Michele Boldrin

The Case Against Patents

The case against patents can be summarized briefly: there is no empirical evidence that they serve to increase innovation and productivity. There is strong evidence, instead, that patents have many negative consequences.

Against Intellectual Monopoly: Does Intellectual Monopoly Increase Innovation?

What we have argued so far may not sound altogether incredible to the alert observer of the economics of innovation. Theory aside, what have we shown, after all? That thriving innovation has been and still is commonplace in the absence of intellectual monopoly and that intellectual monopoly leads to substantial and well-documented reductions in economic freedom and general prosperity. However, while expounding the theory of competitive innovation, we also recognized that under perfect competition some socially desirable innovations will not be produced because the indivisibility involved with introducing the first copy or implementation of the new idea is too large, relative to the size of the underlying market. When this is the case, monopoly power may generate the necessary incentive for the putative innovator to introduce socially valuable goods. And the value for society of these goods could dwarf the social losses we have documented. In fact, were standard theory correct so that most innovators gave up innovating in a world without intellectual property, the gains from patents and copyright would certainly dwarf those losses. Alas, as we noted, standard theory is not even internally coherent, and its predictions are flatly violated by the facts reported in chapters 2 and 3. Nevertheless, when in the previous chapter we argued against all kinds of theoretical reasons brought forward to justify intellectual monopoly on scientific grounds , we carefully avoided stating that it is never the case the fixed cost of innovation is too large to be paid for by competitive rents. We did not argue it as a matter of theory because, as a matter of theory, fixed costs can be so large to prevent almost anything from being invented. So, by our own admission, it is a theoretical possibility that intellectual monopoly could, at the end of the day, be better than competition. But does intellectual monopoly actually lead to greater innovation than competition? From a theoretical point of view the answer is murky. In the long-run, intellectual monopoly provides increased revenues to those that innovate, but also makes innovation more costly. Innovations generally build on existing innovations. While each individual innovator may earn more revenue from innovating if he has an intellectual monopoly, he also faces a higher cost of innovating: he must pay off all those other monopolists owning Boldrin & Levine: Against Intellectual Monopoly, Chapter 8 209 rights to existing innovations. Indeed, in the extreme …

Against Intellectual Monopoly: The Evil of Intellectual Monopoly

We hope by now to have convinced at least a few among you that there has been, there is, and there would be plentiful innovation in the absence of intellectual monopoly. We took this as our starting point because a widespread disbelief in the ability of competitive markets to reward innovators inhibits thinking about a functioning free market economy without intellectual monopoly. After establishing that substantial amounts of money can be made, has been made, and is made by innovators in the complete absence of patents and copyright, the next fundamental doubt is, Is that money enough? It is quite a rhetorical question for the thousands of innovators who, absent legal monopoly, have nevertheless innovated: the money they expected to make must have been enough to motivate them. It is not necessarily such a rhetorical question, though, for potential innovators who chose not to innovate and for all those innovators who took advantage of intellectual monopoly in their activity. Because it is true that an innovator can generally earn more with a monopoly than without, so the profits made under competition may not be enough and some socially valuable innovations may not occur under competition. This – in principle – leaves room for government intervention to correct this market failure. Awarding intellectual monopoly is one possible form of intervention. Unfortunately, it is an especially pernicious form. Economists and decent citizens alike are suspicious of monopoly. There are many good reasons for this.

Against Intellectual Monopoly: Innovation under Competition

We have just seen numerous examples showing the frenetic pace of creation in the absence of copyright. Of course, people love to create stories, music, movies – and even news. So, perhaps you agree that copyright is not such a big deal, and even that it is not such a good idea. However, although we may hope to live lives free of boredom in the absence of intellectual monopoly, what about invention, the driving force of economic growth and prosperity? Would we benefit from all of the machines, drugs, and ideas that surround us if not for the beneficent force of patent law? Can we risk the foundation of our prosperity and growth by eliminating patents? In fact, the evidence shows that the invention of marvelous machines, drugs, and ideas does not require the spur of patents. If anything, the evidence shows, it is the other way around: patent protection is not the source of innovation, but rather the unwelcome consequence that, eventually, tames it. We have already looked at the computer software industry: at its inception and during its most creative decades, the industry was essentially free of patents and made almost no use of copyright protection to prevent entry by competitors. As creativity slowed down, consolidation took place, and a few large monopolists emerged (one in particular), the demand for copyright first and patents later grew.

