In Patent Law: Global Economic Slowdown Edition, one patent practitioner comments:

"International patent filings under WIPO's Patent Cooperation Treaty (PCT) grew by 2.4% in 2008, to nearly 164,000 1 applications. While the rate of growth was modest, as compared to an average 9.3% rate of growth in the previous three years, the total number of applications for 2008 represents the highest number of applications received under the PCT in a single year. Continued use of the PCT, a cornerstone of the international patent system, indicates that companies recognize the importance of sustained investment in research, development and innovation to remain competitive even within challenging economic conditions."

Interesting patent-lawyer spin, in the bolded words--i.e., PATENTING = INNOVATING.

A great comment by Techdirt's Mike Masnick that deserves to be highlighted on its own--Masnick just keeps getting better and better on IP issues:

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"Resources are allocated by prices that form in the market after exchanges of private property. If there is no private property, there are no exchanges."

Shame that someone who claims to understand economics is so woefully wrong.

First off, yes, private property is a key element of a marketplace, but you have to first understand the purpose of private property. This is rather important, and often gets lost in the shuffle. The purpose is to allow for the efficient allocation of resources.

However, when a good is infinitely available, there is no question of the efficient allocation of that resource, because efficiency is easy: anyone who wants a *copy* can get it. This is not socialism, as you imply. It's pure free market capitalism. Your mistake is confusing the "copy" with the original good. It's a common mistake.

Thus, it makes little sense at all to apply property rights to infinitely available goods. In that case, all you are actually doing is making allocation INEFFICIENT by putting artificial and unnecessary limitations on things, and actually diminishing transactions, because the infinitely available works cannot be built upon to create new and valuable works.

So you have put the cart way before the horse here in focusing on the marketplace, rather than the efficient allocation of resources. We like markets for scarce goods because they make allocation efficient.

We can have a market for infinite goods, but since the supply is infinite, the price will get set at zero (this is just basic economics).

Now, the real reason given for IP rights is not about allocation of resources, but incentives to create (you seem to confuse these things in your comment). So, your question about "the calculation problem" is actually about incentives to create, which is separate from the issue you later brought up (the market for efficient allocation).

But, once again, here you seem to have a lack of understanding of the facts. There is tremendous evidence nearly across the board that there are significant and workable models to create plenty of new works (or new inventions) in the absence of IP protections. In fact, much of the evidence suggests that the end result would, in fact, be MORE works created, because so many creative and inventive works are actually built off of earlier works.

In other words, both creative and inventive works are an ongoing process of creation, and placing an unnecessary, inefficient and market limiting tollbooth at each stage of the process drastically slows down the incentives for creation.

So, let's try starting again from scratch. Look at the difference between the allocation problem from the creation problem -- and then look at alternative models and the research concerning how those alternative models do. Then, perhaps, you might want to tone down your false statements concerning "socialism" and maybe, just maybe, apologize to those you insulted with your own statements.

It's easy to find "inventors" who are enthusiastic about patents. It's not so easy to find actual innovators. This article - which is about innovation, not intellectual property - might give an idea why that is. This team has built a prototype product. It might go to market, it might not - but here is the thing: nobody is going to bring it to market without paying them. They can show it off, everyone can see how it works, but until and unless they get paid what they want, nobody can make it. The devil is in all the details. Even if they go to production, it is not the case the a rival is going to be able to jump right in with an identical product. Intellectual property just isn't part of the picture here.

GREAT post on patents and innovation posted on Mises blog in the comments:

I just finished reading your article A Book that Changes Everything.... Great stuff! I wanted to send along my thoughts on the subject.

First, I should confess that I work for a company that has received more patents than any other - for every single year - the last 15 years. Second confession: I co-own several of those IP patents (well, the company is the real owner - I'm just the "inventor" on some of them. I'm a software engineer.).

I'm going to avoid mentioning the company I work for (more corporate regulations), but given the clues you can figure it out fairly easily.

We are slightly different than some of the corporations you mention: "It is impossible to develop software without running into IP problems, and the largest players are living off IP and not innovation"

We do make great money off our patents (I'll explain what I think is the real benefit though). However, we do innovate, and we make the vast majority of our revenue off of our products - because our product is superior. (Ok, I may be slight biased - but our customers tell us this too)

Anyway, I believe that the real benefit of patents for the company I work for, and other large software firms, is that we trade them - sort of like kids with baseball cards. That is, we'll allow firms to use certain patents in exchange for the rights to some of theirs. As you can probably figure out, this is not a real option for start ups that do not have the IP portfolio to make this attractive.

