01 October 2012

Patent Abolitionism

'The Case Against Patents' (Federal Reserve Bank of St. Louis Working Paper 2012-035A) by Michele Boldrin and David Levine argues [PDF] that the US should abandon the patent system.

The authors comment that
The case against patents can be summarized briefly: there is no empirical evidence that they serve to increase innovation and productivity, unless the latter is identified with the number of patents awarded – which, as evidence shows, has no correlation with measured productivity. This is at the root of the “patent puzzle”: in spite of the enormeous increase in the number of patents and in the strength of their legal protection we have neither seen a dramatic acceleration in the rate of technological progress nor a major increase in the levels of R&D expenditure – in addition to the discussion in this paper, see Lerner [2009] and literature therein. As we shall see, there is strong evidence, instead, that patents have many negative consequences. Both of these observations, the evidence in support of which has grown steadily over time, are consistent with theories of innovation that emphasize competition and first-mover advantage as the main drivers of innovation and directly contradict “Schumpeterian” theories postulating that government granted monopolies are crucial in order to provide incentives for innovation. The differing predictive and explanatory powers of the two alternative classes of models persist when attention is shifted to the historical evidence on the life-cycle of industries. The initial eruption of small and large innovations leading to the creation of a new industry – from chemicals to cars, from radio and TV to personal computers and investment banking – is seldom, if ever, born out of patent protection and is, instead, the fruits of highly competitive-cooperative environments. It is only after the initial stages of explosive innovation and rampant growth end that mature industries turn toward the legal protection of patents, usually because their internal grow potential diminishes and the industry structure become concentrated. 
A closer look at the historical and international evidence suggests that while weak patent systems may mildly increase innovation with limited side-effects, strong patent systems retard innovation with many negative side-effects. Both theoretically and empirically, the political economy of government operated patent systems indicates that weak legislation will generally evolve into a strong protection and that the political demand for stronger patent protection comes from old and stagnant industries and firms, not from new and innovative ones. Hence the best solution is to abolish patents entirely through strong constitutional measures and to find other legislative instruments, less open to lobbying and rent-seeking, to foster innovation whenever there is clear evidence that laissez-faire under-supplies it.
They conclude -
In 1958 the distinguished economist Fritz Machlup in a report to Congress famously said
If we did not have a patent system, it would be irresponsible, on the basis of our present knowledge of its economic consequences, to recommend instituting one. But since we have had a patent system for a long time, it would be irresponsible, on the basis of our present knowledge, to recommend abolishing it.
One might imagine that if it would be irresponsible to recommend abolishing it, it would be even more irresponsible to further extend it. Moreover, one might hope that if it is indeed worth preserving such a large government intrusion into private activity that that during the intervening six decades evidence would emerge that patents do indeed serve the desired purpose of encouraging innovation. Sadly the story of the past six decades is the opposite. In new industries such as biotechnology and software where innovation was thriving in the absence of patents – patents have been introduced. Given this continued extension has there been a substantial increase in innovation in recent years? On the contary, it is apparent that the recent explosion of patents in the U.S., the E.U. and Japan, has not brought about anything comparable in terms of useful innovations and aggregate productivity. 
The software industry is an important case in point. In a dramatic example of judge-made law, in the early 1990s sofware patents became possible for the first time. Bessen and Meurer in a large body of empirical work studied the consequences of this unnatural experiment, culminating their [2009] book entitled Patent Failure the title of which summarizes how effective software patents have been for promoting the common good. With six decades of further study since Machlup’s report failing to find evidence that patents do promote the common good, it is surely time to reconsider his recommendation that it would be irresponsible to abolish the patent system. On the contrary: a system that at one time served to limit the power of royalty to reward favored individuals with monopolies has become with the passage of time a system that serves primarily to encourage failing monopolists to inhibit competition by blocking innovation. 
Abolishing patents may seem “pie-in-the-sky” and there are certainly many interim measures that can be taken to mitigate the damage: properly interpreting obviousness, requiring genuine disclosure of working methods and an independent invention defense against patent infringement are useful and – among economists – relatively uncontroversial measures. But why use a band-aid to staunch a major wound? Economists fought for decades – and ultimately with great success – to abolish trade restrictions. It will not escape the careful reader that patents are very much akin to trade restrictions as they prevent the free entry of competitors in national markets, thereby reducing the growth of productive capacity and slowing down economic growth. The same way that trade restrictions were progressively reduced until reaching (almost complete) abolition, a similar (albeit, hopefully less slow) approach should be adopted to “get rid” of patents. Moreover the nature of patents as time-limited makes it relatively easy to phase them out by phasing in ever shorter patent durations. This conservative approach has also the advantage that if reducing patent terms indeed has a catastrophic effect on innovation the process can easily be reversed. 
