Why Economists Think We Should Get Rid of Patents

Why Economists Think We Should Get Rid of Patents

Google’s new promise? It’ll stop trolling.

No, the company, which made this announcement two weeks ago, hasn’t been posting nasty comments on message boards: It has pledged to start the fight against “patent trolling,” which is when companies attack others with lawsuits to defend their patents—even if they don’t intend to do anything with the technology they’ve patented.

So what does this mean for Google? Well, they’re starting out small: They’ve chosen ten patents and said that they won’t sue anyone else for using their patented technology—as long as they don’t get sued themselves. After all, patent fights can get extremely expensive: In 2011, Google spent more on patents than it did on research and development, and it's not alone—competitor Apple did as well.

Google also urged other tech companies to adopt its “Open Patent Non-Assertion Pledge,” in which those companies would also agree not to sue others who had infringed on their patents. The goal is to create a tech community that is devoted to encouraging progress—not defending its territory at the expense of other innovators.

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The company's new stance is one example of a growing chorus of economists and tech innovators who think that patent litigation, in which businesses sue each other for infringing on their patents, is harming the industry. One example comes from voice-recognition technology, such as that which powers the iPhone’s Siri feature. One company in the field, Nuance, believing that start-up Vlingo was encroaching on one of its broad patents, sued, forcing Vlingo to spend $3 million on legal fees. While Vlingo won the suit, the cost proved so great, it eventually had to sell itself to Nuance anyway. Nuance technology is now thought to power Siri, though neither Apple nor Nuance will confirm it.

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In 2011, President Barack Obama signed a patent reform bill, which grants “first-to-file” patents rather than the previous “first-to-invent” patents, because under the old system, when inventors would come up with an idea at the same time, court proceedings were necessary to grant the patent. But at that time, the Berkeley Technology Law Journal suggested that the overhaul would give more power to big companies that have the resources to file first, stifling innovation at start-ups—and making trolling even worse.

Now, a paper from economists with the Federal Reserve Bank of St. Louis argues that our nation should get rid of patents altogether, in order to spur competition and innovation.

Would abolishing patents—which were created in order to incentivize inventors to invest in research and development—drastically reduce innovation in the United States? Or are the patent system and the expensive litigation that often accompanies it so harmful that they actually hurt the economy?

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The Benefits of Patents

Before we dive into all the reasons for eliminating patents, here is some of the conventional wisdom about why patents have been considered productive tools for our economy:

  • Patents help inventors profit. Patents give inventors the exclusive right to profit from their intellectual property.
  • Patents spur innovation. By providing incentives to inventors, patents are thought to promote innovation and technological advancements. Apple founder Steve Jobs has been quoted as saying, “We’re going to patent it all,” when it came to iPhone technology—and that even meant ideas that the company hadn’t built yet. By patenting its work—even if it never used any of the inventions—Apple could thus justify having its team spend time working on cutting-edge projects.
  • Patents help create jobs. Presumably, to turn a profit on an invented idea, an inventor would need a team to execute the concept, leading to job creation.
  • Patents spread knowledge. When inventors are granted patents, their innovative techniques and procedures are made public. Thus, patents could help others to innovate by giving them more advanced tools to build upon.
  • Patents help companies get funding. Venture capital funds and other investors may be more likely to invest in new start-ups if they have secured patents for their work. The Berkeley Patent Survey showed that 67% of companies’ negotiations with VC firms said that the firms in question had implied that patents were an important part of their funding decisions.

How Patents Hurt the Economy

When it comes to the most recent changes to the patent system in the United States, David K. Levine, one of the economists with the St. Louis Federal Reserve, likened it to “rearranging deck chairs on the Titanic.”

