Milton Friedman (and Rothbard) on the Distorting and Skewing Effect of Patents

[From my Webnote series]

Related:

• The “Productivity” of Patent Brainstorming

Friedman wrote, in Capitalism and Freedom:

there are many “inventions” that are not patentable. The “inventor” of the supermarket, for example, conferred great benefits on his fellowmen for which he could not charge them. Insofar as the same kind of ability is required for the one kind of invention as for the other, the existence of patents tends to divert activity to patentable inventions.

As I noted in The Forgotten Costs of the Patent System, the patent system “skews resources away from theoretical R&D and toward practical gizmos and applications, which surely has some cost as well”. Friedman recognized this, but still, bizarrely, supported patents (though he wanted shorter terms). Rothbard also recognized this,¹ but, unlike Friedman, opposed patents (sort of; he supported “common law” or “contractual” copyright which includes inventions like mousetraps).

Update:

See on this also Arnold Plant, “The Economic Theory Concerning Patents for Inventions,” p. 43. As Rothbard writes (Man, Economy, and State, pp. 658–59): “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 patentable areas, while artificially restricting research in the nonpatentable areas.” See also Milton Friedman on the Distorting Effect of Patents.

See also Petra Moser, Patents and Innovation in Economic History (Feb. 2016): “when patent rights have been too broad or strong, they have actually discouraged innovation”. “Moser looks at the products exhibited at the World Exhibitions of the late nineteenth century and asks whether the presence or absence of patent systems across countries affected the types of industries that emerged. She finds that countries that either lacked patent systems entirely or that had weakly enforced patents tended to focus on a small set of industries that depended on technologies that could not be backward engineered, such as the manufacture of scientific instruments.”.

See also See p. 21 of Machlup & Penrose, “The Patent Controversy in the Nineteenth Century” (1950), pointing out that in the late 1800s debate over patents, “Some writers held that patents may promote technological innovation in earlier stages of industrial development while at more advanced stages they become retarding influences.”

See Rothbard:

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. For while it is true that the first discoverer benefits from the privilege, it is also true that competitors are excluded from production in the area of the patent for many years… Moreover, the patentee is himself discouraged from engaging in further research in this field, for the privilege permits him to rest on his laurels ….

Man, Economy, and State and Power and Market, p. 752.

See also quote from Patents Kill: Compulsory Licenses and Genzyme’s Life Saving Drug

Update: See also

Julio H. Cole, “Patents and Copyrights: Do the Benefits Exceed the Costs?”, J. Libertarian Stud. 15, no. 4 (Fall 2001): 79–105, the section “Distorted Incentives,” p. 93.

See

IP Watchdog: “Inventing with Intent: Where Engineering Rigor Meets Business Reality“, an interview with prolific inventor/patentee Fred Shelton, who has more than 3000 patents. Of course Shelton, like buffoon and patent shill Gene Quinn, are in favor of patents. Shocker! But Shelton inadvertently reveals how patents are distorting to inventive activity, as noted above. From the transcript:

[33:38] … maybe it’s just a corporate thing. I don’t that I’ve ever come across [some corporate client saying] “I don’t want to provide the patent person with what they need.” What I do think I’ve seen is an engineer on a team has an idea, the corporation and the the business leadership decides they want to do something with it. They don’t want the engineer distracted. They take whatever they’ve have, put it into a ball, and throw it over the fence and say, “File this.” I would agree that doesn’t end up being a very powerful thing because again the inventor came up with a single solution in their one little area.

They don’t realize multiple embodiments matter. They don’t realize their answer is a third of the total answer, not all of the total answer. And when you want to patent this for the ability to make a good successful moat, I need the other two thirds as well. And in that sense, that’s probably the one thing I personally do differently than practically everybody I’ve come across. I create almost the patent strategy in the invention portion. I even get to a point where these are the kind of the focal areas you would want maybe the claims to be.

I don’t want to write claims. I’m not an expert in that area, but this seems to be the unique piece. And what I see then is okay now let’s make sure I fully enable and give you your multiple options so that you can really articulate as the patent professional this is that part of that claim that is going to be a big deal …

and in the most recent version of like my new version of this now that I’m the customer and the inventor we went through and we created all of the claims for all of the embodiment up front. We actually ended up filing a patent that had I think 17 different independent sets with multiple dependents on each of them. And then what we did is then we revised it and only had them review the beginning one. So what I did is create the entire strategy and the entire continuation strategy but then only work in the patent office on the very first one while still maintaining the protection for all of them.

Now this is inside baseball to some degree. What he is talking about is how a company has an engineer, and they incentive them to file patents—pay them patent filing bonuses, and so on. (The “Productivity” of Patent Brainstorming.) To build up the corporation’s patent warchest: this his value on Wall Street, or with potential acquirers, or it can be used defensively, to ward off patent lawsuits, or as a revenue source by offensively and aggressively “asserting” the patent–in essence, extorting others and becoming a sort of patent troll (e.g. IBM makes a lot by “licensing” its patents).

The very existence of the patent system distorts where R&D dollars flow; they tend to flow more into patentable areas than pure research, math, physics, etc., the outcome of which is less patentable. And as can be seen here, it distorts the innovations produced since, as this guy notes, he has in mind the types of patents he can get–the type of “moat” he can build (sometimes also called a picket fence)—so he comes up with other embodiments to claim more than necessary, so as to make the patent more offensive, dangerous, broader, more valuable, more of an offensive extortion threat, and so on. His mistake is in thinking he is unique; he’s not special. This is how patent lawyers and businessmen and salesmen and engineers think, whether they are more or less conscious of it or not.

But basically this is an example of how invention strategies are influenced, distorted, skewed by the patent process. Consider what he is saying: if there were no patent system, he would just invent what he needs to for a given problem, and would not waste time trying to package the idea with as many related extensions to maximize his patent extortion threat.

1. See Murray N. Rothbard, Man, Economy, and State, scholar’s ed’n (Auburn: Mises Institute, 2004) , 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 patentable areas, while artificially restricting research in the nonpatentable areas.” See also Arnold Plant, “The Economic Theory Concerning Patents for Inventions,” in Selected Economic Essays and Addresses (London: Routledge & Kegan Paul, 1974), p. 43 (originally published in Economica, New Series, vol. 1, no. 1, Feb., 1934, 30-51).   [↩]