Suppose an individual builds a home. This individual is able to decide who lives in this home, whether the home is available for rent or sale, and under what terms. Put differently, this person has a property right on his home. This notion of a property right is now well understood, and it is fair to say that this concept is deeply embedded in most contemporary economies.
Patents are a kind of property right. Just as the builder of a home has a claim on his home, the logic is that the inventor of a new drug or a machine ought to have a similar claim on his invention. This leads to the suggestion that a lawful patent will not only safeguard the present invention but also spur future innovation and productivity. With patents, the state grants an individual or a firm a temporary monopoly right with the hope that such an action will engender new ideas, spread information and, more generally, power the knowledge economy.
Do patents accomplish the above objectives? According to research by Michele Boldrin, David Levine and others, they do not. In fact, there is no empirical evidence that patents increase either innovation or productivity.
To see this, let’s focus on the United States. In 1983, 59,715 patents were issued; in 2003, the number was 189,597; and in 2010, the number rose to 244,341. Even though patent issuance exploded in the last 30 years, there was no corresponding increase in innovations, in research and development expenditures, or in factor productivity growth.
Studies also show that countries that have strengthened their hitherto weak patent regimes have seen an increase in investment in sectors where patents are frequently used. In other words, strengthening the patent regime results in more patenting—but not any concomitant increase in innovative activities. These findings have led many researchers to point out that the costs of patents may well exceed their benefits.
A related insidious development that is worth emphasizing is the rise in patent trolls and in defensive patenting, particularly in the technology industry. Here, firms file large numbers of patents with the aim of deterring their rivals. For instance, if a firm is sued for infringing one of a rival’s many patents, then this firm can threaten to use one of its own patents to countersue. This has an enormously damaging impact on the incentives for future innovations. In this regard, the Economist has pointed to a 2001 study to contend that new microchip makers spent up to $200 million to license potentially irrelevant intellectual property just to avoid lawsuits.
Proponents of patents point to the pharmaceutical industry and contend that there is no way to encourage the creation of new drugs without also providing the temporary monopoly rights that patents grant. To gauge the merit of this viewpoint, consider the work of Dean Baker. He noted that in 2005, the U.S. health system paid $210 billion on prescription drugs. Using generic drugs, a competitive (patent-free) market could have provided the same drugs for no more than $50 billion and this clearly would have led to a saving of $160 billion.
At the same time, drug companies were spending about $25 billion on R&D and Uncle Sam was spending $30 billion on basic medical research. The money Uncle Sam would have been able to save buying drugs for Medicare and Medicaid in a world without patents would have allowed it to double its research spending to $60 billion. This would not only completely replace the R&D spending of the pharmaceutical companies but it would also result in savings of $130 billion!
Advocates for patents believe that government-sanctioned monopolies are crucial to providing the right incentives for innovation. However, there is little empirical support for this perspective. The available evidence shows that useful innovations typically arise in a competitive framework in which there are advantages to being a first mover. Therefore, it is now time to get rid of patents and to consider alternatives—such as the award of prizes—to foster innovative activities.
Amitrajeet A. Batabyal is the Arthur J. Gosnell professor of economics at Rochester Institute of Technology. These views are his own.
9/18/15 (c) 2015 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email firstname.lastname@example.org.