In general, this is an interesting book about patents. It is at times combatant in its language use, other times more neutral. I think it wud have been wiser to use less loaded terms, but it didnt bother me too much. The criticism of IPR is generally sensible, and their case persuasive and plausible, but not as plausible as the case in Patent Failure. References are sometimes missing for questionable claims, but in general there are lots of references. The reference system is annoying, as the notes are at the end of chapters and not in links (it was intended to be published as an ebook, after all) or footnotes or something of that sort.
Below are some more comments and a lot of quotes.
As usual. Colored text is a quote. Colored+italic text is a quote which is also a quote in the source. Black text is my comments. Blue text also mine i.e. links.
–
Why, however, should creators have the right to control
how purchasers make use of an idea or creation? This gives
creators a monopoly over the idea. We refer to this right as
“intellectual monopoly,” to emphasize that it is this monopoly over
all copies of an idea that is controversial, not the right to buy and
sell copies. The government does not ordinarily enforce
monopolies for producers of other goods. This is because it is
widely recognized that monopoly creates many social costs.
Intellectual monopoly is no different in this respect. The question
we address is whether it also creates social benefits commensurate
with these social costs.
–
Even on the desktop – open source is spreading and not
shrinking. Ten years ago there were two major word processing
packages, Word and Wordperfect. Today the only significant
competitor to Microsoft for a package of office software including
word-processing is the open source program Openoffice.
Or rather LibreOffice now. But there is also Google Docs, which isnt open source. It is, however, free.
–
Start with English authors selling books in the United
States in the nineteenth century. “During the nineteenth century
anyone was free in the United States to reprint a foreign
publication”10 without making any payment to the author, besides
purchasing a legally sold copy of the book. This was a fact that
greatly upset Charles Dickens whose works, along with those of
many other English authors, were widely distributed in the U.S.,
and
yet American publishers found it profitable to make
arrangements with English authors. Evidence before the
1876-8 Commission shows that English authors sometimes
received more from the sale of their books by American
publishers, where they had no copyright, than from their
royalties in [England]11
where they did have copyright. In short without copyright, authors
still got paid, sometime more without copyright than with it.12
How did it work? Then, as now, there is a great deal of
impatience in the demand for books, especially good books.
English authors would sell American publishers the manuscripts of
their new books before their publication in Britain. The American
publisher who bought the manuscript had every incentive to
saturate the market for that particular novel as soon as possible, to
avoid cheap imitators to come in soon after. This led to mass
publication at fairly low prices. The amount of revenues British
authors received up front from American publishers often
exceeded the amount they were able to collect over a number of
years from royalties in the UK. Notice that, at the time, the US
market was comparable in size to the UK market.13
More broadly, the lack of copyright protection, which
permitted the United States publishers’ “pirating” of English
writers, was a good economic policy of great social value for the
people of United States, and of no significant detriment, as the
Commission report and other evidence confirm, for English
authors. Not only did it enable the establishment and rapid growth
of a large and successful publishing business in the United States;
also, and more importantly, it increased literacy and benefited the
cultural development of the American people by flooding the
market with cheap copies of great books. As an example: Dickens’
A Christmas Carol sold for six cents in the US, while it was priced
at roughly two dollars and fifty cents in England. This dramatic
increase in literacy was probably instrumental for the emergence of
a great number of United States writers and scientists toward the
end of the nineteenth century.
But how relevant for the modern era are copyright
arrangements from the nineteenth century? Books, which had to be
moved from England to the United States by clipper ship, can now
be transmitted over the internet at nearly the speed of light.
Furthermore, while the data show that some English authors were
paid more by their U.S. publishers than they earned in England –
we may wonder how many, and if they were paid enough to
compensate them for the cost of their creative efforts. What would
happen to an author today without copyright?
This question is not easy to answer – since today virtually
everything written is copyrighted, whether or not intended by the
author. There is, however, one important exception – documents
produced by the U.S. government. Not, you might think, the stuff
of best sellers – and hopefully not fiction. But it does turn out that
some government documents have been best sellers. This makes it
possible to ask in a straightforward way – how much can be earned
in the absence of copyright? The answer may surprise you as much
as it surprised us.
The most significant government best seller of recent years
has the rather off-putting title of The Final Report of the National
Commission on Terrorist Attacks Upon the United States, but it is
better known simply as the 9/11 Commission Report.14 The report
was released to the public at noon on Thursday July 22, 2004. At
that time, it was freely available for downloading from a
government website. A printed version of the report published by
W.W. Norton simultaneously went on sale in bookstores. Norton
had signed an interesting agreement with the government.
