Tabarrok, Cowen, and Douglass North on Patents

by Stephan Kinsella on March 11, 2021

I’ve previously criticized George Mason economist Alex Tabarrok’s views on patents.¹ For example, as noted in Patent Policy on the Back of a Napkin, Tabarrok makes a Laffer-curve style argument that patent rights are currently “too strong.” Of course, he is correct that patent rights are too strong. However, he assumes that we should reduce patent strength, since it’s “too strong” now, but not abolish it, since zero protection is too weak. Instead, there is an optimal amount of patent strength, somewhere between zero and infinity, and we should try to adjust the patent system to optimize the production of innovation.

But there is no evidence that patent policy produces any kind of net societal gains at all,² nor does Tabarrok provide any.

I noticed that Tabarrok and fellow GMU economics professor Tyler Cowen (“T&C”) have a textbook, Modern Principles of Economics (3rd ed. 2015). So I thumbed through it to see what they say there about patents and IP. They deal with the issue of patents, in Chapter 13, not surprisingly, since this chapter’s topic is “Monopoly.” And patents are state grants of monopoly privilege.³ Which … our “free market” economist authors are… in favor of. (See the relevant language from ch. 13 in this excerpt [PDF].) T&C repeat the standard argument that you need some patents, but not too much, but they provide no support for this claim. And such a claim is ultimately an empirical one, which needs empirical support. For example, as I point out elsewhere,⁴ in order to make an empirical argument in favor of the patent system, you must present evidence:

it is incumbent on those who claim the patent system bestows benefits on society to be forthright in acknowledging the costs of obtaining the desired results. They should enumerate the costs, and the benefits, and explain why it is clear that the latter exceeds the former.

It is not enough to show that some innovation is stimulated by the patent system (though I doubt even this is the case); you must compare it to the costs imposed by such a system. In other words, you must determine: How much cost does the patent system impose on society (including innovation that is suppressed, impeded, retarded, or distorted⁵ ); and what is the value of the extra innovation that is incentivized by the patent system, if any? Is the latter greater than the former? You can only know this if you have cardinal measures of each factor.

In short, is the patent system “worth it,” in empirical terms? All the empirical studies I can find conclude either that the patent system is a net cost on society, or that there is no clear evidence that it is a benefit.⁶ The few that pretend to find benefits are incredibly shoddy and dishonest, such as the risible Commerce Dept. study and others.⁷ But not much has changed since Austrian economist Fritz Machlup, in an exhaustive 1958 study prepared for the U.S. Senate Subcommittee On Patents, Trademarks & Copyrights, concluded:

No economist, on the basis of present knowledge, could possibly state with certainty that the patent system, as it now operates, confers a net benefit or a net loss upon society. The best he can do is to state assumptions and make guesses about the extent to which reality corresponds to these assumptions. … If we did not have a patent system, it would be irresponsible, on the basis of our present knowledge of its economic consequences, to recommend instituting one.⁸

T&C’s only attempt to cite evidence for their contention that some patents are “necessary”—i.e., that some level of patent protection produces net benefits—is to cite Douglass C. North:

Video games may seem trivial, but the trade-off between lower prices today at the expense of fewer new ideas in the future is a central one in modern economies. In fact, modern theories of economic growth emphasize that monopoly—when it increases innovation—may increase economic growth.

Nobel prize–winning economic historian Douglass North argues that economic growth was slow and sporadic until laws, including patent laws, were created to protect innovation:

“[T]hroughout man’s past he has continually developed new techniques, but the pace has been slow and intermittent. The primary reason has been that the incentives for developing new techniques have occurred only sporadically. Typically, innovations could be copied at no cost by others and without any reward to the inventor or innovator. The failure to develop systematic property rights in innovation up until fairly modern times was a major source of the slow pace of technological change.”⁹

Now note that even if you could show that patent law increased the pace of technological change, this still does not show that such a system is worth the cost imposed by the system: the cost of hiring patent attorneys, defending lawsuits, increased insurance costs and uncertainty, and reduced innovation (as when a would-be competitor is unable to compete because he is blocked by a patent monopoly, and thus does not bother to invest resources in technological improvements to the original innovations). But does North show even this?

