28 November 2012

Innovation and IP

'Patent Laws and Innovation: Evidence from Economic History' by Petra Moser (Stanford and the National Bureau of Economic Research, 2012) asks 
What is the optimal system of intellectual property rights to encourage innovation? Empirical evidence from economic history can help to inform important policy questions that have been difficult to answer with modern data: 1) Does the existence of strong patent laws encourage innovation? And 2) May patent laws influence the direction – rather than the rate – of technical change? Economic history can also help to shed light on the effectiveness of policy tools that are intended to address problems with the current patent system: 3) How do patent pools, as a mechanism to mitigate litigation risks, influence the creation of new technologies? 4) Will compulsory licensing, as a mechanism to improve access to essential innovations in developing countries, discourage innovation in the developing countries? This essay summarizes results of existing research and highlights promising areas for future research.
As a PBR buff I particular the illustration of the alarm-equipped cage built around the Stark Brother’s Golden Delicious tree to prevent competitors from stealing shoots of the tree. (The illustration features in 'Did Plant Patents Create the American Rose?' by Moser and Paul Rhode in The Rate and Direction of Inventive Activity Revisited (University of Chicago Press, 2012) edited by Joshua Lerner and Scott Stern.)

Moser concludes that
The weight of the historical evidence suggests a number of conclusions: 1) stronger patent laws are neither a necessary nor a sufficient condition to encourage innovation; 2) radical changes in patent laws may influence the direction, if not the level, of technical change; 3) policies that strengthen the monopoly power of patents by allowing competing firms to combine their patents may discourage innovation, while 4) policies that weaken patents by allowing a new set of firms to produce patented inventions may encourage innovation. This essay has presented research results and open questions in the economics of patent laws, and how patents influence innovation. The sum of the existing evidence suggests that patent laws are neither necessary nor sufficient to encourage innovation.
Exhibition data indicate that only a small share of innovations are patented, less than 20 percent overall, and that the usefulness of patents varies most strongly across industries – irrespective of substantial differences in patent laws. These results suggest that providing stronger patent rights may do little to increase inventors’ use of patents and fail to strengthen incentives to invent. Instead, stronger patents may encourage the strategic use of patents, for example by patent trolls, increase litigation risks, and discourage innovation, especially for industries in which the boundaries of intellectual property right are difficult to define. Supreme Court decisions to uphold contested patents, with split courts and surprising outcomes, have created empirical variation to examine these effects.
Historical evidence on patent pools, as a mechanism to resolve litigation, highlight the need for policies that prevent (rather than resolve) litigation. A pool that formed in 1856 to resolve litigation among major producers (and the 19th-century equivalent of a patent troll) appears to have discouraged innovation, possibly by increasing litigation risks for outside firms even as reduced litigation risks for members. The example of the sewing machine industry also suggests that the creation of a pool may discourage outside firms, which tend to be smaller and more innovative, from competing directly with the pool. Although these results are based on a single industry, they highlight the need for additional systematic analyses to examine the effects of pools on the nature of competition and innovation. Such analyses can exploit the large number of pools that have formed since the 1850 across a broad range of technologies and antitrust regimes (e.g., Gilbert 2004, Vaughan 1956).
By comparison, historical evidence from the TWAE indicates that compulsory licensing, which weakens the monopoly power of patents, may encourage innovation, at least in the licensing country. Additional analyses are needed to better understand the mechanisms by which compulsory licensing may encourage invention and to determine the effects on countries whose inventions are licensed. For example, policies that encourage voluntary licensing may be substantially more effective in increasing rates of innovation, if they improve access to critical technical information that patentees tend to omit from patent documents. Compulsory licensing may also encourage by increasing the intensity of competition, highlighting the need for additional systematic analyses of the interaction between patent laws and competition policy.
Finally, it is important to keep in mind that patent policy is just one of many levers through which economic policy can encourage innovation. Other types of intellectual property right – such as copyright, which protects books, music, software, and other types of intellectual assets – may have equally important effects on consumer welfare. Existing empirical analyses have exploited periods of piracy, for example, after the creation of Napster, to examine the effects of copyright on music (for example Oberholzer-Gee and Strumpf 2007; Waldfogel). 
Additional analyses are urgently needed, for example to understand the effects of long-lived copyrights (life of author + 70 years in the United States today) on creativity and the diffusion of knowledge. Similarly, national governments have begun to increasingly use prizes as an alternative to patents, and economic analyses are needed to investigate if and how prizes encourage innovation. More generally, science policy, and the ability to attract – and retain - high-skilled workers is likely to be a key factor in determining variation in rates of innovation across and within countries. Economic history offers rich opportunities for such research.
