Thursday, August 13, 2015

The Economist Decries Patent System


The Economist, one of the most reputed journals, has raised a red flag on the patent system, with a cover story titled ‘Set Innovation Free: Time to Fix the Patent System’ in its August 8th to 14th, 2015 issue. Its Editorial titled ‘Innovation: Time to Fix Patents’ states: "Today’s patent regime operates in the name of progress. Instead it sets innovation back. Time to fix it."

The issue carries an Editorial (called leader in The Economist parlance) and a detailed 3 page article titled ‘Intellectual Property: A Question of Utility’. The main arguments put forward against the patent system is summarized below:

i.                    Evidence show that stronger patent system do not necessarily promote innovation. In a surprising twist to the narrative, more akin to the lingua of a civil society organization, The Economist goes back to the history and recall that the industrial revolution that led to steam ships to the railroads did not have patents as we know today.  It also recall that it argued against patents in the 19th century.

ii.                  The policy premise supporting patents is they serve public good. It provides an incentive to innovate and publish the new idea, in return of a material gain. Publication of new ideas spread the technological advancement as one innovation builds on another. The Economist argues that the evidence to support this claim is weak. Patent documents are carefully written by experts to obscure how it works even from the experts in the field. Instead of spreading knowledge, the current patent system has created a parasitic ecology of trolls and defensive patent holders, who aim to block innovation to grab a share of the spoils than to promote innovation.

iii.                A growing body of research including a 2004 study by the National Academy of Sciences led to the conclusion that the society as a whole might be better off with no patents, with a few exceptions, such as medicines.

iv.               The patent system is expensive and increases costs on the consumers. The cost of challenging a patent thorough legal process is high.

v.                 The cost of innovation that never takes place because of the flawed patent system is incalculable.

vi.               The article rely extensively on a book ‘The Case Against Patents’ by two economists Michele Boldrin and David Levine, compiling the research done so far, arguing that patents are neither good at rewarding innovation nor help in real spread of technology. After analyzing 23 studies carried out in the 20th century on the patent system, they found “weak or no evidence that strengthening of patent regimes increases innovation”.  All it does is to get more patents filed, which is not the same thing as innovation. The main arguments of the book are summarized in the article as below:

a.     Evidence suggest that 19th century countries that lacked patent systems were no less innovative than those which had them.

b.     An exception to the general finding only goes to prove the rule proposed that patents per se do not promote innovation. The exception is the case of Taiwan’s 1986 patent reforms. After the reforms that strengthened Taiwan’s patent system, the R&D spending in the country went up and more American patents were granted to Taiwanese nationals. The article argues that this evidence show only that the countries with weaker patent protection can divert investment and R&D spending to their territories by strengthening it. It does not demonstrate any increase in worldwide R&D spending or innovation.  

c.      Expansion of patent system do not bring about more innovation as evidenced from US experience. In 1970, US extended patent protection to sexually reproducing plants. Studies on wheat showed that this measure did not lead to greater research spending or increase in yield. Even after extending patent protection to all biotech products in the 1980’s, the productivity of agriculture in US rose only at the same rate as before.

d.     The rate of innovation show little relation to patents. In industries from chemicals to computer software, waves of innovation began with lots of participants. Patents started to get filed only years later, once the spurt of innovation die down the incumbents in the maturing industry seek to exclude new entrants as well as to protect themselves from their rivals law suits. The real cause of patents is competition and is only a result of innovation and not the cause of it. The patent system is good for incumbents for fending off competition and not in public interest of promoting innovation.

e.     The system may be offering benefits to some start-ups with little access to capital but having new ideas but not s in mature industries like aerospace and car making. In such industries, the patent on technologies is only one of the component of creating a world beating innovative product. The article cites the cases of market leadership of BMW and Boeing which Chinese companies are unable to crack.

f.       In some sectors like the pharmaceuticals, the argument for continuation of patent is strong due to high initial cost. Here also, evidence do not stand up to the claim of patents fostering innovation. Till 1967 German companies could only have process patents. But they produced more innovation than the British ones which enjoyed product patents.

