Seeking the patent truth: patents can provide justice and funding for inventors.

• Author: Diamond, Athur M., Jr.
• Position: Report

The quality and length of human life have enormously increased since roughly 1800, especially in the West. Deirdre McCloskey has called this enrichment "the great fact" of economic history (2010, 48-49), and Joseph Schumpeter claimed that the creative destruction that caused the enrichment was "the essential fact" of capitalism (1950, 83). Invention and innovation are key components of creative destruction, and for many decades most economists who studied patents believed that patents encouraged invention and innovation (e.g., Stigler 1968; Nordhaus 1969). More recently, however, many distinguished and thoughtful scholars and policy analysts (Cole 2001a, 2001b; Bessen and Meurer 2008; Boldrin and Levine 2008, 2013; Johnson 2010; McCloskey 2010; Ridley 2010) have doubted that patents encourage invention and innovation.

The great fact is not just a historical curiosity because most of us would like to see it continue and accelerate, so it is important to seek out the patent truth. Do patents work well? Should they be maintained, abolished, or reformed? To answer these questions, I begin by examining arguments from ethics and economics, evaluated in the light of historical and contemporary evidence. Next I provide historical narratives of how patent systems have worked well in the past and have stopped working well in the United States in recent decades. Finally, I discuss possible government policy reforms and private entrepreneurial institutional innovations that may create a better patent system in the future.

The Moral Case: Justice and Opportunity

The basic moral argument for patents is akin to the basic moral argument for property rights more generally. John Locke ([1689] 1967) observed that if you mix your labor with land, you have a right to the land. The fundamental moral intuition behind Locke's observation can be given the biblical expression that you should only reap what you sow. Ayn Rand observed that "patents and copyrights are the legal implementation of the base of all property rights: a man's right to the product of his mind" (1966, 125). (1)

Locke also observed that the property right in land was not absolute--it was limited by what Robert Nozick called "the Lockean proviso" (1974, 175-82) that there be as much and as good land left for others to likewise mix their labor with. So Locke's defense of property rights in land comes with a practical qualification. If even the property right in land is subject to practical qualification, so, even more strongly, we would also expect the more obscure case of intellectual property to be subject to practical qualification.

To further understand the roots of the moral intuition behind intellectual--property rights, consider the photos in figure 1 illustrating an experiment with dogs (Range et al. 2009; see also Associated Press 2008). (2) Two dogs who have been trained to shake hands are placed next to each other. I do not know the dogs' names, but I like to call the one on the left "Galt." In the first photo, the experimenter shakes hands with Galt. She then rewards him with a piece of dry brown bread. The experimenter then shakes hands with the second dog, and in the second photo we see her giving him a piece of juicy prime sausage, as Galt watches. In the third photo, the experimenter then extends her hand again to Galt, who turns away without extending a paw (though you can see the sausage-rewarded dog starting to lift a paw to indicate willingness to shake hands again). The moral intuition behind property rights is not just human; it is apparently mammalian! Maybe it goes deeper: Claudia Wascher and Thomas Bugnyar (2013) have replicated the experiment with birds, and McCloskey summarizes research suggesting that even butterflies act as though they share the moral intuition behind property rights (2010, 332-33).

How do the animal experiments apply to patents? Most of us grant that if a farmer mixes her labor with previously unowned land, it is fair that she own the land. So if an inventor likewise mixes her labor with material objects to create an invention, it is also fair that she own the invention. To do otherwise would be to give the inventor the dry brown bread, while we give the farmer the juicy, prime sausage. To do otherwise, according to John Stuart Mill in his Principles of Political Economy, would be "stealing" and "a gross immorality" ([1848] 1909, 933).

