A liberal economists perspective on why patents may not promote innovation.

Summary:

Op-ed published in the Economist which takes a broad look at the usefulness of the patent system and summarises several large studies that cover the subject.

NB: The article takes, unsurprisingly, an entirely economical perspective and completely leaves out moral and ethical perspectives on patents

The article begins with a brief historical perspective of the debate around the role of patents in innovation. It highlights that the question whether the patent system is useful way is a long running one.

Patents role in stimulating innovation:

Large studies show that countries who had strengthened their patent laws did not see an increase in innovation or R&D spending in comparison to countries who hadn’t changed their patent laws. Furthermore, when patent protection was extended to a new sector nationally, the rate of productivity within the sector did not increase. The article argues that patents are the result of successful innovation caused by the threat of competition. In other words, patents are not useful to stimulate innovation but rather used to hinder follow on innovation that could result in competition.

On the other hand, the alternative, open source, approach used by android lead to it becoming the most successful smartphone operating system in the world.

Patents role in diffusing innovation:

Patent filings tend to be as obscure as possible in order to provide as little information as possible to hinder entry of competitors and are therefore not useful in diffusing information effectively. Moreover they are phrased as vaguely as possible to provide the largest possible coverage.

Pitfalls of the patent system:

The patents have become a proxy measure for progress and innovation and are pursued because of it.

Many patents are taken out for defence from lawsuits from competitors. This leads to 40-90% of all patents never being used or licensed out. These “patent thickets” make it harder for all companies to launch new products.

Patents in the Pharmaceutical industry:

The pharmaceutical industry is often touted as the industry in which patents are most useful. Germany, until 1967, did not grant patents on drugs themselves, only on chemical processes. Yet the german pharmaceutical industry was more innovative than the British ones. Italy invented a larger proportion of the worlds new medicines before it granted patents on them than after.

The increase in innovation seen since the 60s and 70s cannot be attributed to patents as public investment has also risen in that time frame.

Quotes:

“Most of the wonders of the modern age, from mule-spinning to railways, steamships to gas lamps, seemed to have emerged without the help of patents. If the Industrial Revolution didn’t need them, why have them at all?”

“When changes in the rate of innovation do occur, they seem to have little to do with patents.”

“Many drug startups see their exit strategy as being bought up for a billion dollars or so by a big pharma company when their projects start to look promising. Billion-dollar prizes would provide similar incentives.

“America … spent $210 billion on prescription drugs that year. Based on how much cheaper generic drugs were than patented ones, Mr Baker calculated that a competitive patent-free market might have provided the same drugs for no more than $50 billion. The drug companies reckoned at the time that they were spending $25 billion on R&D; the government was spending $30 billion on basic medical research. The money it would have been able to save buying drugs for Medicare and Medicaid in a patent-free world have allowed the government to double that research spending, more than replacing industry’s R&D, while still leaving $130 billion in public benefit.”

Source: The Economist, A question of utility. Aug 8th 2015

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