The 81-year-old publisher struck an unusual publishing
deal with the 9/11 commission back in May: Norton agreed
to issue the paperback version of the report on the day of
its public release.…Norton did not pay for the publishing
rights, but had to foot the bill for a rush printing and
shipping job; the commission did not hand over the
manuscript until the last possible moment, in order to
prevent leaks. The company will not reveal how much this
cost, or when precisely it obtained the report. But expedited
printings always cost extra, making it that much more
difficult for Norton to realize a profit.
In addition, the commission and Norton agreed in May on
the 568-page tome’s rather low cover price of $10, making
it that much harder for the publisher to recoup its costs.
(Amazon.com is currently selling copies for $8 plus
shipping, while visitors to the Government Printing Office
bookstore in Washington, D.C. can purchase its version of
the report for $8.50.) There is also competition from the
commission’s Web site, which is offering a downloadable
copy of the report for free. And Norton also agreed to
provide one free copy to the family of every 9/11 victim.15
This might sound like Norton struck a rather bad deal – one
imagines that other publishers were congratulating themselves on
not having been taken advantage of by sharp government
negotiators. It turns out, however, that Norton’s rivals were in fact
envious of this deal. One competitor in particular – the New York
Times – described the deal as a “royalty-free windfall,”16 which
does not sound like a bad thing to have.
Thats pretty cool!
–
Literature and a market for literary works emerged and
thrived for centuries in the complete absence of copyright. Most of
what is considered “great literature” and is taught and studied in
universities around the world comes from authors who never
received a penny of copyright royalties. Apparently the
commercial quality of the many works produced without copyright
has been sufficiently great that Disney, the greatest champion of
intellectual monopoly for itself, has made enormous use of the
public domain. Such great Disney productions as Snow White,
Sleeping Beauty, Pinocchio and Hiawatha are, of course, all taken
from the public domain. Quite sensibly, from its monopolistic
viewpoint, Disney is reluctant to put anything back. However, the
economic argument that these great works would not have been
produced without an intellectual monopoly is greatly weakened by
the fact that they were.
Hah! :D
–
At least in the case of sheet music, the police campaign did
not work. After a few months, police stations were filled with tons
of paper on which various musical pieces were printed. Being
unable to bring to court what was a de-facto army of “illegal”
music reproducers, the police itself stopped enforcing the
copyright law.
Pretty much that which i suggested earlier today that we shud do with DMCA notices. Just send them en masse and overwhelm the system from within. After all, companies already send out a massive amount of DMCA notices, and lots of them are bogus auto-generated ones, and this is true even tho they must stand for perjury if they are caught lying!
Surely, there is no intent to deceive if we do the same, since there is no intent at all in writing generating them.
–
The authors mention some obscure catholic principle in passing. Their reference for it is to AiG. But that makes no sense. AiG is a YEC organisation, not catholic. Catholics are theistic evolutionists, not creationists.
–
Effective price discrimination is costly to implement and
this cost represents pure waste. For example, music producers love
Digital Rights Management (DRM) because it enables them to
price discriminate. The reason that DVDs have country codes, for
example, is to prevent cheap DVDs sold in one country from being
resold in another country where they have a higher price. Yet the
effect of DRM is to reduce the usefulness of the product. One of
the reasons the black market in MP3s is not threatened by legal
electronic sales is that the unprotected MP3 is a superior product to
the DRM protected legal product. Similarly, producers of computer
software sell constrained products to consumers in an effort to
price discriminate and preserve their more lucrative corporate
market. One consequence of price discrimination by monopolists,
especially intellectual monopolists, is that they artificially degrade
their products in certain markets so as not to compete with other
more lucrative markets.
–
In recent years there have been innovative efforts to extend
the use of patents to block competitors. For example we find
A federal trade agency might impose $13 million in
sanctions against a New Jersey company that rebuilds used
disposable cameras made by the Fuji Photo Film Company
and sells them without brand names at a discount. Fuji said
yesterday that the International Trade Commission found
that the Jazz photo Corporation infringed Fuji’s patent
rights by taking used Fuji cameras and refurbishing them
for resale. The agency said Jazz sold more that 25 million
cameras since August 2001 in violation of a 1999 order to
stop and will consider sanctions. Fuji, based in Tokyo, has
been fighting makers of rebuilt cameras for seven years.