There are of course many transitional issues to be worked out. This is particularly the case with respect to pharmaceutical products where patents are only one piece of a complicated regulatory jungle including the approval process and the market exclusivity protections all of which would need to be adjusted as patents are phased out. Because policy proposals are better digested and metabolized when served in the form of small pills, here is our list of small reforms that could be easily implemented. 
(1) Stop the rising tide that, since the early 1980s, is both extending the set of “things” that can be patented and shifting the legal and judicial balance more and more in favor of patent’s holders. 
(2) Because competition fosters productivity growth, anti-trust and competition policies should be seen as a key tool to foster innovation. This is of particular relevance for high tech sectors, from software to bioengineering, to medical products and pharmaceuticals. 
(3) Free trade is a key part of competition policies hence the role that WTO-WIPO-TRIPS play should be redefined to move away from the current neo-mercantilist approach toward free trade in goods and ideas. The aim here should be that of stopping the policy of exporting our intellectual policy laws towards other countries while adopting a policy of exporting free trade and competition in innovation. This seems an urgent goal because, within a couple of decades, the “balance of trade in ideas” between US+EU and Asia may easily reverse. At that point the temptation to engage in “mercantilism of ideas” may well affect the now developing Asian countries, leading to a general increase in IP protection worldwide. 
(4) Cross industry variation in the importance of patents suggests we may want to start tailoring patent’s length and breadth to different sectorial needs. Substantial empirical work needs to be done to implement this properly, even if there already exists a vast legal literature pointing in this direction. 
(5) Reversing the burden of proof: patents should be allowed only when monopoly power is justified by evidence about fixed costs and actual lack of appropriability. The operational model should be that of “regulated utilities”: patents to be awarded only when strictly needed on economic grounds. This requires reforming the USPO, which is urgently needed in any case. 
(6) Prizes and competition. An interesting approach is that of operating to change the role that the NSF and the NIH play in fostering innovation. The basic goal, in this case, is that of reversing the principle according to which federally financed investigation can lead to private patents. As a first step we would advocating going back to the old rule according to which the results of federally subsidized research cannot lead to the creation of new private monopolies but should be available to all market participants. This reform would be particularly useful for the pharmaceutical industry. 
(7) With regards to the latter, we advocate reforming pharmaceutical regulation to either treat stage II and III clinical trials as public goods (to be financed by NIH on a competitive basis) or by allowing the commercialization (at regulated prices equal to the economic costs) of drugs that satisfy the FDA requirements for safety even if they do not yet satisfy the current, over-demanding, requisites for proving efficacy. It is ensuring the efficacy—not the safety—of drugs that is most expensive, time- consuming and difficult. All the usual mechanisms of ensuring the safety of drugs would remain firmly in place. While pharmaceutical companies would be requested to sell new drugs at “economic cost” until efficacy is proved, they could start selling at market prices after that. In this way, companies would face strong incentives to conduct or fund appropriate efficacy studies where they deem the potential market for such drugs to be large enough to bear the additional costs. At the same time this “progressive” approval  system would give cures for rare diseases the fighting chance they currently do not have. This solution would substantially reduce the risks and cost of developing new drugs. 
(8) If this progressive approval approach works for rare diseases, there is no reason is should not be adopted across the board. The current system favors a small number of blockbuster drugs that can be sold to millions of patients. The coming revolution in medicine will rely on carefully targeting hundreds or even thousands of drugs to the correct patients. But lawmakers must first usher in a new system that makes developing these precision treatments possible. The regulation reform we are suggesting would be a first important step to achieve such goal. 
The aim of policy, in general, should be that of slowly but surely decreasing the strength of intellectual property interventions but the final goal cannot be anything short of abolition. Once again, if at the times of Machlup one could still nurture doubts and wonder if the system could not be reformed in a credible and stable form, in 2012 one must ask: is not six decades of failure enough time? Is it not time to take seriously the idea of patent abolition and begin the discussion of these transitional issues?