vii.            The Economist argues for a top to bottom reexamination of whether patents and other forms of intellectual property protection do their job and whether they deserve to exist.  It notes that outright abolition proposals may create issues in terms of ethics of property rights. It points out that no property rights are absolute, citing examples of demolishing houses to make way for roads, taking money through taxation, and putting controls on land use. In these cases a balance is struck between claim of the individual and that of the society.  It says that with ideas, the argument that the government should force the owners is strong.

viii.           The Economist put the argument of free riding upside down.  Free riding problem on ideas is the strongest argument for providing property rights, because the imitator can reproduce the idea, once created, without investment. It says sharing will lead to extra innovation. Ideas overlap and innovations depend on earlier advances, for example, there will be no Iphone without touchscreen. The signs are that innovation today is less about entirely novel breakthroughs but more about clever combinations and extension of existing ideas. Therefore free riding has value in fostering innovation. Open source software including the Android operating system are clear examples.

Suggestions for Reforming Patent System:

The Economist cautions the reformists that they should be aware of their own limitations.  As innovation is complex. At the same breath it points out that the current regime is susceptible to lobbying and plea of special interests.   A ‘clear and rough and ready patent system is better than a complex and an elegant one. In government as in invention, simplicity is strength (Highly desirable but easier said than done as anyone involved in policy making knows. Anyone other than Economist saying this would have been dragged down and beaten up).

The Economist gives the following suggestion for reform:

i.                    The patents should come with a “use it or lose it” rule, so that they expire if the invention is not brought to market.

ii.                  Patents should be easier to challenge without the expense of a full blown court case.

iii.                The burden of proof for overturning a patent in a court should be lowered.

iv.               The requirement that ideas should be non-obvious should be strengthened. Economists states that Apple should not be granted patents for rectangular tablets with rounded corners and nor Twitter the patent on ‘pull to refresh’.

v.                 Governments should gradually reduce the term of patent protection. 20 year is a long term for patent. In fast moving industries, governments should gradually bring down the length of patent. The Economist argues that even the pharmaceutical firms could live with shorter patents if the regulatory regime gives faster approvals.

vi.               Experiments with other forms of financing innovation should could be run alongside the patent system. It beseeches the defenders of the Patent system to do so in their own backyard.

Observations:

What the Economist did not say:

One is disappointed that a critique as comprehensive as what The Economist has done has left out one of the main challenge in driving innovation for large populations. Patents drive innovation only in those areas where market forces are active. It fails to drive innovation in market failure situations. Take the example of neglected tropical infectious diseases which affect vast segments of population in the tropics. These tropical infectious diseases are called neglected because the pharmaceutical industry which drives innovation does not see profits in them. It is a clear example of incalculable cost of innovation that never takes place due to the patent system. The patent system is inequitable in itself. Some suggestions proposed by The Economist, like different modes of financing innovation could address this. There are working examples of product development partnerships in neglected diseases like TB Alliance and MMV, DnDi, Gavi and many others which goes on to show that an alternative system of financing innovation exist in areas where patents do not work.

Compulsory License

The Economist argues that property rights are not absolute. The state can place restrictions on property rights in public interest. There are extensive arguments about wide sharing of ideas and governments have recognized the limits on the patent system. Yet, it shy away from mentioning about the TRIPS recognized too of compulsory license in public interest. To be fair, there is an indirect reference to compulsory license while discussing the US Federal Trade Commission’s recommendation to President Franklin Roosevelt to replace patent system with compulsory licensing.

How can any article which discusses the thereat to innovation posed by the patent system and list out some outlandish (and some not so outlandish) solutions not even discuss this tool available in the existing law? 

Conclusion


The Economist has not said anything really new or path breaking. What has been listed are well known issues and the solutions are also known ones.  

The difference is only this – The Economist, the champion, mouthpiece and lead advocate of free market capitalism is saying this. One can only hope that the world sits up and notice.

1 comment:

  1. Although the Economist did not touch upon the market failure situation, as you have pointed out, it carried a story that decries the patent system. Thank you very much for sharing the major arguments in the article: it is very useful.

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