Jazz takes used shells of disposable cameras, puts in new
film and batteries and then sells them. Jazz’s founder, Jack
Benun, said the company would appeal. “It’s unbelievable
that the recycling of two plastic pieces developed into such
a long case.” Mr. Benun said. ‘There’s a benefit to the
customer. The prices have come down over the years. And
recycling is a good program. Our friends at Fuji do not like
it.20
Sigh.
–
One annoying thing about this book is that it uses the annoying and misleading loaded terms that IP maximalists use. I.e. “steal an idea” instead of “copy an idea” etc.
–
Another astounding example of American intellectual imperialism
is in – not so surprising – Iraq
The American Administrator of [Iraq] Paul Bremer,
updated Iraq’s intellectual property law to ‘meet current
internationally-recognized standards of protection.’ The
updated law makes saving seeds for next year’s harvest,
practiced by 97% of Iraqi farmers in 2002, the standard
farming practice for thousands of years across human
civilizations, newly illegal. Instead, farmers will have to
obtain a yearly license for genetically modified seeds from
American corporations. These GM seeds have typically
been modified from IP developed over thousands of
generations by indigenous farmers like the Iraqis, shared
freely like agricultural ‘open source.’ Other IP provisions
for technology in the law further integrate Iraq into the
American IP economy.24
Fucking derp.
–
The private sector has no monopoly on inadequacy.
Government bureaucrats are notorious for their inefficiency. The
U.S. Patent office is no exception. Their questionable competence
increases the cost of getting patents, but this is a small effect, and,
perhaps a good thing, rather than bad. They also issue many
patents of dubious merit. Since the legal presumption is that a
patent is legitimate unless proven otherwise, there is a substantial
legal advantage to the patent holder, who may use it for blackmail,
or other purposes. Moreover, while some bad patents may be
turned down, an obvious strategy is simply to file a great many bad
patents in hopes that a few will get through. Here is a sampling of
some of the ideas the US Patent office thought worthy of patenting
in recent years.41
# U.S. Patent 6,080,436: toasting bread in a toaster operating
beween 2500 and 4500 degrees.
# U.S. Patent 6,004,596: the sealed crustless peanut butter and
jelly sandwich.
# U.S. Patent 5,616,089: a “putting method in which the golfer
controls the speed of the putt and the direction of the putt
primarily with the golfer’s dominant throwing hand, yet uses
the golfer’s nondominant hand to maintain the blade of the
putter stable.”
# U.S. Patent 6,368,227: “A method of swing on a swing is
disclosed, in which a user positioned on a standard swing
suspended by two chains from a substantially horizontal tree
branch induces side to side motion by pulling alternately on
one chain and then the other.”
# U.S. Patent 6,219,045, from the press release by Worlds.com:
“[The patent was awarded] for its scalable 3D server
technology … [by] the United States Patent Office. The
Company believes the patent may apply to currently, in use,
multi-user games, e-Commerce, web design, advertising and
entertainment areas of the Internet.” This is a refreshing
admission that instead of inventing something new,
Worlds.com simply patented something already widely used.
# U.S. Patent 6,025,810: “The present invention takes a
transmission of energy, and instead of sending it through
normal time and space, it pokes a small hole into another
dimension, thus, sending the energy through a place which
allows transmission of energy to exceed the speed of light.”
The mirror image of patenting stuff already in use: patent stuff
that can’t possibly work.
I had thought of the same shotgun style idea.
–
That monopoly is generally bad for society is well
accepted. It is not surprising that the same should be true of
intellectual monopoly: the evidence presented here is no more than
the tip of the iceberg. Many other inefficiencies, bad business
practices, technological regressions, etc. are documented daily by
the press. These are a consequence of the especially strong form of
monopoly power that current IP legislation bestows upon patent
and copyright holders. We insist on documenting and discussing a
subset of these facts for the simple reason that we have become so
accustomed to them that we inclined to take them for granted. Yet
these inefficiencies are not natural – they are manmade, and we
need not choose to tolerate them. We argue in later chapters that
neither patents nor copyright succeed in fostering innovation and
creativity. So we must ask: what is the point of keeping institutions
that provide so little good while inflicting so much harm?
