Wenzel on patents in developing countries

by Stephan Kinsella on February 18, 2014

Readers of this site may be aware I have tangled in the past with pro-IP libertarian Robert Wenzel (or whatever his real name is), who has been threatening for years to unbosom onto us his libertarian justification for intellectual property. See, e.g.,

After our debate he seemed to have backed off the IP bandwagon but still on occasion pipes up about it. Case in point is his recent blog post:

Intellectual Property and Economic Development

Rod Hunter writes:

Some activists and government officials get the relationship between strong IP protection and economic growth backwards, claiming that IP rights are an obstacle to development, and thus should not be enforced until after countries achieve high-income status. This attitude is particularly prevalent in India, which recently put trade negotiations with the EU on hold, and it was central to the failure of the Doha Round of global trade talks. As Indian Commerce Minister Anand Sharma put it, “inherent flexibilities must be provided to developing countries.”

But the bottom line is that the ideas protected by IP rights are the dynamo of growth for developed and developing countries alike. Instead of diluting IP rights, developing countries like India should recognize that strengthening IP protection is a prerequisite for attracting the foreign investment that they need to help their economies grow, create jobs, and improve their citizens’ capacity to consume.

Today, IP accounts for much of the value at large companies. One study found that in 2009, across a variety of industries in the US, intellectual capital – patents, copyrights, databases, brands, and organizational knowledge – held a 44% share of firms’ overall market value. Such companies have little desire to put their IP at risk of erosion or outright theft; they want to do business where they know that their IP is safe.

Developing countries have a lot to gain from attracting multinational firms. Such companies bring technologically advanced imports and new management techniques that foster growth in domestic firms, while spurring industrial modernization. They also spawn new local companies that serve as suppliers, thereby boosting employment, augmenting workers’ skills, improving productivity, and increasing government revenue.

Currently, India attracts a mere 2.7% of global spending on research and development; China, with its stronger IP rights, attracts close to 18%; and the US brings in 31%. United Nations data show that India’s stock of foreign direct investment (FDI) was equivalent to just 11.8% of its GDP from 2010 to 2012 – far lower than the developing-economy average of roughly 30%.

According to a new study by the economists Robert Shapiro and Aparna Mathur, if India achieved Chinese levels of IP protection, its annual FDI inflows would increase by 33% annually. In the pharmaceutical sector – which is particularly vulnerable to IP infringement – a stronger IP regime could increase FDI inflows from $1.5 billion this year to $8.3 billion in 2020, with pharmaceutical R&D doubling to $1.3 billion over the same period.

Note: Rod Hunter was a senior director for international economics on the White House’s National Security Council under President George W. Bush and is presently a senior vice president at the Pharmaceutical Research and Manufacturers of America. He appears to be supporting the views of those who write his paycheck, crony big pharma. That said, I believe the data he presents offers a significant challenge to those who claim that IP protection is always a negative for an economy.

I want to further add that my view on IP protection differs from Hunter’s in that I believe independent discovery should be the criteria for IP protection and not the current system which, for example, in the area of patents grants monopolistic patent protection to only the first inventor.

A few things about this confused post. First, he admits Rod Hunter, whom he quotes, is a corporatist shill for “crony big pharma.” Yet Wenzel still thinks Hunter’s post supports him: “That said, I believe the data he presents offers a significant challenge to those who claim that IP protection is always a negative for an economy.”

One problem: Hunter does not provide any “data” to show that IP protection is justified. At most, Hunter is demonstrating that if a country increases IP protection, it will attract more foreign direct investment from firms that can take advantage of the monopoly IP protection. But so what? This only shows that content providers will seek monopoly protection where they can get it. It does not show that IP protection promotes innovation, is a good idea, or is justified or compatible with libertarianism. I am sure that if India offered generous tax-funded R&D subsidies or subsidies for factories, to foreign companies, they would take advantage of it. So what? (This insipid trotting out of “evidence” calls to mind this: USPTO/Commerce Dept. Distortions: “IP Contributes $5 Trillion and 40 Million Jobs to Economy”.)

Second: Hunter and “Wenzel” seem stubbornly oblivious to studies showing that even in the pharmaceutical arena, there is no case for patents. They need to read chapter 9 of Boldrin & Levine’s Against Intellectual Monopoly. As libertarian attorney Jacob H. Huebert explains in “The Fight against Intellectual Property,”

Boldrin and Levine have found that the pharmaceutical industry historically grew “faster in those countries where patents were fewer and weaker.” Italy, for one, provided no patent protection for pharmaceuticals before 1978, but had a thriving pharmaceutical industry. Between 1961 and 1980, it accounted for about nine percent of all new active chemical compounds for drugs. After patents arrived, Italy saw no significant increase in the number of new drugs discovered there — contrary, one supposes, to the IP advocates’ predictions.