We have a huge team of IP lawyers, a bonus structure that makes it attractive to try to patent any possible new inventions, and a management that uses your personal patent portfolio as a factor in determining who to promote. We've been told that they'll patent anything new we come up with - even if it is unrelated to the business (i.e. I've seen them patent an exercise device).

We'll often write papers on items that the business decides not to patent - just to show prior discovery should we be challenged by other corporations. We also get a bonus for this - just not as much.

From an employee standpoint, this is attractive. Hey - it's a lot of extra money to us, and we are helping out our company. As an employee who happens to be a libertarian, I honestly have no issue with my company taking advantage of the silly IP laws.

That brings me back to the main issue at hand though: should we have IP laws?

Speaking from my own experience, corporations (such as the one I work for) spend a lot of money to innovate. However, I would "press that button" and get rid of IP law immediately, given the chance. I agree completely with the arguements made in the article - as such, I'll just bring up a few other issues:

I think IP law is incredibly damaging to innovation and competition. In the case of software patents, moreso in that they take resources (primarily money which gets redirected to legal teams) from firms who are forced to research existing patens, and also defend themselves against IP lawsuits.

Many software patents are particularly silly. Many of these are issued for algorithms - the vast majority of the time, these algorithms are only available outside the company via patent! That is, when they are shipped externally, it is in a form that is not readable (object code). Sure - this can be reverse engineered. But for a particularly complex program or operating system, this in itself would be a colossal endeavor. Yet, a patent is issued for it - and the patent describes exactly what the algorithm does!

Another firm could look at the patent and use the invention. In most cases, it would be impossible to tell that they've "stolen" anything. Here they are counterproductive.

I should also mention the obvious - the corporation which holds the patent already has a huge advantage! They will ship a product with these innovations before any other corporation can ship its' product. Quite frankly it will generally be a significant period of time before another product can be shipped which contains these innovations - even if the innovation was immediately obvious and known. This will not generally be the case.

Then you have the patents for user interface - these are just silly. I've seen patents issued (granted, this was a long time ago) for using a particular color on a "dummy" terminal.

Anyway, I hope I do not sound like a hypocrit (because I hold IP patents). As I said, it is a part of my job. I also cannot fault my company for taking advantage of whatever silly laws are created. I simply view this as another case of the state interfering with the market, and the market adjusting to exploit the foolishness of the laws.

In Easing the Transition to an Alternative Economy, posted at the Citizen's Briefing Book at Change.gov by "Mutualist" Kevin Carson (mentioned here at Center for a Stateless Society, and here on Carson's blog), Carson has a good critique of the damaging and distorting effects of IP. Now, he does mix it in with ideas I find questionable (see 1, 2, 3), such as the leftist hostility to "bigness" and the corporate form of business, the penchant for "localism," the notion that "road subsidies" somehow favor large companies (which basically, as many "vandarchists" seem to believe, makes them fair game for vandalism and worker appropriation since they do not "really" own their property), and the idea that we should "liminat[e] differential tax exemptions that favor firms engaged in centralized, large-scale, capital-intensive production" (this would just amount to raising taxes--now he does advocate making up for this by lowering overall taxes, but only enough to be "revenue neutral," which, by my math, does not prevent net taxes from being raised on some companies; a good libertarian opposes all tax increases)--so I bold the parts below that I reall like:

If we want to replace the present centralized economy of waste production and planned obsolescence, it's an inescapable fact that a great deal of excess manufacturing capacity cannot be saved. In my opinion it's a mistake to try to prop it up through expedients like the Detroit bailout.

Corporate capitalism has been plagued from its late-19th century beginnings with chronic crises of overaccumulation and overproduction, which would probably have destroyed it in the Great Depression (despite the New Deal) had WWII not postponed the crisis for a generation by helpfully blowing up most of the plant and equipment in the world outside the U.S. and creating a permanent war economy for absorbing surplus output. But Europe and Japan rebuilt their industrial capital by 1970, and since then the chronic crises have been back with a vengeance. Before the current downturn, America's overbuilt industry couldn't dispose of its full output running at capacity, even with everybody tapping into home equity and maxing out their credit cards to replace everything they owned every five years. And we'll never see those levels again. So there's no escaping the fact that much of our plant and equipment, in a few years, will be rust.