–
Examples of individual creativity abound. An astounding
example of the impact of copyright law on individual creativity is
the story of Tarnation.120
Tarnation, a powerful autobiographical documentary by
director Jonathan Caouette, has been one of the surprise
hits of the Cannes Film Festival – despite costing just $218
(£124) to make. After Tarnation screened for the second
time in Cannes, Caouette – its director, editor and main
character – stood up. […] A Texan child whose mother was
in shock therapy, Caouette, 31, was abused in foster care
and saw his mother’s condition worsen as a result of her
“treatment.” He began filming himself and his family aged
11, and created movie fantasies as an escape. For
Tarnation, he has spliced his home movie footage together
to create a moving and uncomfortable self-portrait. And
using a home computer with basic editing software,
Caouette did it all for a fraction of the price of a
Hollywood blockbuster like Troy. […] As for the budget,
which has attracted as much attention as the subject
matter, Caouette said he had added up how much he spent
on video tapes – plus a set of angel wings – over the years.
But the total spent will rise to about $400,000 (£230,000),
he said, once rights for music and video clips he used to
illustrate a mood or era have been paid for.9
Yes, you read this right. If he did not have to pay the copyright
royalties for the short clips he used, Caouette’s movie would have
cost a thousand times less.
–
The most disturbing feature of the DMCA is section 1201,
the anti-circumvention provision. This makes it a criminal offense
to reverse engineer or decrypt copyrighted material, or to distribute
tools that make it possible to do so. On July 27, 2001, Russian
cryptographer Dmitri Sklyarov had the dubious honor of being the
first person imprisoned under the DMCA. Arrested while giving a
seminar publicizing cryptographical weaknesses in Adobe’s
Acrobat Ebook format, Sklyarov was eventually acquitted on
December 17, 2002.
The DMCA has had a chilling effect on both freedom of
speech, and on cryptographical research. The Electronic Frontier
Foundation (EFF) reports on the case of Edward Felten and his
Princeton team of researchers
In September 2000, a multi-industry group known as the
Secure Digital Music Initiative (SDMI) issued a public
challenge encouraging skilled technologists to try to defeat
certain watermarking technologies intended to protect
digital music. Princeton Professor Edward Felten and a
team of researchers at Princeton, Rice, and Xerox took up
the challenge and succeeded in removing the watermarks.
When the team tried to present their results at an academic
conference, however, SDMI representatives threatened the
researchers with liability under the DMCA. The threat
letter was also delivered to the researchers employers and
the conference organizers. After extensive discussions with
counsel, the researchers grudgingly withdrew their paper
from the conference. The threat was ultimately withdrawn
and a portion of the research was published at a
subsequent conference, but only after the researchers filed
a lawsuit.
After enduring this experience, at least one of the
researchers involved has decided to forgo further research
efforts in this field.13
Disgusting!
–
The DMCA is not just a threat to economic prosperity and
creativity, it is also a threat to our freedom. The best illustration is
the recent case of Diebold, which makes computerized voting
machines now used in various local, state and national elections.
Unfortunately, it appears from internal corporate documents that
these machines are highly insecure and may easily be hacked.
Those documents were leaked, and posted at various sites on the
Internet. Rather than acknowledge or fix the security problem,
Diebold elected to send “takedown” notices in an effort to have the
embarrassing “copyrighted” material removed from the Internet.
Something more central to political discourse than the
susceptibility of voting machines to fraud is hard to imagine. To
allow this speech to be repressed in the name of “copyright” is
frightening.
Perhaps this sounds cliched and exaggerated – a kind of
“leftist college kids” over-reactive propaganda. In keeping with
this tone here is a college story about the leaked documents, and
how the Diebold and the DMCA helped to teach our future
generations about the first amendment.
Last fall, a group of civic-minded students at Swarthmore
[… came] into possession of some 15,000 e-mail messages
and memos – presumably leaked or stolen – from Diebold
Election Systems, the largest maker of electronic voting
machines in the country. The memos featured Diebold
employees’ candid discussion of flaws in the company’s
software and warnings that the computer network was
poorly protected from hackers. In light of the chaotic 2000
presidential election, the Swarthmore students decided that
this information shouldn’t be kept from the public. Like
aspiring Daniel Ellsbergs with their would-be Pentagon
Papers, they posted the files on the Internet, declaring the
act a form of electronic whistle-blowing. Unfortunately for
the students, their actions ran afoul of the 1998 Digital
Millennium Copyright Act (D.M.C.A.), […] Under the law,
if an aggrieved party (Diebold, say) threatens to sue an
Internet service provider over the content of a subscriber’s
Web site, the provider can avoid liability simply by
removing the offending material. Since the mere threat of a
lawsuit is usually enough to scare most providers into
submission, the law effectively gives private parties veto
power over much of the information published online — as
the Swarthmore students would soon learn.
