Thursday, January 28, 2010


I'm currently reading Guy Sorman's book Economics Does Not Lie: A Defense of the Free Market in a Time of Crisis. It's pretty good. Here is an excerpt on patents I found interesting:
For economists, it has not been proved that intellectual property is essential to innovation, because patents encourage monopolies and rent-seeking. In a brief against intellectual property, two of [economist Paul] Romer's disciples, Michele Boldrin and David Levine, have proposed to show how, throughout Western history, patents have harmed innovation more than they have helped it.

This paradox began with James Watt, the inventor of the steam engine. In 1769, Watt secured the protection of the Parliament of London, which granted him a patent. Protected by this patent, Watt took care not to improve his engine for thirty years; He was slow in commercializing it, he prevented his competitors from infringing on his monopoly, and he himself refused to borrow useful innovations, since these were patented by rivals. Boldrin and Levine conclude that Watt's monopoly slowed the Industrial Revolution by decades; steam engines developed only after his demise.

Another example of intellectual property turning against its proprietor is the case of the French enterprise La Fuchsine, which held a patented monopoly on dyes in 1864. It stopped innovating, and ultimately it declined while its competitors left France for Basel., where patents were ignored. Basel became the European capital of dyes, to France's loss.

In the pharmaceutical industry, some argue, patents are absolutely essential to innovation because of the importance of research budgets. But it's worth noting that in Italy, the pharmaceutical industry created more medications before 1978, when patents were introduced, than after. Today, the introduction of generic drugs that do not always respect intellectual property has not prevented American and European laboratories from amassing the highest profits in the world.

Do patents really motivate investment in research? Boldrin and Levin argue that the hope for patented profits directs laboratories toward the most lucrative products, not necessarily the most useful ones. The authors do not conclude that we should abolish intellectual property, but they do no consider it essential for growth. From the moment they innovate, businesses gain a commercial advantage that does not require a patent; the patent only allows them, as it did Watt, to transform this advantage into a monopoly, an innovation into a rent.

The Watt of today, in Romer's view, is Bill Gates. Is Microsoft harmful to overall development? Romer is convinced that it is: Microsoft abuses its monopoly, smothers competitors, and prevents the emergence of new ideas that could be better than its own. And we find, indeed, that the most creative period in computer technology was in Silicon Valley before computer programs were patented at all.

It is equally remarkable that modern computer technology developed in Silicon Valley instead of in the Boston area, the historical capital of computer manufacturing. Climate alone cannot explain this shift to California. Here is another possible reason: Intellectual property rights were less protected in California than in Massachusetts. In California, workers in these fields are permitted to move from one employer to another immediately; that would be illegal in Massachusetts. Silicon Valley's advantage has everything to do with the mobility of engineers and the cross-fertilization of their ideas.
You can read Sorman's City Journal article with the same name as the book here.

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