Friday, July 5, 2013

Matt Ridley: The Tabarrok curve - striking a balance between intellectual property and freedom to innovate

The economist Arthur Laffer is reputed to have drawn his famous curve—showing that beyond a certain point higher taxes generate lower revenue—on a paper napkin at a dinner with Dick Cheney and Donald Rumsfeld in the Washington Hotel in 1974. Another economist, Alex Tabarrok of George Mason University, last year drew a similar curve on a virtual napkin to argue that, beyond a certain point, greater protection for intellectual property causes less innovation. He thinks that U.S. patent law is well beyond that optimal point.

Last week the Supreme Court came out against the patenting of genes, on the grounds that they are discoveries, not inventions, though it did allow that edited copies of the DNA of a breast cancer gene should be seen as invented diagnostic tools. Dr. Tabarrok thinks that decision and other recent rulings are nudging patent law back in the right direction after a protectionist drift in the 1980s and '90s.

The argument for patents is that, without the monopoly they grant, inventors will not make discoveries, and if they do, they won't share them. So inventors get 20 years of protection against imitators. The counterargument is that patents are often used defensively to deter rival innovators and thus to discourage innovation. America's Semiconductor Chip Protection Act of 1984 resulted in more patenting but less innovation as firms tried to build up defensive "war chests" of patents to use in disputes with each other.

Many firms use patents as barriers to entry, suing upstart innovators who trespass on their intellectual property even en route to some other goal. In the years before World War I, aircraft makers tied each other up in patent lawsuits and slowed down innovation until the government stepped in. Much the same has happened with smartphones and biotechnology today. New entrants have to fight their way through "patent thickets" if they are to build on existing technologies to make new ones.

In his 2010 book "The Gridlock Economy," Michael Heller compares this monopolistic use of patents to a "phantom tollbooth" (a phrase borrowed from Norton Juster's 1961 children's book). Biotech companies that patent molecular techniques act like medieval barons along the Rhine who stifled trade by taking advantage of weakened imperial authority to extract tolls from passing cargo boats.

The logical next step in the corruption of the patent system was the invention of the patent "troll"—a company that buys up little-used patents not to develop the product in question but just to prosecute trespassers and extract money from them. The result has been some huge payouts, including one from BlackBerry.

Dr. Tabarrok argued in his 2011 book "Launching the Innovation Renaissance" that patents cannot encourage innovation if they raise its costs. In fields where innovation is a cumulative process, he argued, restricting patents would cause firms to lose some of their monopoly rights, but they would gain the opportunity to use the innovations of others. "The result is greater total innovation."

Patents are supposed to prevent imitation, but in practice, imitation is often more costly than innovation. Most patent disputes are not about firms copying each other's inventions but about two companies discovering simultaneously the next step in an innovative process. Yet patent law can't easily handle that type of situation.

The glaring exception is pharmaceuticals, where testing for safety and efficacy makes innovation extremely costly, but where imitation can be cheap. In these circumstances, patents are not only necessary but might be strengthened. Elsewhere they should be weakened and shortened.

Viscount Matt Ridley, an acclaimed author and former Science and Technology Editor for the Economist blogs at


Geoffrey said...

I think that the issue of pharmaceutical patents raises some interesting questions. Big Pharma is often charged with "discovery" of new uses, or characteristics of its product at the end of its 20 years of market protection, simply as a means to gain another five years of monopoly. If the discoveries are genuine, the public has been unnecessarily deprived. If they are not, competitive development has been unjustifiably stifled.

Duncan Cairncross said...

There are two issues
(1) Patents awarded for obvious improvements
An improvement should not be obvious to a professional in that field
(2) Software is protected by copyright not patents - this is wrong! copyright has too long a protection period
(Copyright has too long a protection period anyway)

As far as the pharmaceutical industry is concerned patents are a very inefficient mechanism to reward innovation and provide medicine
Some type of prize mechanism with the drugs being made and sold at a sensible price would be better
Especially as most are based on research paid for by the taxpayer