Not long after the students posted the memos, Diebold sent
letters to Swarthmore charging the students with copyright
infringement and demanding that the material be removed
from the students’ Web page, which was hosted on the
college’s server. Swarthmore complied. […]19
The story did not end there, nor did it end too badly. The
controversy went on for a while. The Swarthmore students held
their ground and bravely fought against both Diebold and
Swarthmore. They managed to create enough negative publicity
for Diebold and for their liberal arts college, that Diebold
eventually had to back down and promise not to sue for copyright
infringement. Eventually the memos went back on the net.
All’s well what ends well? When the wise man points at the
moon, the dumb man looks at the finger.
–
Economists refer to the net benefit to society from an
exchange as “social surplus.” With intellectual property the
innovator collects a share of the social surplus she generates,
without intellectual property the innovator collects a smaller share:
this is the competitive value of an innovation. When such
competitive value is enough to compensate the innovator for the
cost of creation the allocation of resources is efficient, neither too
few nor too many innovations are brought about, and social surplus
is maximized. One can show mathematically that, under a variety
of competitive mechanisms, the private value accruing to an
innovator increases with the social surplus: inventors of better
gadgets make more money. This is true even when the private
value becomes a smaller share of the social surplus as the latter
increases.
Notice that we insist on “a share of the social surplus”, not
the entire surplus. Contrary to what many pundits repeat over and
over, there is nothing terrifying about this: even under intellectual
monopoly innovators receives a less than 100% share of the social
surplus from innovation, the rest going to consumers. Under
competition for those innovations that are produced both
consumers and imitators receive a portion of the social surplus an
innovation generates, and such portion is strictly larger than in the
previous case. These pundits use the jargon “uncompensated
spillovers” to refer to the social surplus accruing to those besides
the original innovator. There is nothing wrong with such
spillovers, however. That competitive markets do allow for social
surplus to accrue to people other than producers is, indeed, one of
their most valuable features, at least from a social perspective; it is
what makes capitalism a good system also for the not-so-
successful among us. The goal of economic efficiency is not that of
making monopolists as rich as possible, in fact: it is almost the
opposite. The goal of economic efficiency is that of making us all
as well off as possible. To accomplish this producers must be
compensated for their costs, thereby providing them with the
economic incentive of doing what they are best at doing. But they
do not need to be compensated more than this. If, by selling her
original copy of the idea in a competitive market and thereby
establishing the root of the tree from which copies will come, the
innovator earns her opportunity cost, that is: she earns as much or
more than she could have earned while doing the second best thing
she knows how to do, then efficient innovation is achieved, and we
should all be happy.
This no copyright at all is interesting. Notice how it instantly solves all problems with sampling. Under a for profit copyright only, sampling is difficult to deal with.
–
Consider the problem of automobiles and air pollution.
When I drive my car, I do not have to pay you for the harm the
poison in my exhaust does to your health. So naturally, people
drive more than is socially desirable and there is too much air
pollution. Economists refer to this as a negative externality, and we
all agree it is a problem. Even conservative economists usually
agree that government intervention of some sort is required.
We propose the following solution to the problem of
automobile pollution: the government should grant us the exclusive
right to sell automobiles. Naturally, as a monopolist, we will insist
on charging a high price for automobiles, fewer automobiles will
be sold, there will be less driving, and so less pollution. The fact
that this will make us unspeakably rich is of course beside the
point; the sole purpose of this policy is to reduce air pollution. This
is of course all logically correct – but so far we don’t think anyone
has had the chutzpah to suggest that this is a good solution to the
problem of air pollution.
If someone were to make a serious suggestion along these
lines, we would simply point out that this “solution” has actually
been tried. In Eastern Europe, under the old communist
governments, each country did in fact have a government
monopoly over the production of automobiles. As the theory
predicts, this did indeed result in expensive automobiles, fewer
automobiles sold, and less driving. It is not so clear, however, that
it actually resulted in less pollution. Sadly, the automobiles
produced by the Eastern European monopolists were of such
miserably bad quality that for each mile they were driven they
created vastly more pollution than the automobiles driven in the
competitive West. And, despite their absolute power, the
monopolies of Eastern Europe managed to produce a lot more
pollution per capita than the West.
