From my Mises blog post from 2009, with some updates:
JULY 13, 2009 by STEPHAN KINSELLA
On occasion you get some defender of patents who is upset when we use the m-word to describe these artificial state-granted monopoly rights. For example here one Dale Halling, a patent attorney (surprise!) posts about “The Myth that Patents are a Monopoly” and writes, ” People who suggest a patent is a monopoly are not being intellectually honest and perpetuating a myth to advance a political agenda.”
Well, let’s see. First, see my post Epstein and Patents, noting that the pro-patent Epstein writes:
Patented goods are subject to a lawful monopoly created by the state in order to induce their creation. No one thinks that new pharmaceutical drugs will be invented by private firms that cannot receive a rate of return sufficient to recover [various costs]. … The legal monopoly granted by the patent is the only mechanism that allows the producer to recover those fixed costs….
Is the pro-patent Epstein being dishonest?
And see my comments (1, 2) on The Three Stages of Invention post, excerpted below:First, as to whether patents are monopoly grants–hell, even the feds admit this: “Section 154 and related provisions [e.g. Sec. 271] obviously are intended to grant a patentee a monopoly only over the United States market….” U.S. Supreme Court, Deepsouth Packing Co. v. Laitram Corp., 406 U.S. 518 (1972). See also: King Instr. v. Perego, by the Court of Appeals for the Federal Circuit (“Congress made the policy choice that the “carrot” of an exclusive market for the patented goods would encourage patentees to commercialize the protected inventions so that the public would enjoy the benefits of the new technology during the patent term in exchange for granting a limited patent monopoly. In other words, the public expected benefits during “‘the embarrassment of an exclusive patent as Jefferson put it.’” Graham v. John Deere Co., 383 U.S. 1, 10-11 (1966).)
See also Engel Ind. v. Lockformer Co. (“We hold that the disputed royalties provisions do not inappropriately extend the patent monopoly to unpatented parts of the patented system”); Carborundum Co. v. Molten Metal Eq. Co. (“A patentee, in demanding and receiving full compensation for the wrongful use of his invention in devices made and sold by a manufacturer adopts the sales as though made by himself, and therefore, necessarily licenses the use of the devices, and frees them from the monopoly of the patent.”)
And: Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947):
The Florida statute is aimed directly at the promotion of intellectual creation by substantially restricting the public’s ability to exploit ideas that the patent system mandates shall be free for all to use. Like the interpretation of Illinois unfair competition law in Sears and Compco, the Florida statute represents a break with the tradition of peaceful coexistence between state market regulation and federal patent policy. The Florida law substantially restricts the public’s ability to exploit an unpatented design in general circulation, raising the specter of state-created monopolies in a host of useful shapes and processes for which patent protection has been denied or is otherwise unobtainable. It thus enters a field of regulation which the patent laws have reserved to Congress. The patent statute’s careful balance between public right and private monopoly to promote certain creative activity is a “scheme of federal regulation . . . so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it.”
Brenner v. Manson, 383 U.S. 519 (1966):
Whatever weight is attached to the value of encouraging disclosure and of inhibiting secrecy, we believe a more compelling consideration is that a process patent in the chemical field, which has not been developed and pointed to the degree of specific utility, creates a monopoly of knowledge which should be granted only if clearly commanded by the statute. Until the process claim has been reduced to production of a product shown to be useful, the metes and bounds of that monopoly are not capable of precise delineation. It may engross a vast, unknown, and perhaps unknowable area. Such a patent may confer power to block off whole areas of scientific development, without compensating benefit to the public. The basic quid pro quo contemplated by the Constitution and the Congress for granting a patent monopoly is the benefit derived by the public from an invention with substantial utility. Unless and until a process is refined and developed to this point — where specific benefit exists in currently available form – there is insufficient justification for permitting an applicant to engross what may prove to be a broad field.
Diamond v. Chakrabarty, S.Ct. (1980), Brennan’s dissent:
I agree with the Court that the question before us is a narrow one. Neither the future of scientific research, nor even the ability of respondent Chakrabarty to reap some monopoly profits from his pioneering work, is at stake. Patents on the processes by which he has produced and employed the new living organism are not contested. The only question we need decide is whether Congress, exercising its authority under Art. I, 8, of the Constitution, intended that he be able to secure a monopoly on the living organism itself, no matter how produced or how used.