Turning to North, again we find no empirical evidence. (See the relevant language from North in this excerpt [PDF].) He basically repeats the type of argument Tabarrok makes in the Napkin post and T&C make in ch. 13 of their text: that without state granted monopoly privileges to protect innovators from competition, there will be some kind of underproduction of innovation, and that with the “right” amount of patent protection, we will get more innovation and thus more wealth and prosperity. But the argument itself is just an argument; it is not empirical proof. Even Tabarrok, in his Napkin post, concedes that patent protection can impede innovation. How does he know that even a weaker patent strength won’t also impede innovation? How does he know there is a “Laffer curve” type shape; I believe the curve monotonically decreases from zero: the more patent strength, the less innovation and prosperity. It’s like taxes or the minimum wage: a large minimum wage will cause drastic unemployment; but even a low minimum wage will cause some unemployment.

In North’s book, he simply gives arguments for why he thinks patents contributed to the rapid increase in technological innovation and improvements during the industrial revolution, but he does not provide any evidence for this contention, nor does he even try to show that any increase in innovation spurred by patents was worth the (non-zero) cost of the patent system. Ironically, the only empirical evidence he cites is the 1958 Machlup study which, as noted above, concludes: “No economist, on the basis of present knowledge, could possibly state with certainty that the patent system, as it now operates, confers a net benefit or a net loss upon society” (emphasis added; see p. 165, n.3). But of course he does not quote Machlup saying this! He only cites Machlup to support the notion that there has been controversy over whether the value of patents. Indeed there has!

Consider the timeline here. The only outliers are North, then T&C:

England, pre-1623: Patents granted by the king to protect court favorites from competition (cronyism; protectionism; mercantilism).
Statute of Monopolies, 1623: Eliminates most monopoly-granting patents, but permits patents for inventions to continue to be granted. No empirical studies done.
Founders, 1789, 1790: Constitution authorizes patent law; Congress immediately enacts first patent law. No empirical studies done to show that patents actually do “promote the Progress of … useful Arts”. It’s just assumed.
Fritz Machlup, 1958: “No economist, on the basis of present knowledge, could possibly state with certainty that the patent system, as it now operates, confers a net benefit or a net loss upon society.“
Douglass C. North, 1982: The technological progress and innovation that accompanied the Industrial Revolution was due to the modern patent system. Perversely cites Machlup. Must not have read it.
George Priest, 1986: “[I]n the current state of knowledge, economists know almost nothing about the effect on social welfare of the patent system or of other systems of intellectual property.”¹⁰
Wesley M. Cohen & Stephen A. Merrill, 2003: “There are theoretical as well as empirical reasons to question whether patent rights advance innovation in a substantial way in most industries. …The literature on the impact of patents on innovation must be considered emergent. One reason is that the effect of patent policy has many dimensions … and these continue to challenge scholars both theoretically and empirically.”¹¹
François Lévêque & Yann Ménière, of the Ecole des mines de Paris, 2004:

The abolition or preservation of intellectual property protection is … not just a purely theoretical question. To decide on it from an economic viewpoint, we must be able to assess all the consequences of protection and determine whether the total favorable effects for society outweigh the total negative effects. Unfortunately, this exercise [an economic analysis of the cost and benefits of intellectual property] is no more within our reach today than it was in Machlup’s day [1950s].¹²

Boston University Law School Professors (and economists) Michael Meurer and Jim Bessen, 2008: “it seems unlikely that patents today are an effective policy instrument to encourage innovation overall”; instead, “patents place a drag on innovation” and “the patent system fails on its own terms …. Overall, the performance of the [U.S] patent system has rapidly deteriorated in recent years. By the late 1990s, the costs that patents imposed on public firms outweighed the benefits. This provides clear empirical evidence that the patent system is broken. . . . [O]ur analysis has relevance to innovation in other countries.”¹³
Michele Boldrin & David Levine, 2008: Exhaustive empirical study in Against Intellectual Monopoly, concludes that patents do not promote, but hinder, innovation.
Andrew Torrance, 2009:

Patent systems are often justified by an assumption that innovation will be spurred by the prospect of patent protection, leading to the accrual of greater societal benefits than would be possible under non-patent systems. However, little empirical evidence exists to support this assumption. One way to test the hypothesis that a patent system promotes innovation is experimentally to simulate the behavior of inventors and competitors under conditions approximating patent and non-patent systems. Employing a multi-user interactive simulation of patent and non-patent (commons and open source) systems (“The Patent Game”), this study compares rates of innovation, productivity, and societal utility. … Initial data generated using The Patent Game suggest that a system combining patent and open source protection for inventions (that is, similar to modern patent systems) generates significantly lower rates of innovation (p<0.05), productivity (p<0.001), and societal utility (p<0.002) than does a commons system. These data also indicate that there is no statistical difference in innovation, productivity, or societal utility between a pure patent system and a system combining patent and open source protection.¹⁴