Arguments in favor of intellectual monopoly often have a
similar flavor. They may be logically correct, but they tend to defy
common sense. Ed Felten suggests applying what he calls the
“pizzaright” test. The pizzaright is the exclusive right to sell pizza
and makes it illegal to make or serve pizza without a license from
the pizzaright owner.1 We all recognize, of course, that this would
be a foolhardy policy and that we should allow the market to
decide who can make and sell pizza. The pizzaright test says that
when evaluating an argument in favor of intellectual monopoly, if
your argument serves equally well as an argument for a pizzaright,
then your argument is defective – it proves too much. Whatever
your argument is, it had better not apply to pizza.
Heh
–
While replacing secrecy with legal monopoly may have
some impact on the direction of innovation, there is little reason to
believe that it actually succeeds in making important secrets public
and easily accessible to other innovators. For most innovations, it
is the details that matter, not the rather vague descriptions required
in patent applications. Take for example, the controversial Amazon
one-click patent, U.S. Patent 5,960,411. The actual idea is rather
trivial, and there are a variety of ways in which one-click purchase
can be implemented by computer, any one of which can be coded
by a competent programmer given a modest investment of time
and effort. For the record, here is the detailed description of the
invention from the patent application:
The present invention provides a method and system for
single-action ordering of items in a client/server
environment. The single-action ordering system of the
present invention reduces the number of purchaser
interactions needed to place an order and reduces the
amount of sensitive information that is transmitted between
a client system and a server system. In one embodiment, the
server system assigns a unique client identifier to each
client system. The server system also stores purchaser-
specific order information for various potential purchasers.
The purchaser-specific order information may have been
collected from a previous order placed by the purchaser.
The server system maps each client identifier to a
purchaser that may use that client system to place an order.
The server system may map the client identifiers to the
purchaser who last placed an order using that client
system. When a purchaser wants to place an order, the
purchaser uses a client system to send the request for
information describing the item to be ordered along with its
client identifier. The server system determines whether the
client identifier for that client system is mapped to a
purchaser. If so mapped, the server system determines
whether single-action ordering is enabled for that
purchaser at that client system. If enabled, the server
system sends the requested information (e.g., via a Web
page) to the client computer system along with an
indication of the single action to perform to place the order
for the item. When single-action ordering is enabled, the
purchaser need only perform a single action (e.g., click a
mouse button) to order the item. When the purchaser
performs that single action, the client system notifies the
server system. The server system then completes the order
by adding the purchaser-specific order information for the
purchaser that is mapped to that client identifier to the item
order information (e.g., product identifier and quantity).
Thus, once the description of an item is displayed, the
purchaser need only take a single action to place the order
to purchase that item. Also, since the client identifier
identifies purchaser-specific order information already
stored at the server system, there is no need for such
sensitive information to be transmitted via the Internet or
other communications medium.28
As can be seen, the “secret” that is revealed is, if anything, less
informative than the simple observation that the purchaser buys
something by means of a single click. Information that might
actually be of use to a computer programmer – for example the
source code to the specific implementation used by Amazon – is
not provided as part of the patent, nor is it required to be. In fact,
the actual implementation of the one-click procedure consists of a
complicated system of subcomponents and modules requiring a
substantial amount of human capital and of specialized working
time to be assembled. The generic idea revealed in the patent is
easy to understand and “copy,” but of no practical value
whatsoever. The useful ideas are neither revealed in the patent nor
easy to imitate without reinventing them from scrap, which is what
lots of other people beside Amazon’s direct competitors (books are
not the only thing sold on the web, after all) would have done to
everybody’s else benefit, had the U.S. Patent 5,960,411 not
prevented them from actually doing so. Certainly it is hard to argue
that the social cost of giving Amazon a monopoly over purchasing
by clicking a single button is somehow offset by the social benefit
of the information revealed in the patent application.
–
What we have argued so far may not sound altogether
incredible to the alert observer of the economics of innovation.
Theory aside, what have we shown, after all? That thriving
innovation has been and still is commonplace in the absence of
intellectual monopoly and that intellectual monopoly leads to
substantial and well-documented reductions in economic freedom
and general prosperity. However, while expounding the theory of
competitive innovation, we also recognized that under perfect
competition some socially desirable innovations will not be
produced because the indivisibility involved with introducing the
first copy or implementation of the new idea is too large, relative
to the size of the underlying market. When this is the case,
monopoly power may generate the necessary incentive for the
putative innovator to introduce socially valuable goods. And the
value for society of these goods could dwarf the social losses we
have documented. In fact, were standard theory correct so that
most innovators gave up innovating in a world without intellectual
property, the gains from patents and copyright would certainly
dwarf those losses. Alas, as we noted, standard theory is not even
internally coherent, and its predictions are flatly violated by the
facts reported in chapters 2 and 3.