In “The Case Against Patents,” published in The Journal of Economic Perspectives, he and co-author Michele Boldrin write in their introduction: “There is no empirical evidence that [patents] serve to increase innovation and productivity, unless productivity is identified with the number of patents awarded.” Their research shows that the patent system in the United States is actually stifling innovation, and giving benefits solely to companies large enough to lobby in favor of their own self-interest. Here’s a look at some of their arguments:

  • Studies show that patents don’t increase productivity. Levine and Boldrin show that while the number of patents has quadrupled over the last three decades, the Bureau of Labor Statistics finds that annual growth in productivity has actually decreased, from 1.2% in the 1970s to below 1% from 1990 to 2009. Regarding productivity, Levine says, “We usually refer to total factor productivity (TFP), meaning how much output we get for a given amount of input …. For example, how much value can be produced from a given amount of labor and capital? This has increased enormously over time due to innovation—but not, as far as anyone can tell, due to patents." Levine and Boldrin suggest, from looking at studies nationally and globally, that because patents grant a monopoly—at least for a limited period of time—they hurt the type of competition that would lead to more innovation.
  • Patents favor larger companies. The United States’ patent laws have led to the development of the “patent trolls.” Take, for instance, Jobs’s drive to patent technologies Apple had thought up but not necessarily developed. Because of its huge size and profits, Apple can afford to prosecute smaller companies that it feels are infringing upon its patents—even if Apple doesn’t foresee using those inventions in the near future. By forbidding other companies to profit from similar technologies, Apple, and other big companies especially protective of patents, could thus be hampering job creation and economic growth.
  • Non-specific patents discourage competition. Unlike mechanical objects, which patents were initially developed to protect, the nature of software has led to broad patents that grant ownership of concepts rather than physical creations, enabling patent owners to argue that those building totally different products have violated their intellectual property. In a New York Times interview, federal appellate judge Richard A. Posner said that the standard for granting patents had become too loose, creating chaos. If inventors can be sued for violating patents they didn’t know existed—or ones that didn’t seem applicable to their work—then there’s no longer much of an incentive to invest in R&D.
  • Patents hurt consumers. By granting monopolies, patents hurt consumers by not allowing competition to bring down costs. Levine and Boldrin argue that this is especially prevalent in the pharmaceutical industry, where patents help raise the cost of prescription drugs and at the same time prevent innovative new treatments from coming to market.

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In the tech sector, stifling competition can also hurt the consumer: In the landmark patent case in which Apple went head to head with Samsung for two years, Samsung’s loss, in which it will have to pay Apple about $600 million, prompted the company to release this statement: “Today’s verdict should not be viewed as a win for Apple, but as a loss for the American consumer .… It will lead to fewer choices, less innovation and potentially higher prices.”

Could the U.S. Ever Do Away With Patents Altogether?

Given that Boldrin and Levine argue that patents substantially harm the economy, is it plausible that the United States would ever do away with patents entirely?

Levine, looking internationally for models, points to Holland and Switzerland, which he says didn’t have patents at all during “the most important stages of the Industrial Revolution” in those countries. While he believes it would be difficult to revoke patents altogether, Levine states, “Constant political pressure from the many people who are involved in innovation and who benefit from it, together with political reforms to make government more responsive to the common welfare and less responsive to special interests” would help to change the system.

Levine continues, saying, “Economists fought long and hard against both slavery and trade restrictions—systems that were as entrenched in their time as patents are today. It took a long time in both cases but ultimately we prevailed over the vested interests."

In the meantime, however, he suggests slowly phasing out patents by giving increasingly brief patent durations. Additionally, Levine and Boldrin suggest examining the value of patents in different sectors, writing, “Because competition fosters productivity growth, antitrust and competition policies should seek to limit patents when they are hindering innovation. This policy may be of particular relevance for high-tech sectors, from software to bioengineering, to medical products and pharmaceuticals.”

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It may turn out that corporations—who are spending such enormous sums on patent litigation—may decide to change the tide when it comes to patents, as with Google’s new pledge. Whether or not other companies, however, decide to take up the cause as well remains to be seen.

What do you think: Should patents be protected for inventors … or done away with for the good of the economy?

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