During the last year of his life, Steve Jobs spoke of Apple's patent-violation lawsuit against Google: "Our lawsuit is saying, 'Google, you f***ing ripped off the iPhone, wholesale ripped us off.' Grand theft. I will spend my last dying breath if I need to, and I will spend every penny of Apple's $40 billion in the bank, to right this wrong. I'm going to destroy Android, because it's a stolen product" (quoted in Isaacson 2011, 512, asterisks added by Diamond). (3) For Jobs, money was not the issue (whether as incentive or enabler). He believed that Google had stolen what was his and that theft was wrong. By the way, those who accuse Jobs of hypocrisy on this issue are wrong: he did not steal the mouse from Xerox PARC (Hiltzik 2000, 329-45), as was suggested, for example, in the television movie Pirates of Silicon Valley (Burke 1999). The inventors and executives at Xerox PARC consciously gave Jobs access to their intellectual property--the inventors in part because they wanted their inventions to see the light of day (having despaired of Xerox ever successfully bringing them to market), the executives in part because Xerox received substantial stock shares in Apple.

Economists have sometimes objected: Who cares about justice to the inventors? Only consumers matter. I respond that justice is a value that is built into us and can be articulately defended. But assume the opposite--that we care only about consumers. If we fail to provide justice to inventors, they will have less incentive to invent and fewer means. In the long run, a world with less invention is not a good world for consumers.

Injustice for inventors also hurts consumers by undermining the economic system that creatively and efficiently produces the goods for consumers. People will accept inequality if they believe that most of those who do well have deserved to do well (Zingales 2009, 2012). If entrepreneurs are allowed to benefit from their innovations, but inventors are not allowed to benefit from their inventions, then the entrepreneurs will be seen as unjustly free-riding on the inventors. (4) The likely political result is that voters will support higher taxation of the innovative entrepreneurs. But this will hurt us all, if George Gilder (1992) and I (Diamond 2012) are right that allowing innovative entrepreneurs to keep more of their income provides them the funds to innovate more in the future. Justice is good for the soul, and it is good for consumers, too.

The primary moral benefit of a successful patent system is that it provides justice for inventors. But an important secondary moral benefit is that it democratizes the opportunity to invent (Khan 2005). The independently wealthy can continue to invent either in the presence or in the absence of a patent system. For the working poor or the lower middle class, however, patents provide the funding that makes inventive activity possible. Working-class tinkerers were crucial to some of the key mechanical inventions of the Industrial Revolution (Rosen 2010). And an Argentine auto mechanic recently invented a device that promises to save lives in difficult childbirths. He has financed continued improvements in the device through royalties from his patents (McNeil 2013).

I emphasize the inventor's receiving of money through patents as just and enabling; I do not emphasize it as an incentive, although I think that it sometimes plays that role--and if money provides an incentive for some inventor, that inventor may be less noble, but the invention may still be useful. Our institutions should mainly not block the noble from acting nobly, but it is all for the best if they also provide incentives for the rest of us to act as if we were noble.

The Economic Case for Patents: Incentive, Enabler, and Source of Information

Before Abraham Lincoln was president, he was sometimes invited to give a lecture in which he praised the benefits of new technology and the patent system as a motivator of invention (Khan and Sokoloff 2001, 244). Lincoln would presumably be comfortable with the first standard economic rationale for patents: if patents provide inventors with an income, they provide an incentive for the inventors to invent by allowing them to obtain a higher level of utility.

Proponents of the open-source movement and other critics of intellectual property argue that the patents-as-incentive approach assumes a less noble and inaccurate picture of humans in general and of the inventor in particular. They argue that the inventor's motive power is the desire to create. To the extent that the open-source movement is correct, a stronger economic argument for patents focuses on patents providing funding for inventors that serves not as an incentive for invention, but as an enabler of invention.

The importance of patents as an enabler of invention can be appreciated by considering the First Industrial Revolution (the one in the late eighteenth century associated with the steam engine). Robert Gordon (2000) has strongly argued that the most important examples of creative destruction occurred during that Industrial Revolution, which is associated with the application of steam power to manufacturing and transportation. William Rosen (2010) points out that many of the great inventors of this First Industrial Revolution were inarticulate tinkerers. They lacked the voice to tell us with credibility and passion how the money from patents enabled them to continue to invent. Thomas Newcomen may have been a greater inventor than James Watt, but we remember Watt because Watt and...