Nevertheless, when in the previous chapter we argued
against all kinds of theoretical reasons brought forward to justify
intellectual monopoly on “scientific grounds”, we carefully
avoided stating that it is never the case the fixed cost of innovation
is too large to be paid for by competitive rents. We did not argue it
as a matter of theory because, as a matter of theory, fixed costs can
be so large to prevent almost anything from being invented. So, by
our own admission, it is a theoretical possibility that intellectual
monopoly could, at the end of the day, be better than competition.
But does intellectual monopoly actually lead to greater innovation
than competition?
From a theoretical point of view the answer is murky. In
the long-run, intellectual monopoly provides increased revenues to
those that innovate, but also makes innovation more costly.
Innovations generally build on existing innovations. While each
individual innovator may earn more revenue from innovating if he
has an intellectual monopoly, he also faces a higher cost of
innovating: he must pay off all those other monopolists owning
rights to existing innovations. Indeed, in the extreme case when
each new innovation requires the use of lots of previous ideas, the
presence of intellectual monopoly may bring innovation to a
screeching halt.1
Difficult indeed to say on theoretical grounds alone. Only empirical data can show.
–
On the problem of measuring innovation.
One important difficulty is in determining the level of
innovative activity. One measure is the number of patents, of
course, but this is meaningless in a country that has no patents, or
when patent laws change. Petra Moser gets around this problem by
examining the catalogs of innovations from 19th century World
Fairs. Of the catalogued innovations, some are patented, some are
not, some are from countries with patent systems, and some are
from countries without. Moser catalogues over 30,000 innovations
from a variety of industries.
Mid-nineteenth century Switzerland [a country without
patents], for example, had the second highest number of
exhibits per capita among all countries that visited the Crystal
Palace Exhibition. Moreover, exhibits from countries without
patent laws received disproportionate shares of medals for
outstanding innovations.7
Moser does, however, find a significant impact of patent law on
the direction of innovation
The analysis of exhibition data suggests that patent laws may
be an important factor in determining the direction of
innovative activity. Exhibition data show that countries without
patents share an exceptionally strong focus on innovations in
two industries: scientific instruments and food processing. At
the Crystal Palace, every fourth exhibit from a country without
patent laws is a scientific instrument, while no more than one
seventh of other countries innovations belong to this category.
At the same time, the patentless countries have significantly
smaller shares of innovation in machinery, especially in
machinery for manufacturing and agricultural machinery.
After the Netherlands abolished her patent system in 1869 for
political reasons, the share of Dutch innovations that were
devoted to food processing increased from 11 to 37 percent.8
Moser then goes on to say that
Nineteenth-century sources report that secrecy was
particularly effective at protecting innovations in scientific
instruments and in food processing. On the other hand,
patenting was essential to protect and motivate innovations in
machinery, especially for large-scale manufacturing.9
Evidence that secrecy was important for scientific instruments
and food processing is provided, but no evidence is given that
patenting was actually essential to protect and motivate
innovations in machinery. Notice that in an environment in which
some countries provide patent protection, and others do not, bias
caused by the existence of patent laws will be exaggerated.
Countries with patent laws will tend to specialize in innovations
for which secrecy is difficult, while those without will tend to
specialize in innovations for which secrecy is easy. This means
that variations of patent protection would have different effects in
different countries.
It is interesting also that patent laws may reflect the state of
industry and innovation in a country
Anecdotal evidence for the late nineteenth and for the twentieth
century suggests that a country’s choice of patent laws was
often influenced by the nature of her technologies. In the
1880s, for example, two of Switzerland’s most important
industries chemicals and textiles were strongly opposed to the
introduction of a patent system, as it would restrict their use of
processes developed abroad.10
The 19th century type of innovation – small process innovations
– are of the type for which patents may be most socially beneficial.
Despite this and the careful study of economic historians, it is
difficult to conclude that patents played an important role in
increasing the rate of 19th and early 20th century innovation.
