. If you can't keep others from copying your ideas, you are forced to keep innovating in order to stay ahead of the competition. With patents, one innovation is all that is required to ensure long-term sustainability. I would expect patents to have the worst impact in fields where competing ideas aren't really possible - like medicine (it's unlikely that two different "cures for cancer" will be found for the same cancers) or computing. I'd love to know how the idea of patents improving innovation arose to begin with. – Glen O Apr 7 '15 at 14:01
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    @NuclearWang That is a reasonable hypothesis. But it is also testable by evidence from the history of inventions. And that is what the question is about: whether the evidence backs that hypothesis or an alternative one where patents generally inhibit all innovation. – matt_black May 17 '18 at 18:24
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In general the evidence that we have isn't good enough to come to a clear conclusion about whether patents are benefitial.

Still there's are interesting observations about the real world effects of patents.

We have a few real world examples of different industries that operate without patent protection. Those industries come in two kinds:

  1. Industries were there are no laws for patent protection
  2. Black market industries that operate outside the rule of law.

The European clothing industry is a case of an industry that operates without patent protection. It still produces enough innovation to have a new line of fashion every year.

The Iraqi IED industry is a good example for an industry that's capable of fast innovation without patents.

On the other hand there are existing industries that have patents. One of them is the UK's electronics industry. Christopher Thomas el al wrote a paper titled "The economic impact of the patent system: a study of the British experience" where he found:

The electronics companies that responded to our industrial inquiry were uniformly of the opinion that the size and direction of their R&D is not affected in any significant way by the existence of patents and that in general patents nowadays have very little impact on competition between major firm in the industry.

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    The IED "industry" is an unfair example. IED manufacturers are not competing against themselves, but against common enemy. The conditions that patents are designed to protect against (keeping innovations secret from other manufacturers to protect competitive edge) do not apply. – Oddthinking Oct 22 '11 at 1:58
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    LOL. The Thomas et al paper was published in 1973. The electronics industry has been through one or two changes in the past 37 years. – Oddthinking Oct 22 '11 at 2:01
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    I'd have thought the consensus was that patents are useful if only because few of the anti-patent studies are ever referenced. I've found some good ones, though, starting with Terence Kealey's anti-patent rant in his book Sex, Science and Profits. I may add these to an answer if I can find the time to summarise them. – matt_black Nov 1 '11 at 23:50
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    IEDs are a bad example of an industry without patents. A far better, legal, upstanding industry is fashion. There's a turnover in fashion every year or two, people continue to buy new fashions, yet fashions aren't even copyrightable, much less patentable. – Bruce Ediger Aug 19 '14 at 23:05

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