Against Monopoly

defending the right to innovate

Monopoly corrupts. Absolute monopoly corrupts absolutely.

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Patents and the Concentration of Wealth

In the previous post, we saw that the dramatic increase in patent awards since about 1980 has not been accompanied by any consequent change in overall economic growth in the United States. But before we conclude that patents don't do anything at all (except employ examiners and attorneys), let's look a bit farther afield.

For convenience, we repeat below the diagram shown in the previous post, of annual patent grants for the last half-century plotted on a logarithmic scale.

In the next graph, using data from Thomas Piketty's remarkable work Capital in the 21st Century, we plot the percentage of US national income collected by the top 1% of earners for about the same time period:

We can immediately see that, just like the number of patent grants, the share of income going to the top centile was about constant (or perhaps falling a bit) in the period 1960 to 1980, and then some time between 1980 and 1983 started going up dramatically. While there's a lot of scatter, we can make a plausible approximation that the share grows at about 2.6%/year from 1980 to 2010. This isn't exactly the same as the rate of growth of patent grants, but it isn't that different. Certainly the qualitative behavior of the two datasets is extremely similar. It's not easy to say if one is delayed with respect to the other, so the relationship might be causal, or it might be that both are the result of a single common cause. (Or, of course, the correlation could be accidental.) But in any case, this dataset looks a lot more like something related to patenting than the US GDP did.

Now, folks who have studied these issues (such as Prof. Piketty) would point at changes in tax law and corporate culture long before looking at intellectual property issues, when searching for the reasons behind the increase in wealth concentration in recent decades. And quantitatively they are probably correct. If we value each patent granted at $50,000, then the total value of a year's patenting is around twelve billion dollars. Even if that's pessimistic by a factor of 3 or 4, it's still a rather tiny fraction of the US GDP of around fifteen trillion dollars today. It seems reasonable that we should regard the close resemblance of our two graphs as showing that the behavior of both datasets is driven by a common cause, which we might characterize as the increasing influence of established wealth in governmental policy over the last 3 decades.

Nevertheless, we will suggest by the following argument that the result we see is consistent with a sensible understanding of what granting lots of patents might be expected to produce. A patent is a right to exclude: it gives the holder the legal right to prevent other people or organizations from doing something that, absent the patent, they have the ability and resources to accomplish. (You can't sue someone for infringement unless they are able to infringe.) About 90% of granted patents are owned by corporations, in the majority of cases due to compulsory assignment as a condition of employment. This percentage, incidentally, was only 71% in 1991.

The possession of these rights would be expected to have two consequences. The first is that the relative value of an employee relative to an employer is reduced: the employer now owns something the employee knows how to do. The employee can make improvements on an invention, possibly for a different employer, and patent same - but if the practice is still covered by the first grant, the initial employer can exclude the inventor from their own invention.

The second consequence is that established firms can raise barriers to entry by owning large numbers of patents. Barriers to entry increase profitability by reducing the number of competitors in a space without the need for product improvements. As noted, for example, by Boldrin and Levine in Against Intellectual Monopoly, patenting tends to increase as industries mature. Exclusion of competitors without corresponding improvements in products or services represents a net transfer of wealth to corporate management and investors over consumers. If patents were granted only for substantial improvements in products or services, and thus their disclosure represented a public good, it is possible that this transfer might be mitigated by the benefit to the public. However, US patents are in fact granted more or less at random, with little distinction between meaningless and profound disclosures. (We will discuss this assertion in more detail in the next post; a similar point is made in a recent post from the folks at Patent Progress: Why We Need Better Patent Quality.) It is unlikely that the resulting public benefit would outweigh the cost of granted rights to exclude.

And, of course, the third consequence of granting rights to exclude is the rise of non-practicing entities, patent "trolls", whose activities involve no products at all, but simply the threat of exclusion of other parties as a means of extorting payment.