The goal should be a shift from the present system of overaccumulated, centralized, oligopoly industry, and its business model of planned obsolescence and "push" distribution, to a decentralized economy of small-scale manufacturing for local markets. This means, among other things, a switch from capital-intensive production methods based on product-specific machinery, to production with small-scale, general purpose machinery. It means, in place of the old Sloanist production model, something like the present-day economy of Italy's Emilia-Romagna region: networked small manufacturers producing for the local market, with a high degree of cooperative ownership. Such an economy, based on a "pull" distribution model with production geared to demand on a just-in-time basis, will be insulated from the boom-bust cycles of the old national "push" economies. And we need a new model of user-friendly, modular product design aimed at cheap and easy repairability and recycling.

Your main focus, in my opinion, should be to ease the transition by eliminating present policies (market-distorting subsidies, privileges, and cartelizing regulations) that impede it and protect the old economy from the new one.

This means, for one thing, eliminating differential tax exemptions that favor firms engaged in centralized, large-scale, capital-intensive production: e.g., the depreciation allowance, the R&D credit, the deductability of interest on corporate debt, and the exemption of stock transactions involved in mergers and acquisitions from capital gains tax). Then lower the corporate income tax enough to be revenue-neutral.

It means, especially, eliminating the biggest subsidy to economic centralization, and to artificially large market area and firm size: i.e., subsidies to long-distance transportation. The Interstate should be funded entirely by weight-based user fees on trucking, which causes virtually all of the roadbed damage. All subsidies to new airports or to expanding old ones should be eliminated, including all federal guarantees of local bond issues.

Perhaps most important of all, it requires radically scaling back the present strong "intellectual property" regime. IP (through patent pooling and exchange, monopolies on current production technologies, etc.) is probably the single most powerful cartelizing force, which enables each industry to be concentrated in the hands of a few players. It impedes the transfer of skills and new technology from the old manufacturing dinosaurs to the kinds of small, local producers we need. It also serves as a powerful bulwark to planned obsolescence, imposing legal restrictions on the manufacture of cheap generic replacement parts.

Scaling back IP law (a good start would be repealing the DMCA, the WIPO Copyright Treaty, and the Uruguay Round's TRIPS accord) would eliminate the barriers to the diffusion of skill and technology that currently prop up the old corporate dinosaurs of the software and entertainment industries, and facilitate their replacement by networked production on an open source model. Please cut loose the MPAA, RIAA, and Bill Gates, and do so yesterday!

Finally, we need to eliminate all subsidies to large-scale agribusiness. The result will be a flourishing sector of community-supported agriculture, replacing the old agribusiness dinosaurs as fast as new ground can be cultivated.

It can of course be useful to point out harmful consequences of various policies, if only to engage advocates of same on their own turf. Thus in There's No Such Thing as a Free Patent I point out that those who claim the benefits of patents outweigh the costs never seem to tally up these figures and give us the net. And indeed, whenever anyone ties to do this, they usually conclude that the patent system does more harm than good. For example, Boldrin and Levine's Against Monopoly, Bessen & Muerer's work, Julio Cole's Patents and Copyrights: Do the Benefits Exceed the Costs?, and so on (see my post, What Are the Costs of the Patent System?).

And yet, there are severe drawbacks to relying exclusively on the utilitarian approach, as I explained in my Against Intellectual Property. We need to have principled, moral reasons that can cut through the fog of inconclusive utilitarian back-and-forth. Case in point is Rosemarie Ziedonis's reply to Bessen & Muerer's On the Apparent Failure of Patents. In her civil and reasonable reply, she argues that Bessen & Muerer provide

little basis for concluding (as the authors assert) that public firms outside the chemical and pharmaceutical industries would be "better off" if patents did not exist. Public firms benefit from the patent system in numerous ways that are not captured by Bessen and Meurer's "net benefits" calculations, including through information revealed during the patenting process and through growth opportunities provided by startups. More generally, the authors are unable to observe the innovative productivity or financial performance of public firms in an alternative, nonpatent regime."

What can a utilitarian say when a critic simply replies, "but there are other benefits you are not capturing"? The strongest counter, it seems to me, is to note that the burden of proof is on the proponent of a utilitarian argument favoring a state regulation, but how do utilitarians ever know if they've taken all costs, and all benefits, into account? That's why a principled, property-rights argument is crucial.

A more complete excerpt of Ziedonis's comments follows:

A second problem with Bessen and Meurer's "better off" assertion is its implicit assumption that the private value firms reap from owning patents is equivalent to the private value those firms derive from the patent system. Here, it is important to understand what was (and was not) included in Bessen and Meurer's statistics. While the authors' "net benefits" calculations allowed public firms to be harmed by patents owned by outsiders through encounters of infringement lawsuits, they did not allow firms to reap benefits from the activities of others. Recall that only the value captured from a firm's own portfolio was captured in the authors' calculations. There are several ways in which public firms reap indirect benefits from the patent system. One is through information revealed during the patenting process (i.e., "spillovers"). In addition to enticing investment through the lure of future profits (the "reward theory" of focal attention in Bessen and Meurer's article), the patent system also aims to foster innovation through the disclosure of information about new inventions (in detailed drawings and descriptions contained in published patent documents) that otherwise might be held secret or be more difficult for outsiders to unravel. ...

