Wonderful summary of the history and analysis of the economic advantages and disadvantages to a patent system. I’m a patent lawyer who has been worrying about the question of whether patents promote progress for a couple of decades. https://www.symmetrybroken.com/whats-wrong-with-the-patent-system/
Their observation is that a combination of free entry into political and economic competition has enabled adaptive efficiency, and hence promoted progress, in what they call open access societies.
Patents and corporations both began as royal prérogatives. The Venetian Patent Act is a historical anachronism, representing one of the first (if not the first) open access orders in human history. But it was circumscribed in geography (but not necessarily temporally!). NWW might say that Venetian patents opened access to Venetian markets for foreigners and non-elites who had improvements to the state of the art.
But more generally in view of NWW, I believe the question to ask is whether a given patent is necessary to formation of a corporation or not. Patents as a system of insurance (think third party debt collection for investors) is less appealing, although probably not as socially costly as critics of NPEs would have it. And note that some would distinguish between NPEs and PAEs (patent assertion entites) because universities, government labs, and others never intend to practice what they patent but also don’t rely upon litigation and licensing as their primary source of revenue.
“As Simon Rifkind, the Co-Chairman of the 1967 United States President’s Commission on the Patent put it, ‘the patent system is more essential to getting together the risk capital which it required to exploit and to develop and to apply the contributions of the genius inventor than to provide a stimulus for the actual mental contribution’”
Nothing has changed in over 50 years in this regard. The best reason to file a patent is because without one nobody reasonable is going to feel comfortable investing. But what fields remain in which this is true except for those in which regulatory approval is required before revenue?
“The question, then, is whether patents are associated (1) with more inventing activity overall, and (2) with more productive uses of the inventions once they are invented. In economic terms, we are more looking for evidence that patents facilitate capital formation and technology diffusion, both of which are well-studied and associated with economic growth.”
The evidence for multiple inventions is devastating to the case that patents are required for (1).
NWW have the right framework for analyzing (2), which is directly relevant to the first part of the economic terms you identify. The second part (diffusion) is more subtle, but best understood (I believe) through comparisons to alternative institutions of open source licensing and trade secret torts. Patents look favorable relative to trade secrets in many cases, but not to open source licensing in most.
The overarching theme seems to be what do we need the get people to work together toward bringing some technical dream to market after it has been demonstrated as possible by scientists? In the case of drugs or medical therapy, there’s no question that exclusive rights are required to attract capital. In the case of software, it’s less clear, and the dead weight costs of the system look more dubious.
Thanks again for the wonderful summary of a complex and nuanced question.
These are all great points. But I have to say I don’t agree that the question is whether patents are required for the formation of a corporation because that excludes a lot of R&D that might be done by an existing corporation. Maybe the best way to put it is whether it increases the share of R&D invested in science and technology. These are all so tricky to measure; “invention” is abstract, but R&D includes, for example, buying servers.
For what it’s worth, I don’t think that the evidence of multiple inventions is devastating for capital formation around inventions. The question is whether it increases invention overall, for example in helping companies attract financing or just providing more capital (for example, through licensing) to do other things. The evidence there is in favor of patents, but of course, to some extent capital formation bleeds into technology diffusion. For example, some of the papers I talk about show how patents help startups attract VC, get higher sales, and get exits more often. Is that evidence of attracting capital, or is that a longitudinal piece of evidence that the technology got more widely diffused? And how does that relate to the counter-factual of whether this increased the amount of invention? To me it’s clear that inventors invent because that’s who they are. Patents would help facilitate invention by helping inventors attract more resources to invent in the first place. (The result could be negative if the blocking rights become too severe of course!)
One last thing, I completely agree with you on the difference between NPEs and PAEs. On top of universities et al, I’d also add R&D companies that monetize through patent licensing, like ARM.
Just found this tidbit in the biography of the first patent commissioner Henry Ellsworth:
“Acting as Patent Commissioner, Ellsworth made a decision that profoundly affected the future of Hartford and Connecticut. The young Samuel Colt was struggling to establish a firm to manufacture his new revolver. Ellsworth became interested in Colt’s invention, and in 1836 made the decision to issue Colt U.S. Patent No. 138. On the basis of Ellsworth’s decision, Colt was able to raise some $200,000 from investors to incorporate the Patent Arms Manufacturing Company of Paterson, New Jersey, the forerunner of the mighty Colt arms manufacturing empire.”
