The Patent Dilemma

In simple terms patent law is frustrating. There is a strong rational argument for keeping patents and abolishing them. Those who innovate deserve some kind of compensation for their efforts, however even temporary monopoly leads to inefficiency and does not best benefit society. In the following I will consider the arguments for and against patents.

There are four central arguments that were used to justify the patent system of the 19th century. Taken from the book “The Patent System and Inventive Activity” by H.I. Dutton.

The Natural-Law Thesis

This thesis is based on the assumption that individuals have a natural right to property of their own ideas. Using others ideas was tantamount to theft as it was private property. Even supporters of the patent system would not go far to advance this argument. William Hindmarch noted that an inventor couldn’t have any natural right to prevent another person from making or using a similar invention summarises the breakdown of this thesis, on the basis that being loosely defined no boundaries are set as to what is a unique and individual idea.

Reward by Monopoly Thesis

The base argument of this thesis is that inventors should be rewarded according to the usefulness of their invention, since market forces may not always guarantee it. Adam Smith and John Stuart Mill were patrons of this argument as he noted the importance of the rule of law, and the institutional framework, which corrected market failure.

This is beneficial because allowing inventors monopoly ensured a period where they would gain sufficient return for the effort, without this protection competitors could in theory lower their costs at no cost. Introducing the free riding problem to the benefit of others inventions. In any case there was the argument they were harmless, market forces would determine the profitability from the invention, if it were a useless invention then there would be no reward.

Jeremy Bentham also distinguished between two categories of labor. In that there was the physical variety whereby it could be imitated with similar reward. Then the skilled variety where progress would reduce cost of production, rather than simply add to production.

Monopoly Profit Thesis

Private rewards was a clear incentive to invent, it differs from the rewards argument as it concerns itself with the duration and exclusiveness of the monopoly. Noting that it is economic growth for society that is ultimately desired. So in this sense growth and private profit would go hand in hand. There is evidence for this link in that many claimed that patents were integral to the creation of the most valuable inventions.

There was also the aspect of the speed at which innovation was carried out when patents were under use, this applied to foreigners and domestic inventors as the patent system enabled both equally to pursue invention, while securing the industrial basis of the economy.

Exchange-for-Secrets Thesis

This was based on the 18th century idea of contract, whereby a bargain occurred as one received protection and the other received knowledge. This thesis emphasised the importance of disclosure. This theory was not concerned with output but rather the dissemination of information of the existing technologies.

This had led to the more complex nature of patents, requiring full disclosure of the technology or inventions in a specification, in order for law officers to make provisions for the patent, established in 1734, and emphasised in 1778. Simply put by John Farey patent is the price of disclosure.

Anti-Patent

The greatest fear about patents was the manner in which monopoly was pursued, noting the particular evils associated with monopoly to ward off the use of patents. The counter-argument was rather that patents had brought what was private discovery into the common, and that just because the monopoly existed did not mean that market would demand it, or that an artificial price increase could be maintained. There was also the notion by William Spence that monopoly prompted a specific type of competition.

The main ideology behind the anti-patent movement was on the basis of free trade and the emancipation of industry. This had gained better grounding after the Corn Laws were repealed and the navigation acts took place.

  • Dangers of monopoly, negative effects on workers, manufacturers, etc.
  • No longer necessary due to a mature economy, firms able to compete normally without special privileges
  • The Economist argued it was immoral and economically unsound
  • The lottery nature of patents, whoever got the idea first by chance
  • The inefficiency of how patents were administered, and the lack of protection they actually offered is the main factor that put off inventors.

Against Intellectual Property – Boldrin & Levine

The example of James Watt’s new engine shows the limitations of patents, after initially having to spend six months obtaining a patent, he then spent time combating off rival inventors, to which the patent was then extended. Then after a period of commercial production his advanced engine had only sold 449 units of the 2250 steam engines around. A patent also limited him with the technology he required being the property of James Pickard.

This situation effectively describes Watt as not only an inventor but able to exploit the legal system, noting that his partner had strong connections in parliament. The legal system was used to limit competition, with evidence of limited adoption of steam engine innovation due to Watts’s monopoly. It is also worth noting that Watt spent more time on legal matters rather than inventing. This is summarised as rent seeking behaviour; this is shown through the patent extension that was not needed but favourable for Watt. In the conventional monopoly manner high prices prevented others from entering the market.

Most often attributed to the patent system are the evils of monopoly, corrupt rent seeking, legal suppression of innovation, reduced economic growth, and the los of personal freedom. It is argued that innovation would thrive in the absence of intellectual monopoly. This is brought up next to the concept of free trade and what used to be extreme protectionism. With the authors arguing that today there is the violation of intellectual property laws in that consumers desire cheap books, music, etc. in convenient format and are willing to violate law for it.

The legal framework is as follows in levels of protection of intellectual property: Patents, Copyrights, and Trademarks. Copyright tends to the specific, whereas patents provide broad protection over a general idea. The Right of Sale is a fair concept in that inventors should be able to profit from their work, the right to control however results in prosecution carried out by government.

Intellectual monopoly may be denoted as the right of the owner of the intellectual property to dictate how the purchaser uses the idea and or limiting them. Concept of first mover advantage, should still command a fair premium on the market? Economists favour competition over monopoly on the basis of freedom of contract and well-defined property rights. Shrink-wrap agreements are effectively enforcing collusive contracts. Their argument suggests that the right of sale should be present but then whoever completes a legal purchase and owns a copy now has the right to use the technology however they would like to. The law inhibits the potential of creativity. Similar analogy created between intellectual property and trade restrictions, looking at the transmission of goods being superior under free trade. The reward for invention argument is limited.

Milton Friedman notes the dangers of occupational licensure, but makes a notable point in that there seems to be support for such laws, as the producer group will always be more concentrated then the consumer group (Capitalism and Freedom, Page 143).


The outline of these arguments shows that there is validity in either approach, making the next requirement a look at examples. But rather than making a solution clearer, it goes on to complicate it further.

Take one of the most popular examples: pharmaceutical companies. We understand that there are high costs associated with the research and development of new drugs, therefore firms would like to be compensated for their effort and innovation. However, this tends to price drugs at a level unaffordable for the vast majority of society. Then on the consumer side this means the lack of consumption of a merit good. In the United Kingdom the National Health Service subsidises the cost of drugs in order to ensure and encourage consumption, such as free drugs for those in full time education. Nevertheless, this is limited as the NHS must choose which drugs to subsidise, and what degree to subsidise them. Firms may aggressively price increasing the burden on the NHS, this is often the case with brand new drugs.

Now if we consider paracetamol, the moment the patent ended the market was flooded with new brands all delivering the same product. Now a consumer can get paracetamol of 500mg pills from Sainsbury’s at £0.55, this effectively allows it to be consumed by anyone. The low price a consequence of extreme competition, and economies of scale resulting in mass production.

If we take the idea of altruism and greatest social benefit, we would look to reduce the comprehensiveness of patents. This brings forward the question of how much innovation should be rewarded it terms of length of patent, we leave the market forces to decide how well the innovator fares, but regardless it may stop others from innovating, lead to legal disputes, and tends towards what we see as the “evils of monopoly”. I personally believe that the anti-patent argument tends to over emphasise first-mover advantage, as in a world where communication occurs at increasingly higher speeds, information can be spread quicker then a firm may act.

Copyright Almog Adir © 2014 · All Rights Reserved · My Website

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