Although the evidence generated from Bessen and Meurer's analysis is alarming, it provides little basis for concluding (as the authors assert) that public firms outside the chemical and pharmaceutical industries would be "better off" if patents did not exist. Public firms benefit from the patent system in numerous ways that are not captured by Bessen and Meurer's "net benefits" calculations, including through information revealed during the patenting process and through growth opportunities provided by startups. More generally, the authors are unable to observe the innovative productivity or financial performance of public firms in an alternative, nonpatent regime. Would opportunities to "outsource" R&D to more efficient performers or to profit from entrepreneurial-firm acquisitions be deleteriously affected? It is highly unlikely, of course, that the U.S. patent system will be abolished. Nonetheless, when assessing the current system's performance, these indirect effects of patents are important to consider.

JANET RAE-DUPREE has a thought-provoking piece entitled "For Innovators, There Is Brainpower in Numbers" link here. She begins, "Despite the enduring myth of the lone genius, innovation does not take place in isolation. Truly productive invention requires the meeting of minds from myriad perspectives, even if the innovators themselves don't always realize it." She goes on to examine how individuals work together successfully in groups with some examples, but it led me to speculate on what this means for promoting innovation in another sense. Since what we want is innovation, policy on IP needs to accomodate to this perception. Much innovation seems to come from large companies with the resources to devote to it. They would, I expect, prefer less regulation, such as that coming from the copyright and patent laws which fence in what they can do.

That may be wrong, however. Instead, one might argue that the really large companies with lots of patents have accomodated to the IP regime. They can cross license and largely avoid any limits on their own activities. Large companies may even find a cross-licensing regime preferable, by limiting competition. IP-based oligopoly would then be preferred to open competition.

But that bars a large number of potential innovators, whether as individuals or small groups, from doing so. In the long run we see innovation reduced or slowed. The social cost of this regime is enormous, bad for consumers and more broadly, for humanity.

I've noted before (2) the disturbing trend of intellectuals--some even libertarian or free marketeers--advocating taxpayer-funded "medical innovation prizes" to supplement or replace the current patent system--e.g., Alex Tabarrok's support of an $80 billion/year "medical innovation prize fund", and similar proposals by others, including Joseph Stiglitz and Forbes.com.

Now, on Cato Unbound, one "Dean Baker" has his own proposal:

I do not support a prize system .... A prize system would preserve what I see as some of the worst problems of the patent system, most importantly encouraging secrecy in research. ... My ideal system would be a system in which the government allocates a pot of money (@$30 billion a year approximately equal to private R&D in the pharmaceutical sector) that would be awarded in long-term contracts to a relatively small number of master contractors. For example, there can be 10 master contractors getting grants of roughly $30 billion each spread over 10 years.

Of course this is not a perfect system and there may well be better alternatives, but the point is to get the discussion started. ... Perhaps a progressive-libertarian alliance can force economists/policy makers to take this issue seriously.

I think you've got the conversation started, buddy. Congratulations! Now, can you leave us the hell alone

Update: Will Wilkinson, in Dean Baker on Libertarians and the Fight Against Corporatism, discussing the interchange between Dean Baker and Tim Lee, gushes, "the extent of overall agreement really is pretty impressive, and promising." Dissent!

Update2: Cato's Tim Lee writes: "I can't agree with Baker that all copyright and patent monopolies are illegitimate. Copyright and patent protections have existed since the beginning of the republic, and if properly calibrated they can (as the founders put it) promote the progress of science and the useful arts. Like any government intervention in the economy, they need to be carefully constrained. But if they are so limited, they can be a positive force in the American economy."

Ah, yes, that's our job as market liberals--to help the state "properly calibrate" its grants of pattern privilege!

Update3: On HuffPo, Baker ridicules DC intellectuals who favor the bailout, in How Do You Make a DC Intellectual Look Less Articulate Than Sarah Palin Being Interviewed by Katie Couric? Not a bad piece, but his anti-bailout credibility is undermined a bit by advocating $30B of state funding to promote innovation!

The Lexra Story--"An example of how Patent law hurts innovation", according to my friend Max Chiz.

What he said.