So the case for IP is never, ever made. You would think a real libertarian, instead of a corporatist shill like “Rod Hunter,” would not recommend a state-granted monopoly to help pharma developers make more money—that he would, instead, recommend the abolition of various costs the same state imposes on the industry, such as: taxes, import restrictions, the FDA regulatory process, minimum wage, pro-union legislation, and so on. But no, instead of asking the state to get out of the way, which would vastly decrease costs faced by innovative industries (including Big Pharma), these “libertarians” ask the same state to tack on yet another layer of state intervention: the monopolistic, privilege-granting, anti-competion patent system.

Then Wenzel ends on this incoherent note:

I want to further add that my view on IP protection differs from Hunter’s in that I believe independent discovery should be the criteria for IP protection and not the current system which, for example, in the area of patents grants monopolistic patent protection to only the first inventor.

Wenzel, like far too many libertarian advocates of IP, apparently does not even understand the system he says that he thinks he is in favor of (the system he keeps threatening to justify in a book, no less!). In this, he reminds of Ayn Rand, who erroneously originally thought the US had a first-to-file system and thus strained to justify it (Ayn Rand Finally Right about the First-to-File US Patent System). She was wrong; we had a first-to-invent system. The system is now first-to-file, like in the rest of the world—but it still requires that the patentee be the inventor. Or, as Wenzel seems to be trying to get at here, they have to show “independent discovery.” In other words, the patent system in the US has always, and still does, require the patentee to be an independent inventor. If you learn about it from someone else, you cannot get a patent on it because you are not the inventor. The current rules about “first to file” only apply in rare cases where there are two or more independent inventors, and a decision has to be made as to which one gets the patent.

Possibly, Wenzel is trying to say we should go back to the first-to-invent system, but this would make almost no difference; again, it would apply only in a miniscule number of cases (less than a few dozen a year).

Or maybe Wenzel is saying that everyone who can prove they thought of an idea on their own should be able to get a patent—so that you could have two, three, or more people each entitled to a patent on the same invention. Who knows what he means.

Or, perhaps he is saying that independent invention should be a general defense to an accusation of patent infringement: the patent holder can only sue people who learned from the patentee, but not those that thought of the same idea on their own. Imitation bad! Competition bad! But if you have a bunch of people each independently re-inventing the wheel, that good!¹

I have proposed such a defense before ( How to Improve Patent, Copyright, and Trademark Law), and in fact, as I noted before, regarding Obama’s recent patent reform law:

The AIA’s one significant improvement–probably the first real improvement to US patent law since 1790–was to adopt a fairly broad prior user right, one not restricted to business methods.

(See The American Invents Act and Patent Reform: The Good, the Meh, and the Ugly; also audio and slides.)

However, this still does not provide an independent inventor defense, only a prior-user right, which is of narrow and limited applicability. And even if there were a general independent invention defense—which industry and special interests and pro-IP “libertarians” would fight, tooth and nail—this still would only be a very minor improvement in patent law. Even if every reform that the IP “reform” libertarians want were made—improve patent quality, get rid of patent trolls, eliminate software patents, reduce the patent term, make the losing patent plaintiff pay, impose a working requirement, provide prior use and independent inventor rights—it would make almost no difference. In fact, things could even get worse: with higher-quality patents, defendants would be virtually defenseless and would simply have to cave in to demands of their competitors. At least today, everyone knows most patents are junk and so there is a good chance you can find a chink in the armor if pushed to defend yourself in a lawsuit. With a “perfect” patent system with 100% “high quality” patents issued only to companies who would use them against their actual competitors to enforce a monopoly position in a given market, you would have fewer patents, and possibly even less competition.

The main problem with the patent system is not software patents, low-quality patents, or patent trolls: it is the grant of “high quality” patents to actual companies that make products, who can use these patents as a protectionist bludgeon against their competitors. And it is this core of patent law that people like Wenzel, alleged proponents of Austrian economics, liberty, and free markets, dismayingly, shamefully support.

Patents are simply state-granted monopoly privileges that protect entrenched industries from competition. The US patent system alone imposes hundreds of billions of dollars of net cost on the economy every year. It restricts free speech.² It reduces innovation.³ It distorts the market.⁴ It gives rise to cartels and barriers to entry.⁵ It impoverishes people.⁶ It gives rise to imperialism and corruption of free trade.⁷ It confuses and corrupts libertarians into supporting restrictions on free trade⁸ and multi-billion dollar taxpayer subsidies to private industry.⁹

The very idea of patents is evil to the core. Shame on any supposed advocate of human liberty, technology, innovation, or freedom that is in favor of this modern legal abomination. Down with patents. Down with copyright. Down with trademark and trade secret law, and defamation law, too. Down with the state.