We may have a legit disagreement about the role of patents in supporting the funding of at least certain types of R&D. The Bayh-Dole Act appears to have created a comparative advantage for universities and government labs in funding R&D. Is that the best model? There are reasonable arguments that it is not. But so long as universities and government labs have tech transfer offices, I’m dubious about curiosity driven R&D getting funded by for-profit corporations. Anyway the US market doesn’t appear to support it the way it did before the 1980s. But if you believe startups are doing curiosity driven research, then we’re talking about different things. For me, curiosity driven research is literally curiosity driven with no obvious expectation of commercial use. I don’t believe patents are either necessary or sufficient to funding this kind of research, which is sometimes called basic science.
I was exaggerating the weight of the evidence of multiple inventions a little in arguing against the need for patents to support scientific discoveries, but not much. I note that even in responding to this point, you reach for the desire to “help[] companies attract financing or just providing more capital” as beneficial. But that’s where we agree patents and licensing are socially beneficial. The question is whether they’re necessary or beneficial to get to the point where attracting capital makes sense. I’m arguing no because the history of science and engineering demonstrates that fundamental breakthroughs are not predictable enough to be funded commercially. AT&T and IBM were able to do it because they were monopolies at a scale that hasn’t been replicated since then.
So we agree that inventors invent because that’s who they are. We both want to ensure we have inventors, and that they get compensated well enough to ensure we get the benefit of their work.
But who are these inventors? Are they scientists who we also want to teach and publish their discoveries? Are they engineers building the next great platform for human society to grow? If the former, why wouldn’t government grants be sufficient? If the latter, why not venture capital? That seems like the right way to frame the potential disagreement here.
In the end, there just aren’t many actual people who fit anywhere between these two archetypes. I actually have met a few of them, but they are exceptionally rare. And I don’t know that we need to modify the institutions we have today to encourage more to follow in their footsteps. Maybe. But from where I sit today, I feel safer saying patents are best for society when used only as a mechanism for attracting capital to a venture capital startup or other for-profit corporation.
Wonderful summary of the history and analysis of the economic advantages and disadvantages to a patent system. I’m a patent lawyer who has been worrying about the question of whether patents promote progress for a couple of decades. https://www.symmetrybroken.com/whats-wrong-with-the-patent-system/
Lately, I’ve been partial to the model of progress articulated by North, Wallis, and Weingast (NWW) in Violence and Social Orders. https://www.symmetrybroken.com/what-the-patent-system-can-learn-from-violence-and-the-social-order/
Their observation is that a combination of free entry into political and economic competition has enabled adaptive efficiency, and hence promoted progress, in what they call open access societies.
Patents and corporations both began as royal prérogatives. The Venetian Patent Act is a historical anachronism, representing one of the first (if not the first) open access orders in human history. But it was circumscribed in geography (but not necessarily temporally!). NWW might say that Venetian patents opened access to Venetian markets for foreigners and non-elites who had improvements to the state of the art.
But more generally in view of NWW, I believe the question to ask is whether a given patent is necessary to formation of a corporation or not. Patents as a system of insurance (think third party debt collection for investors) is less appealing, although probably not as socially costly as critics of NPEs would have it. And note that some would distinguish between NPEs and PAEs (patent assertion entites) because universities, government labs, and others never intend to practice what they patent but also don’t rely upon litigation and licensing as their primary source of revenue.
“As Simon Rifkind, the Co-Chairman of the 1967 United States President’s Commission on the Patent put it, ‘the patent system is more essential to getting together the risk capital which it required to exploit and to develop and to apply the contributions of the genius inventor than to provide a stimulus for the actual mental contribution’”
Nothing has changed in over 50 years in this regard. The best reason to file a patent is because without one nobody reasonable is going to feel comfortable investing. But what fields remain in which this is true except for those in which regulatory approval is required before revenue?
“The question, then, is whether patents are associated (1) with more inventing activity overall, and (2) with more productive uses of the inventions once they are invented. In economic terms, we are more looking for evidence that patents facilitate capital formation and technology diffusion, both of which are well-studied and associated with economic growth.”
The evidence for multiple inventions is devastating to the case that patents are required for (1).
NWW have the right framework for analyzing (2), which is directly relevant to the first part of the economic terms you identify. The second part (diffusion) is more subtle, but best understood (I believe) through comparisons to alternative institutions of open source licensing and trade secret torts. Patents look favorable relative to trade secrets in many cases, but not to open source licensing in most.
