Bessen & Meurer: Patents Do Not Increase Innovation
In Bessen & Meurer latest patent study ("Do patents perform like property?," Academy of Management Perspectives, pp. 8-20 (August 2008)), the authors conclude: "intellectual property rights have at best only a weak and indirect effect on economic growth" and "The direct comparison of estimated net incentives suggests that for public firms in most industries today, patents may actually discourage investment in innovation."
The entire conclusion is below. See also Keith Sawyer's post, Do Patents Increase Innovation?, who note: "In 1999, for example, the total profits from patents in all U.S. public firms (excluding pharma) was about $3 billion, but their litigation costs associated with those patents were a whopping $12 billion!"
The historical evidence, the cross-country evidence, the evidence from economic experiments and estimates of the net benefits of patents all point to a marked difference between the economic importance of general property rights and the economic importance of patents or intellectual property rights more generally. With the cross-country studies in particular, the quality of general property rights institutions has a substantial direct effect on economic growth. Using the *same* methodology and in the *same* studies, intellectual property rights have at best only a weak and indirect effect on economic growth.
The research also suggests a reason why patents differ from general property rights in motivating economic growth overall: the positive effects of patents appear to be highly contingent. Differences in technology and industry seem to matter a lot for twentieth century R&D managers and also for the innovative performance of nineteenth century world's fair exhibitors. Some results from the cross-country studies suggest that less developed countries have a harder time realizing benefits from patents or that countries that participate actively in international trade may benefit more.
Some of these differences arise because of differences in the relative costs and effectiveness of alternatives to patents. Patents may contribute more to economic growth in the pharmaceutical industry than they contribute in electronics industries because the latter can more effectively earn returns on innovation through lead time advantage, sales of complementary products and services, etc. Other differences may arise because of subtle differences in patent institutions. During the nineteenth century, the US patent institutions performed differently (and perhaps better) than their British counterparts. Patents are likely to work better in the pharmaceutical industry because patents on chemical entities have much sharper boundaries than, for example, patents on software.
Of course, the economic effectiveness of all forms of property depends on details of the supporting institutions--this is evident from the disparate growth paths of Soviet Bloc economies. But the economic effectiveness of patents may be much more sensitive to the details of the relevant institutions than are general property rights. Perhaps this is because patent law may be much more specialized, complex and sophisticated than, say, real property law and, so, effective institutions may be more difficult to develop and maintain.
In any case, the empirical economic evidence strongly rejects simplistic arguments that patents universally spur innovation and economic growth. The direct comparison of estimated net incentives suggests that for public firms in most industries today, patents may actually discourage investment in innovation.
I cross-posted this at Against Monopoly. David Levine has an interesting reply in the comments. In response to one commenter, Lonnie Holder, who had criticized Bessen & Meuer, Levine replied:
I think there is some confusion here. I don't know of any economist who thinks that there are no circumstances under which an innovation might occur more quickly if there is a possibility of patenting it. That doesn't answer the question of whether on balance patent systems help or hurt innovation. The evidence suggest that the positive and negative effects of patents are basically a wash. I'm not sure why you focus on one piece of their evidence, that about patent litigation costs, which is about two pages in a 25 page paper. Nobody would suggest that this single piece of evidence is especially decisive.
It doesn't seem very sensible to argue we should have a patent system because occasionally it speeds innovation. In fact a patent system has many downsides, which from various posts, I think you agree with Lonnie. The only reason I can see to put up with these downsides is because the system leads to substantially more innovation than we would have without it. If the government is going to intervene in private markets, enforcing private exclusivity rights (if you prefer that to monopoly), don't we want strong evidence that this accomplishes the desired goal? If you believe in small government, then surely you want strong evidence that a policy accomplishes the desired goal before supporting it. Picking nits with Bessen and Meurer misses the point. If the system works at all well, it shouldn't be hard to find evidence that it does that. There are plenty of economists who think patent systems are a good idea - including Bessen and Meurer who would like to see patents rolled back but not eliminated - but we haven't found any study by any economist of any persuasion that has evidence for anything beyond the assertion that "weak patents may have a mildly positive effect on innovation."
Finally, I can't parse your last paragraph, maybe something got left out? What is the inconsistency between the proposal that mature industries file for increased patent protection - a fact that jumps out of the data - and the fact that large numbers of firms favor weaker patents? Firms can be found in large numbers on both sides of the patent divide. Indeed, one reason patents haven't flown out of control the way copyrights have is because there are interests well represented on both sides.
Comments (12)
Person
Actually, Stephan_Kinsella, the claim is that the current (government) patent system, in some areas but not others, discourages innovation. Merely reading the part you bolded is extremely misleading.
1) Encouraging innovation is not the only reason to support patents, just like encouraging production is not the only reason to support property rights.
2) The relevant apples-to-apples comparison would be to government-enforced property rights. What do we have there?
-Cronyism.
-Bailouts.
-Inflationary currency.
-Random nationalization and expropriation.
-Obscenely stupid liability law.
"oh oh oh! But when I talk about property rights, I'm not talking about that. *OBVIOUSLY* the government can screw up anything."
Yep. And when I talk about IP rights, I'm not talking about Amazon's one-click. Obviously, the government can screw up anything.
Published: November 3, 2008 4:45 PM
Simon
Sorry I'm a bit off topic but how does an IP proponent feel about reading copyrighted books? Does that mean the owner of the copyright owns part of the readers brain? What happens I read a book accidentally!
