The case against patents can be summarized briefly: there is no empirical evidence that they serve to increase innovation and productivity, unless productivity is identified with the number of patents awarded—which, as evidence shows, has no correlation with measured productivity. Both theory and evidence suggest that while patents can have a partial equilibrium effect of improving incentives to invent, the general equilibrium effect on innovation can be negative. A properly designed patent system might serve to increase innovation at a certain time and place. Unfortunately, the political economy of government-operated patent systems indicates that such systems are susceptible to pressures that cause the ill effects of patents to grow over time. Our preferred policy solution is to abolish patents entirely and to find other legislative instruments, less open to lobbying and rent seeking, to foster innovation when there is clear evidence that laissez-faire undersupplies it. However, if that policy change seems too large to swallow, we discuss in the conclusion a set of partial reforms that could be implemented.Business as usual from those authors (a previous version is noted here), who conclude -
In 1958, the distinguished economist Fritz Machlup in testimony before 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.” A proposal to abolish patents may seem “pie in the sky.” Certainly, many interim measures could be taken to mitigate the damage caused by the current system: for example, properly enforcing the standard that patents should only be granted for non-obvious insights; requiring genuine disclosure of working methods in patents (the opposite of certain recent “protectionist” proposals to institute secret patents); and allowing an “independent invention” defense against claims of patent infringement. But why use band-aids to staunch a major wound? Economists fought for decades - ultimately with considerable success - to reduce restrictions on international trade. A similar approach, albeit less slow, should be adopted to phase out patents. Because policy proposals are often better digested and metabolized in small bites, here is our list of small reforms that could be easily implemented.
1) Patents are time limited, which makes it relatively easy to phase them out by phasing in ever shorter patent durations. This conservative approach also has the advantage that if reducing patent terms indeed has a measurable effect on innovation, the process can be reversed.
2) Stop the rising tide that, since the early 1980s, has extended the set of what can be patented and has shifted the legal and judicial balance substantially in favor of patent holders.
3) Because competition fosters productivity growth, antitrust and competition policies should seek to limit patents when they are hindering innovation. This policy may be of particular relevance for high-tech sectors, from software to bioengineering, to medical products and pharmaceuticals.
4) Current international trade negotiations that affect patents often occur as part of either the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which was signed in 1995 as part of the World Trade Organization negotiations, or as part of the World Intellectual Property Organization, an agency of the United Nations. The nature of these agreements and organizations is well indicated by the use of the propaganda term “intellectual property” in their titles. In both cases, these talks are often focused on how to prevent ideas from high-income countries from being used in low-income countries - what we would characterize as essentially a neo-mercantilist approach toward free trade in goods and ideas. We should be highly cautious about this agenda. Within a couple of decades, the “balance of trade in ideas” between the US and European economies and emerging economies in Asia might easily equalize or reverse. Engaging in “mercantilism of ideas” may seem favorable to certain large US firms now, but such rules may become costly to the US economy if they are applied to protect patents held in the future by producers in the now-developing Asian economies.
5) If the US economy is to have patents, we may want to start tailoring their length and breadth to different sectoral needs. Substantial empirical work needs to be done to implement this properly, although a vast legal literature is already pointing in this direction.
6) Patents should not be granted based only on technological insights, but should also take economic evidence into account. For example, if an invention is easy to copy or has a high fixed cost, then patent protection to provide an incentive for the inventor may be more suitable. Ultimately, patents should be awarded only when strictly needed on economic grounds, as spelled out earlier.
7) We advocate returning to the rule prior to the Bayh–Dole Act of 1980 according to which the results of federally subsidized research cannot lead to patents, but should be available to all market participants. This reform would be particularly useful for encouraging the dissemination of innovation and heightening competition in the pharmaceutical industry.
8) In several industries, notably pharmaceuticals, it would be useful to rethink all of the government policies that bear on incentives for invention. The broad point is that there are a number of ways to reduce the risks and cost of developing new drugs, rather than just trying to ratchet up patent protection.
In general, public policy should aim to decrease patent monopolies gradually but surely, and the ultimate goal should be the abolition of patents. After six decades of further study since Machlup’s testimony in 1958 has failed to find evidence that patents promote the common good, it is surely time to reassess his conclusion that it would be irresponsible to abolish the patent system. The patent system arose as a way to limit the power of royalty to award monopolies to favored individuals; but now its primary effect is to encourage large but stagnant incumbent firms to block innovation and inhibit competition.