Against Intellectual Monopoly: The Devil in Disney

Patents threaten our economic prosperity, we have argued, because of the many evils of monopoly and especially because of the evil we call IP-inefficiency. Copyright seems less threatening. Enriching without reason a few actors, singers, or book writers is not as bad as letting millions of people die because some monopolist is not producing enough anti-AIDS pills. The copyright industry itself is economically insignificant. The entire motion picture and recording industry has fewer employees than the IBM Corporation. If we consider all employment in copyright-connected industries, we find that industries such as fabricated metal production and transportation equipment manufacturing employ substantially more workers – the “copyright” industry is about on par with the furniture industry in terms of economic importance. In important respects, copyright law seems less threatening than patents. Although the length of copyright is excessively long, the scope of coverage historically has been narrow: in principle, only the expression of ideas is covered, not the ideas themselves. Again, in principle, this is less harmful to the downstream production of new ideas and the expression of ideas than is the much broader protection offered by patents. Certainly, in practice, if I want to write a Harry Potter–like book about child sorcerers I am free to do so. On the other hand, over time, copyright has grown in scope: I am not free to write a sequel in the Harry Potter series. In some respects, copyright increases competition, encouraging the production of similar but different works.

Against Intellectual Monopoly: The Pharmaceutical Industry

It is often argued that the best case for the existence of patents is in the pharmaceutical industry. The fixed cost of innovation is large, with estimates of the average cost of bringing a single new drug to market as high as

Against Intellectual Monopoly: The Bad, the Good, and the Ugly

800 million in year 2000 dollars. Patent protection is more limited in the pharmaceutical industry than in other industries: because of the lengthy gap between discovery and approval of a new drug, the effective monopoly protection is estimated to last only twelve years – plus the three- to five-year extensions as allowed by the Drug Price Competition and Patent Term Restoration Act (known as the Hatch-Waxman Act) of September 1984. Indeed, according to the industry surveys mentioned in earlier chapters, the only industry in which patents are thought to play an important role in bringing new products to market is the pharmaceutical industry. The pharmaceutical industry is worthy of special consideration also for another complementary reason. The technology operated by the pharmaceutical industry – the chemical and industrial processes through which medicines are produced, packaged, and shipped – seems to fit the hypothesis of constant returns to scale almost perfectly. That is, the cost of shipping the ten-millionth container of medicine is about the same as that of shipping the first. From that come the many complaints about the pharmaceutical companies not shipping medicines to poor countries – even poor African consumers would be willing to pay the few additional cents needed to produce the additional medicine.

Defenses of Intellectual Monopoly

In a famous 1958 study on the economics of the patent system, the distinguished economist Fritz Machlup, paraphrasing an earlier statement by his longtime coauthor Edith Penrose, concluded 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. Almost fifty years later, the first half of this illustrious sentence is more valid than it has ever been. Sadly, the recommendation has not been followed: far from maintaining the status quo, the patent system has been enormously extended, and there is no sign of the end of the expansion of intellectual monopoly to every corner of our economic system. Moreover, the fifty years since have turned up no evidence that patents serve to increase innovation. It is time to reconsider the second recommendation. Defenders of intellectual monopoly like to portray intellectual property as a powerful and beneficial medicine. If a medicine has serious side effects and scientific studies have found at best weak evidence of temporary benefits, would you employ such a drug on an otherwise healthy patient? Probably not, unless the illness was life threatening.

The Case Against Intellectual Monopoly, Chapter 1

We focused at the outset on the many successful industries in which competition and innovation have gone and still go hand in hand. Then, we documented the many social evils that the presence of intellectual monopoly, in the form of either patents or copyrights, brings about. In Chapter 6, we introduced a theoretical framework capable of explaining the very same existence of innovative competitive industries, their evolution, and the call for intellectual monopoly arising from those industries once they mature and turn stagnant. Yet we have also learned that the same theoretical framework rationalizing competitive innovations also predicts that innovations of social value may fail to materialize under competition. This leaves open the theoretical possibility that intellectual monopoly increases overall innovation. If intellectual monopoly delivers substantially more innovation than competition, it might be a worthwhile system, despite the many costs we documented in Chapters 4 and 5. Hence, the issue is worthy of further investigation, which we pursue next in two steps. In this chapter, we examine the theoretical reasons – other than the indivisibility already discussed in Chapter 6 – adduced to support the existence of intellectual monopoly. In Chapter 8, we report on the extent to which patents and copyrights increase the social rate of creation and innovation. We are keenly aware that there are many who argue in favor of intellectual monopoly. They often provide logically correct reasons why, all other things equal, intellectual monopoly would deliver more innovation than competition.