Published: November 3, 2008 4:51 PM
Stephan Kinsella
Silas,
"Actually, Stephan_Kinsella, the claim is that the current (government) patent system, in some areas but not others, discourages innovation. Merely reading the part you bolded is extremely misleading."
I supplied a longer quote, and a link to the whole paper, for more context.
"1) Encouraging innovation is not the only reason to support patents, just like encouraging production is not the only reason to support property rights."
Well, it is one reason trotted out by pro-IP types. That's why it's useful to debunk their propaganda.
"2) The relevant apples-to-apples comparison would be to government-enforced property rights.... Yep. And when I talk about IP rights, I'm not talking about Amazon's one-click. Obviously, the government can screw up anything."
But note, the authors did find that normal property rights, even when enforced by the state, do lead to higher economic growth. But not IP.
Published: November 3, 2008 5:11 PM
Person
So what you're saying, Stephan_Kinsella, is that they did a cost-benefit analysis and found that it suppots physical property but not IP, and instead of mocking their dangerous utilitarian reduction, you're citing them as support?
Tell me, what other rights depend on meeting a CBA?
Published: November 3, 2008 5:34 PM
Person
I almost forgot: they're saying that under *state*-enforced quasi-private property system, there's higher economic growth.
Anyone here want to bet that they didn't subtract off all the phony economic growth, i.e. war profits, SarBox accounting profits ...
Published: November 3, 2008 5:37 PM
Inquisitor
I do not believe Kinsella said that is all there is to it. He is undermining a specific argument in favour of IP.
Published: November 3, 2008 5:40 PM
kiba
Unfortunately, no evidence against IP is good enough for the staunchest proponent of IP.
Published: November 3, 2008 6:19 PM
Dexter Morgan
What is this "empirical evidence" nonsense? Are we not Austrians here?
Published: November 3, 2008 8:16 PM
Stanley Pinchak
Dexter Morgan,
Sometimes to convince someone particularly set in their ways, you must explain a particular phenomenon in terms that they are familiar with. Unfortunately with intellectuals (sic?) who base their theory on empirical evidence, showing them a particular set of data which contradicts their viewpoint does not end the dispute in favor of the new evidence. Instead it is only the starting point to adjust various initial parameters to obtain the expected results. You are right to be wary of this trap. If empirical evidence were all that were needed to overcome economic fallacies, Keynesian and Monetarist Economics would have been rejected years ago. Instead were are subject to various economic experiments like a so many lab rats.
Published: November 3, 2008 9:31 PM
Andras
What about the pharmaceuticals?
By the way, how anyone can put a price and cost on the two systems and compare them. There is no market for the patent system. I can not pick a patent agency with better services. It is a government monopoly, like protection of ultimately every other rights. In analogy, how can you price and compare having or not having a government protection against murder, robbery etc. You can only show that it is not a logical system or even that it is not a system at all but you can not quantify their prices and costs and compare them. Imaginary prices will not answer you whether there are or there are not fundamental intellectual property rights.
Published: November 3, 2008 10:19 PM
Stefan Guta
There is one industry that thrives because of LACK of copyright protection.
That is the Big Fashion industry. Actually copyright would kill their business. Big names in the industry bet on the fact that their latest creations will be copied by third party manufacturers by the next 3-6 months, so that the can present the new collections in 3-6 months. They invest milions of dollars in creation of new designs, and their success in mesured in how much the "generic" clothing industry is copying their design. So that they can make new designs in the future.
Absence of copyright actually accelerates inovation. If you have a patent for 5 or ten years, you just sit on it for that time. Even if you have another better product on the pipeline, you will not release it, you just patent it at the right time, and wait for the first patent to expire. Most companies do exactly that - will never release the best products until "the time is right". Some products or technologies might never even see the light of day.
The presumption that you spend time and resources inventing something, and then somebody just copy your work and thus steals it is wrong - as you are able to do the same thing. People will not stop inventing or inovating, quite the opposite they will have to invent more to remain competitive.
As for drug companies spending money on invention of drugs - it's simply a big fat lie. Just read "800 milion dollar pill" by Merrill Goozner ( http://www.amazon.com/800-Million-Pill-Truth-behind/dp/0520239458 ) and you will see how really pays for drug innovation.
Published: November 4, 2008 5:38 AM
Artisan
at Stefan Guta:
the fashion industry is protected by some copyright.
Ever wondered why you cannot buy Hermes shirts or Louis Vuitton bags over another internet store than LVMH's own? Why Ebay got condemned in France?
Can't put a logo on a shirt similar to a famous brand logo either...
To put an end to these rules is a crusade not worth it though... from a free-market utilitarian point of view.
Suppressing patent (not speaking even about copyright) is a poor cause for advancing the free market idea.
The fact that millions die in 3rd world countries for not having access to those patented drugs... surely shows very eloquently how "technology" is valued more than "humanity" at some point in our society. And conversely the main point you're going to make if you push that no-patent agenda ... is that humanity needs to be protected over the technological advance... that's closer to social-democracy than it is to capitalism.
Whereas if you insist on the reasons why every calculation is impossible within the State department to start with, you will avoid this misunderstanding and when understood, every utilitarian argument for state monopoly should thus fall one day or another,when it's ripe.
Published: November 5, 2008 9:48 AM