Boldrin & Levine, 2013: “The case against patents can be summarized briefly: there is no empirical evidence that they serve to increase innovation and productivity….”¹⁵
Tabarrok & Cowen, 2010–2015: Cite North (1982) to support the contention that patent monopoly grants increase innovation and thus economic growth.
Petra Moser, 2016: “when patent rights have been too broad or strong, they have actually discouraged innovation”¹⁶
Heidi L. Williams, 2017:

“To summarize, evidence from patent law changes has provided little evidence that stronger patent rights encourage research investments….

The patent system is a widely-used policy lever attempting to better align the private returns to developing new technologies with the social value of those inventions. The past few decades have seen the development of large academic literatures in a variety of fields – including economics, law, and strategy, among others – investigating various aspects of the patent system. However, surprisingly little research has focused on empirically estimating the key parameters needed to evaluate the social costs and social benefits of the patent system. A half-century ago, Penrose (1951) and Machlup (1958) argued that insufficient empirical evidence existed to make a conclusive case either for or against patents. Today, I would argue that given the limitations of the existing literature we still have essentially no credible empirical evidence on the seemingly simple question of whether stronger patent rights – either longer patent terms or broader patent rights – encourage research investments into developing new technologies. While researchers have recently begun to make progress on the more limited question of how patents on existing technologies affect follow-on innovation (Galasso and Schankerman, 2015; Sampat and Williams, 2015), evidence on the overall effects of patents on research investments are needed as one input into optimal patent policy design.¹⁷

Hon. Maureen K. Ohlhausen, “Patent Rights in a Climate of Intellectual Property Rights Skepticism,” Harv. J. L. & Tech., 30, no. 1 (Fall 2016 [pdf]): 1–51, pp. 8–9:

Respected economists Michele Boldrin and David Levine find “no evidence that intellectual monopoly achieves the desired purpose of increasing innovation,” describe IP rights as an “unnecessary evil,” and call for the patent system’s abolition.38 Economist Adam Jaffe and Harvard Business School professor Josh Lerner call the patent system “broken.”39 Law professors Michael Meurer and James Bessen think it “unlikely that patents today are an effective policy instrument to encourage innovation overall.”40 As for encouraging ideas, the Economist wrote that “[t]oday’s patent systems are a rotten way of rewarding them.”41 Indeed, the magazine appeared to embrace the notion that “society as a whole might even be better off with no patents than with the mess that is today’s system.”42 In law professor Thomas Cheng’s view, theory and empirical studies “firmly refute[] the notion that patent protection is necessary for securing innovation.”43 Richard Stallman argues that “patent law should be abolished.”44 The Electronic Frontier Foundation’s view is that the “patent system is broken” and “it’s time to start over.”45

The chorus of criticism goes on. Attorney William Hubbard argues that “patent protection in the United States should be weakened.”46 The Hon. Richard A. Posner sees “serious problems with our patent system.”47 A leading authority on patent law, Mark Lemley, has proclaimed the existence of a “patent crisis.”48 A renowned economist, Carl Shapiro, believes that the “patent system . . . provides excessive rewards to patent holders . . . reduc[ing] economic efficiency by discouraging innovation.”49 Even Google, which secured more than 2,500 patents in 201450, has sometimes poured cold water on the importance of IP rights. Its general counsel, Kent Walker, has opined that a “patent isn’t innovation. It’s the right to block someone else from innovating” and that “patents are not encouraging innovation.”51 Although outright elimination of the patent regime is an outlier view, many commentators believe that society ought to jettison patents in particular fields of invention such as computer software, business methods, and genetics.52 Even some who have defended the status quo have done so reluctantly.53 ]¹⁸

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So if T&C favor a patent system only if and because it makes us all better off, by creating net prosperity, by incentivizing more innovation than otherwise would arise without patents, where the value of this extra innovation dwarfs the value of innovation suppressed by patents and other costs of the patent system; but if they provide no evidence that this is in fact the case… they why do they favor it? Why not call for abolition, or at least be open to this option?

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If anyone believes I am somehow overlooking or missing something here, please feel free to call it to my attention.