'Swimming Against the Current: The Rise of a Hidden Developmental State in the United States' [PDF] by Fred Block in (2008) 36(2) Politics & Society 169 comments
 Despite the dominant role of market fundamentalist ideas in U.S. politics over the last thirty years, the Federal government has dramatically expanded its capacity to finance and support efforts of the private sector to commercialize new technologies. But the partisan logic of U.S. politics has worked to make these efforts invisible to mainstream public debate. The consequence is that while this “hidden developmental state” has had a major impact on the structure of the U.S. national innovation system, its ability to be effective in the future is very much in doubt. The article ends by arguing that the importance of these development initiatives to the U.S. economy could present a significant opening for new progressive initiatives. 
On a number of key dimensions, the trajectory of the United States has diverged sharply from that of Western Europe over the past thirty years. The divergence is most marked in social policy and the philosophy of governance, where the choices made by the United States have been influenced by market fundamentalism — a vastly exaggerated belief in the capacity of market self-regulation to solve economic and social problems. To be sure, many Europeans have also been taken with the idea of Afree markets since the fall of the Berlin Wall, but their actual policies have been far more restrained in cutting back gov- ernment regulation of business, leaving the poor and sickly on their own, and directly challenging the institutionalized role of organized labor at the work-place and in the political arena. As a consequence, most Western European societies have not experienced the dramatic increases in economic inequality and heightened economic insecurity that have occurred in the United States. 
But in one important and often overlooked respect, European and U.S. policies have converged. On both sides of the Atlantic, governments have played an increasingly important role in underwriting and encouraging the advance of new technologies in the business economy. Consistent with ideas of the “knowledge economy” or postindustrial society that stress the economy’s immediate dependence on scientific and technological advance, governments have embraced developmental policies that support cutting edge research and work to assure that innovations are transformed into commercial products by companies.4 Governments do this because they recognize that in a competitive world econ- omy, failing to create new high value added economic activities in the home economy will ultimately threaten their citizen’s standard of living.
But the way in which governments pursue these policies differs dramatically between Europe and the United States. In Europe, both national governments and the European Community are open and explicit about their developmental agendas, and political parties occasionally compete over which will be more effective in pursuing such initiatives. In the United States, in contrast, the developmental state is hidden; its existence is not recognized in political debate or in the media. Congress, under the rubric of “competitiveness policy,” periodically passes legislation that bolsters and expands the developmental capacities of the U.S. state, but this happens with little public debate or discussion.
The hidden quality of the U.S. developmental state is largely a result of the dominance of market fundamentalist ideas over the last thirty years. Developmental policies have lived in the shadows because acknowledging the state’s central role in promoting technological change is inconsistent with the market fundamentalist claim that private sector firms should simply be left alone to respond autonomously and spontaneously to the signals of the marketplace.
For example, in their highly influential book, Free to Choose, Milton and Rose Friedman see no economic justification for the government funding scientific research through the National Science Foundation. If funding scientific research is not a proper governmental role, then certainly there is no justification for public agencies getting involved in the commercialization of new technologies.
In this sense, it is remarkable that the United States has any kind of developmental policies outside of the defense and national security sectors. That they exist at all is testimony to the powerful dynamism of an emerging knowledge economy that has been able to swim upstream against the current of a hostile political philosophy. But the inevitable result is that U.S. developmental practices have been significantly distorted by the constraints within which they have emerged. It is here where the divergence between the United States and Europe again becomes apparent. In Europe, developmental state policies often work in synergy with the legacy of social democratic and Christian democratic policies that emphasize social inclusion, partnership between business and labor, and a commitment to the sharing of rewards. In the United States, in contrast, the “winner takes all” model with its attendant increases in inequality tends to work at cross purposes with developmental state policies. 
The argument is developed in five main sections. The first section introduces the concept of a Developmental Network State and tells the story of how this institutional structure emerged in the United States beginning in the 1980’s. The second explains how partisan politics and ideology worked to keep this U.S. developmental system hidden. The third provides an overview of how the Developmental Network State functions currently in the United States. The fourth section explains how its peculiar development, and particularly its covert character, undermines the sustainability of U.S. developmental efforts. The conclusion argues that the pressing need to reform the Developmental Network State provides significant political opportunities for progressives in the United States.