Now you can argue that patent holders do not necessarily have “monopoly power” (see The Importance of Patents for Economic Development – 1999, by Prof. William Hennessey), but as Rothbard et al. have pointed out, the government’s concept of monopoly is flawed; the only issue that matters is whether there is a legal monopoly granted. See, e.g., Hoppe, A Theory of Socialism and Capitalism, ch. 9, pp. 185-86:
The monopoly problem as a special problem of markets requiring state action to be resolved does not exist. In fact, only when the state enters the scene does a real, nonillusory problem of monopoly and monopoly prices emerge. The state is the only enterprise whose prices and business practices can be conceptually distinguished from all other prices and practices, and whose prices and practices can be called “too high” or “exploitative” in a completely objective, nonarbitrary way. These are prices and practices which consumers are not voluntarily willing to pay and accept, but which instead are forced upon them through threats of violence.
See also Rothbard, Man, Economy, and State (with Power and Market): “The only viable definition of monopoly is a grant of privilege from the government.”
Now it is, indeed, clear that a patent is a monopoly grant to someone that permits them to charge above-market prices; this is exactly the goal of the patent law: to provide this monopoly profit to inventors so as to incentivize them to innovate and file for patents. And it is why, for example, Blackberry paid over $600 million to NTP in a recent patent suit; and it is why consumers will have to pay more for Blackberry services than they otherwise would, etc. Did NTP have “monopoly power” as defined by the government’s antitrust scheme? I don’t know. Probably not. But did they extort RIM/Blackberry by use of the government-granted patent monopoly? Of course.
See also Arnold Plant, The Economic Theory Concerning Patents for Inventions, sections 16, 19, 20, 24:
The patent system may, on the one hand, be expected to affect the making of inventions in two ways. The first is to divert inventive activity into those fields in which the monopoly grant will be expected to prove most remunerative. It may, secondly, affect the total amount of inventive activity.
… the utilitarians assumed that the patent system was responsible for the greater part of inventing activity. The question which they one and all failed to ask themselves, however, is what these people would otherwise be doing if the patent system were not diverting their attention by the offer of monopolistic profits to the task of inventing. By what system of economic calculus were they enabled to conclude so definitely that the gain of any inventions that they might make would not be offset by the loss of other output? By no stretch of the imagination can the inventing class be assumed to be otherwise unemployable. Other product which is foregone when scarce factors are diverted in this way completely escaped their attention.
… at the beginning of this century Professor J. B. Clark was still writing: “If the patented article is something which society without a patent system would not have secured at all – the inventor’s monopoly hurts nobody… His gains consist in something which no one loses, even while he enjoys them.”? No inkling here that the patent inducement to invent diverts scarce human effort from other production, and that the subsequent exploitation of patents again interferes with the disposition of scarce factors which would obtain under competitive conditions.
… It seems unquestionable not only that a very considerable volume of inventive activity must definitely be induced by price conditions, but also that that activity is diverted by price movements from other types of endeavour as well as from other fields of invention. Entrepreneurs faced with new difficulties or with new opportunities will divert not only their own attention, but that of every technician who can be spared, from the business of routine production to that of urgent innovation. They will not rely exclusively upon those types of professional inventors whose autonomous output pours out in a stream of unvarying size, and some of whom may be prepared, in return for the inducements which the entrepreneurs can offer, to transfer their spontaneous activity to their service. It cannot be assumed that all who are capable of innovation spend their whole lives in inventing. Many of them are also able administrators and production controllers; some in the past have been clergymen and barbers, and in our own time there is a steady flow of technicians from the research laboratories of pure science into those of industrial invention and out again. … The patent system … enables those who “have the monopoly of the right to use a patented invention to raise the price of using it … and in that way to derive a larger profit from the invention than they could otherwise obtain. The effect must surely be to induce a considerable volume of activity to be diverted from other spheres to the attempt to make inventions of a patentable type. [emphasis added]
See also Rothbard, Man, Economy, and State, ch. 10, sec. 7:
It is by no means self-evident that patents encourage an increased absolute quantity of research expenditures. But certainly patents distort the type of research expenditure being conducted. . . . Research expenditures are therefore overstimulated in the early stages before anyone has a patent, and they are unduly restricted in the period after the patent is received. In addition, some inventions are considered patentable, while others are not. The patent system then has the further effect of artificially stimulating research expenditures in the patentableareas, while artificially restricting research in the nonpatentable areas.