Thus, it is plausible, though hardly proven, that the increase in US patenting has played a role in the roughly contemporaneous increase in the concentration of wealth in the United States. Research work in the islands of the Aegean sea over 2300 years ago, reported in Will Durant's The Life of Greece [1], showed that a substantial middle class is required for the success of a democratic system of government. While many other changes in policy are needed to moderate and perhaps reverse the progress of the United States towards a plutocracy, improvements in the means of granting patent monopolies can play a role. Suggestions for such improvements - some modest, some wildly ambitious - will constitute the topics of the remainder of this series of posts.


USPTO; Capital in the 21st Century, T. Piketty (trans. A. Goldhammer), figure 8.6; http://www.nsf.gov/statistics/seind93/chap6/doc/6e1a93.htm; http://www.nytimes.com/2014/04/14/opinion/my-ideas-my-bosss-property.html;

Notes: 1: OK, I'm doing this one from memory; my copy is buried in the garage, don't ask. If someone has a digitized version of the book and can provide the specific citation (and any corrections to my instant characterization) I'd appreciate the help.

Patents and Economic Growth

Patents and Economic Growth: A Beautiful Experiment

Any time someone proposes changes in the patent system, they can expect to encounter platitudes about how important the protection of "intellectual property" (a term invented in the 1970's) is to innovation and prosperity. Just about everyone involved in the system seems to accept the notion that patents are important in promoting technological progress and thus economic growth. For example, in testimony to the US Congress last year, former USPTO director David Kappos, referring to patent reforms, said "…we are reworking the greatest innovation engine the world has ever known." But people believe a lot of things that aren't true. Is this one of them?

It turns out that, courtesy mostly of the Federal courts with just a bit of help from Congress, the United States has performed a lovely experiment in the last five decades that conclusively demonstrates that patents do not play a role in promoting the overall economy. Let's take a look.

The figure below shows the number of patents granted per year, from the early 1960's until last year.

We can immediately see that the number of patents granted per year was about constant for quite a long time, from roughly 1962 to 1982, but then increased dramatically (and is still going up). By the end of the period, about four times as many patents were being granted per year as at the beginning. If patents are important for economic growth, we would expect to see some sort of secular increase in growth corresponding to this massive change in patenting. And on the contrary, if patents are detrimental to growth, we'd expect to see growth decrease starting around the 1980's. Naturally, we wouldn't be surprised if the response to this change was delayed a bit, as the effects of patent grants might take a while to percolate through the system. However, the changes can't be delayed by more than the 17- or 20-year term of a patent, and it's been more than 20 years since the changes started. This is as nice an experiment as you get to do in the social sciences, so whatever result we get has to be considered as authoritative.

In the next graph, we show the United States gross domestic product, corrected for inflation into 2009 dollars, as red dots. The blue line is a very simple model for the data, which assumes a constant annual growth of 3.42% per year.

You can see that the blue line fits the measured data very precisely until 2007: that is, the US economy grew at a very constant 3.4% annual rate from 1963 to 2007. For those who enjoy statistics, the correlation coefficient between the measured data and this simple model, excluding 2007 through 2013, is 99.8%. That's pretty danged good even for the physical sciences. There is no evidence whatsoever for a sustained increase in growth some time after 1982, which would correspond to the hypothesis that patents benefit innovation and growth.

The data is even clearer when presented on a logarithmic scale. Logarithms are the numbers to which a base, such as 10, must be raised to produce a value. Thus, the logarithm of 10 is 1, the logarithm of 100 is 2, and so on. Logarithms have many virtues and are widely used in data analysis; see for example

Wikipedia:Logarithmic Scale

In this context, a constant growth rate becomes a straight line on a logarithmic plot. In the next graph, we can easily see that patenting growth has been a roughly constant 4.4% per year after about 1980.

The final image shows US GDP again plotted logarithmically.