The overarching theme seems to be what do we need the get people to work together toward bringing some technical dream to market after it has been demonstrated as possible by scientists? In the case of drugs or medical therapy, there’s no question that exclusive rights are required to attract capital. In the case of software, it’s less clear, and the dead weight costs of the system look more dubious.
Thanks again for the wonderful summary of a complex and nuanced question.
These are all great points. But I have to say I don’t agree that the question is whether patents are required for the formation of a corporation because that excludes a lot of R&D that might be done by an existing corporation. Maybe the best way to put it is whether it increases the share of R&D invested in science and technology. These are all so tricky to measure; “invention” is abstract, but R&D includes, for example, buying servers.
For what it’s worth, I don’t think that the evidence of multiple inventions is devastating for capital formation around inventions. The question is whether it increases invention overall, for example in helping companies attract financing or just providing more capital (for example, through licensing) to do other things. The evidence there is in favor of patents, but of course, to some extent capital formation bleeds into technology diffusion. For example, some of the papers I talk about show how patents help startups attract VC, get higher sales, and get exits more often. Is that evidence of attracting capital, or is that a longitudinal piece of evidence that the technology got more widely diffused? And how does that relate to the counter-factual of whether this increased the amount of invention? To me it’s clear that inventors invent because that’s who they are. Patents would help facilitate invention by helping inventors attract more resources to invent in the first place. (The result could be negative if the blocking rights become too severe of course!)
One last thing, I completely agree with you on the difference between NPEs and PAEs. On top of universities et al, I’d also add R&D companies that monetize through patent licensing, like ARM.
Just found this tidbit in the biography of the first patent commissioner Henry Ellsworth:
“Acting as Patent Commissioner, Ellsworth made a decision that profoundly affected the future of Hartford and Connecticut. The young Samuel Colt was struggling to establish a firm to manufacture his new revolver. Ellsworth became interested in Colt’s invention, and in 1836 made the decision to issue Colt U.S. Patent No. 138. On the basis of Ellsworth’s decision, Colt was able to raise some $200,000 from investors to incorporate the Patent Arms Manufacturing Company of Paterson, New Jersey, the forerunner of the mighty Colt arms manufacturing empire.”
https://en.m.wikipedia.org/wiki/Henry_Leavitt_Ellsworth
+1 for the primacy of the role of patents as an institution for attracting capital that would otherwise be impossible to attract
We may have a legit disagreement about the role of patents in supporting the funding of at least certain types of R&D. The Bayh-Dole Act appears to have created a comparative advantage for universities and government labs in funding R&D. Is that the best model? There are reasonable arguments that it is not. But so long as universities and government labs have tech transfer offices, I’m dubious about curiosity driven R&D getting funded by for-profit corporations. Anyway the US market doesn’t appear to support it the way it did before the 1980s. But if you believe startups are doing curiosity driven research, then we’re talking about different things. For me, curiosity driven research is literally curiosity driven with no obvious expectation of commercial use. I don’t believe patents are either necessary or sufficient to funding this kind of research, which is sometimes called basic science.
I was exaggerating the weight of the evidence of multiple inventions a little in arguing against the need for patents to support scientific discoveries, but not much. I note that even in responding to this point, you reach for the desire to “help[] companies attract financing or just providing more capital” as beneficial. But that’s where we agree patents and licensing are socially beneficial. The question is whether they’re necessary or beneficial to get to the point where attracting capital makes sense. I’m arguing no because the history of science and engineering demonstrates that fundamental breakthroughs are not predictable enough to be funded commercially. AT&T and IBM were able to do it because they were monopolies at a scale that hasn’t been replicated since then.
So we agree that inventors invent because that’s who they are. We both want to ensure we have inventors, and that they get compensated well enough to ensure we get the benefit of their work.
But who are these inventors? Are they scientists who we also want to teach and publish their discoveries? Are they engineers building the next great platform for human society to grow? If the former, why wouldn’t government grants be sufficient? If the latter, why not venture capital? That seems like the right way to frame the potential disagreement here.
In the end, there just aren’t many actual people who fit anywhere between these two archetypes. I actually have met a few of them, but they are exceptionally rare. And I don’t know that we need to modify the institutions we have today to encourage more to follow in their footsteps. Maybe. But from where I sit today, I feel safer saying patents are best for society when used only as a mechanism for attracting capital to a venture capital startup or other for-profit corporation.