Update: See “Ideas Need Protection: Abolishing Intellectual-property Patents Would Hurt Innovation: A Middle Ground Is Needed,” by William F. Shughart II, a senior fellow with the Independent Institute, The Baltimore Sun (Dec. 21, 2009):
Granting a temporary monopoly to the rare breakthrough is necessary, therefore, to provide its inventor with an opportunity to earn a return on the investment that led to the new idea – and to encourage additional such investments. Such protection is especially important in the pharmaceutical industry, where, in its absence, new drugs could be duplicated by competitors, and the incentive to invest would disappear, stifling the discovery process.
To paraphrase the late economist Joan Robinson, patents and copyrights slow down the diffusion of new ideas for a reason: to ensure there will be more new ideas to diffuse.
Update: It is interesting to note that one of the first patent statutes was England’s Statute of Monopolies of 1623.
Update: New York Law School professor Beth Noveck, quoted in an article on improving the U.S. patent system, admits: “A patent is a pretty significant monopoly, so we want to make sure we are giving it to the right people.”
Update: See my post IP Rights as Monopolistic Grants to Overcome the Public Goods Problem.
Update: As I note in Canada’s Founders Debated Justification for Patents, Canadian Sen. Jean-Charles Chapais, the agriculture minister, in introducing legislation for a Canadian patent law in 1869, readily admitted the monopoly nature of patents:
It must be remembered that a patent is a kind of monopoly, though he did not mean to say that the word monopoly should be taken in its fullest sense, but nevertheless it is a monopoly, because it gives to a man the right of manufacturing or vending alone, an article useful to the public; certainly there was great reason for granting this monopoly.
Update: In Thomas Jefferson’s Letter to James Madison, August 28, 1789 (On the liberty to write, speak, and publish and its limits), he proposes to James Madison, then in the process of drafting the Bill of Rights, that the following be incorporated into the Bill of Rights:
Art. 9. Monopolies may be allowed to persons for their own productions in literature and their own inventions in the arts for a term not exceeding — years but for no longer term and no other purpose.
This was written just shortly before the Constitution itself was to be ratified. It appears to be aimed at adding a limit on how many years Congress could grant patent and copyright monopolies for. The copyright and patent clause in the then-pending Constitution had no outside limit on how long the patent and copyright monopoly grants could be, providing: “To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” Jefferson apparently wanted the “limited time” to be capped at some maximum number of years (probably 14 or 21 years or so). If he had got his way, (a) it would be clearer to everyone that patent and copyright are monopolies, and (b) Big Media and Mickey Mouse would not have been able to extend the copyright term to its current 100+ years.
See also Alex Tabarrok, Launching the Innovation Renaissance (which I discuss here):
Innovators need time to recoup their sunk costs, but why should every useful, non-obvious and novel idea be granted a 20-year patent? Maximizing innovation requires treating different industries differently. The idea for one-click shopping does not have the same sunk costs of research and development as a new pharmaceutical, and the former does not need and should not be given the same monopoly rights as the latter. [Tabarrok, Alex (2011-11-21). Launching The Innovation Renaissance: A New Path to Bring Smart Ideas to Market Fast (Kindle Locations 241-243). TED Books. Kindle Edition.]
Update: “A patent is an obvious monopoly; the patentee has exclusive rights and, where patented processes are involved, conditions are necessarily monopolistic. This influence has many ramifications. Not merely does it directly protect the manufacturer of patented articles; it also permits the creation of a whole network of tying contracts, forced joint supply, resale price maintenance and other trade practices, not particularly conspicuous in themselves but cumulatively highly conducive to the consolidation of monopolistic conditions. Indeed it is so important an influence that it is no exaggeration to say that special lines of expertise exist, not to forward the progress of invention but merely to devise variations in productive processes permitting the continuation of this form of monopoly power.” ~ Lionel Robbins (1939)