It's readily apparent that the GDP data lies almost perfectly on the straight line of constant 3.4% annual growth, until the Great Recession. (And it's scarily clear that the slope of the line is now lower than it has been in the past five decades.) It's even easier to see that there is no correlation between patenting and GDP. We could double the system again, or get rid of it altogether, and expect no significant effect on overall prosperity in the United States. US patents do not play a measurable role in overall economic growth.

Now, it's worth noting that there is an abrupt decrease in GDP in the Great Recession of 2007, followed by what appears to be a secular decrease in sustained economic growth thereafter, to about 2.3% per year. It's hard even for the most dedicated opponent of the patent system to blame a sudden event in 2007 on a trend starting in 1981. But one could also argue that the sudden deflection in 2007-2008 must not be real, but must reflect a discrepancy between "real" economic growth and recorded GDP, so that growth may have slowed substantially earlier than shown. A possible version of this idea is depicted by the dotted green line, which illustrates the hypothesis that growth slowed to 2.3% per year around 1998, but the change was not observed by the means used to measure GDP until 2007. If we were to accept this hypothesis as real, we see the change in growth started in the late 90's, about 15 years after the change in the patent system - at the outer edge of plausible time delays. Even if US economic growth slowed a while ago, it's hard to claim the event was correlated with a change in the patent system occurring much earlier. We can't really assert that patents hurt the US economy, only that they don't help it. In the next post we'll establish a more dramatic correlation demonstrating the real effects of patent monopolies.

It's not impossible that this absence of utility is a consequence of the specific system we have used in the United States for the last few decades, and that another "better" system might show superior results. A similar examination of patents in other jurisdictions would be helpful, though it seems unlikely that other countries have made such nice dramatic changes in their policies in corresponding times. (I'd love to be wrong about that.)

In the next post we'll examine what patents are correlated with, and therefore what their real role in society probably is.


USPTO, http://www.multpl.com/us-gdp-inflation-adjusted/table, http://democrats.judiciary.house.gov/sites/democrats.judiciary.house.gov/files/documents/Kappos131020_1.pdf


From Rafael Magri

Today I was reading a book called "The Omnivore's Dilema" and came accross something that I believe could be useful in your line of research (and I don't remember reading about it anywhere else).

In the book, some executive from General Mills is quoted saying that recipes are not intellectual property. So, all you can get is a few months head start with some new product, time enough to establish a brand.

So, if the processes food industry is innovative enough, this fits nicely with the thesis that patents may be unecessary.

What passes for intellectual thought

Cecil Quillen points us to the Partnership for American Innovation an organization devoted to making sure nobody ever innovates again...

How many innovations are patented

Not all innovations are patented, and the question of how many is fundamental to understanding what is going on. Cecil Quillen points us to a careful new paper by R. Fontana, A. Nuvolari, H. Shimizu, A. Vezzulli attaching the issue.

A new book on patent trolls

Patent Trolls Predatory Litigation and the Smothering of Innovation by William J. Watkins Jr.

All Our Innovation Are Belong You

Sadly patent trolls really do inhibit innovation: new research from Catherine Tucker. (Thanks to Jim Bessen and Cecil Quillen for this.)

All Our Patents Are Belong You

The way the patent system functions is very different than people imagine. In early stages of a new technology growing the market is crucial - and encouraging competitors much more important than trying to suppress them. Hence patents can play only a negative role. Tesla has figured this out: especially interesting to read is how Elon Musk's thinking about patents evolved as he came to understand how different is the reality from the rhetoric.

Rights Violations Aren't the Only Bads

In my latest article, "Rights Violations Aren't the Only Bads," I argue that it makes no sense for a pro-IP person to say to an anti-IP person, "Well, if you don't believe that ideas can be owned, then you can't complain if someone plagiarizes or adulterates your work."

I try to show that this response is total nonsense.

Intellectual Property Fosters Corporate Concentration

My latest piece on IP is "Intellectual Property Fosters Corporate Concentration."


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