More recent work by Moser,11 exploiting the same data set
from two different angles, strengthens this finding – that is, that
patents did not increase the level of innovation. In her words:
“Comparisons between Britain and the United States suggest that
even the most fundamental differences in patent laws failed to raise
the proportion of patented innovations.”12 Her work appears to
confirm two of the stylized facts we have often repeated in this
book. First that, as we just mentioned in discussing the work of
Sokoloff, Lamoreaux and Khan, innovations that are patented tend
to be traded more than those that are not, and therefore to disperse
geographically farther away from the original area of invention.
Based on data for the period 1841-1901, innovation for industries
in which patents are widely used is not higher but more dispersed
geographically than innovation in industries in which patents are
not or scarcely used. Second, when the “defensive patenting”
motive is absent, as it was in 1851, an extremely small percentage
of inventors (less than one in five) chooses patents as a method for
maximizing revenues and protect intellectual property.
Summing up: careful statistical analyses of the 19th century’s
available data, carried out by distinguished economic historians,
uniformly shows two things. Patents neither increase the rate of
innovation, nor are the best instrument to maximizes inventors’
revenue. Patents create a market in patents and in the legal and
technical services required to trade and enforce them.
Very interesting data.
–
Quoting this for linguistic reasons…
Nevertheless, the core idea of a unified European patent
system was not abandoned and continued to be pursued in various
forms, first under the leadership of the European Commission, and
then under the European Union. In 2000 a Community Patent
Regulation proposal was approved, which was considered a major
step toward the final establishment of a European Patent. Things,
nevertheless, did not proceed as expeditiously as the supporters of
a E.U. Patent had expected. As of 2007 the project is still, in the
words of E.U. Commissioner Charlie McCreevy, “stuck in the
mud”13 and far from being finalized. Interestingly the obstacles are
neither technical nor due to a particularly strong political
opposition to the establishment of a continent-wide form of
intellectual monopoly. The obstacles are purely due to rent-seeking
by interest groups in the various countries involved, the number of
which notoriously keeps growing. Current intellectual monopolists
(and their national lawyers) would rather remain monopolists
(legal specialists) for a bit longer in their own smaller markets than
risk the chance of loosing everything to a more powerful
monopolist (or to a foreign firm with more skilled lawyers) in the
bigger continental market.
That feel when reading academic books in revised editions… and they still fail to do lose vs. loose distinction. Useless distinction. At least, they chose the most sensible spelling. The spelling loose still has a pointless and silent e in the end.
–
It could be, and sometimes is, argued that the modern
pharmaceutical industry is substantially different from the
chemical industry of the last century. In particular, it is argued that
the most significant cost of developing new drugs lies in testing
numerous compounds to see which ones work. Insofar as this is
true, it would seem that the development of new drugs is not so
dependent on the usage and knowledge of old drugs. However, this
is not the case according to the chief scientific officer at Bristol
Myers Squib, Peter Ringrose, who
told The New York Times that there were ‘more than 50
proteins possibly involved in cancer that the company was
not working on because the patent holders either would not
allow it or were demanding unreasonable royalties.18
Truth-telling remarks by pharmaceutical executives aside,
there is a deeper reason why the pharmaceutical industry of the
future will be more and more characterized by complex innovation
chains: biotechnology. As of 2004, already more than half of the
research projects carried out in the pharmaceutical industry had
some biomedical foundation. In biomedical research gene
fragments are, in more than a metaphorical sense, the initial link of
any valuable innovation chain. Successful innovation chains depart
from, and then combine, very many gene fragments, and cannot do
without at least some of them. As gene fragments are in finite
number, patenting them is equivalent to artificially fabricating
what scientists in this area have labeled an “anticommons”
problem. So it seems that the impact of patent law in either
promoting or inhibiting research remains, even in the modern
pharmaceutical industry.19
–
A few additional facts may help the reader get a better
understanding of why, at the end, we reach the conclusion we do.
Sales are growing, fast; at about 12% a year for most of the 1990s,
and still now at around 8% a year; R&D expenditure during the
same period has been rising of only 6%. A company such as
Novartis (a big R&D player, relative to industry’s averages) spends
about 33% of sales on promotion, and 19% on R&D. The industry
average for R&D/sales seems to be around 16-17%, while
according to the CBO [1998] report the same percentage was
approximately 18% for American pharmaceuticals in 1994;
according to PhRMA [2007] it was 19% in 2006. The point here is
not that the pharmaceutical companies are spending “too little” in
R&D – no one has managed (and we doubt anyone could manage)
to calculate what the socially optimal amount of pharmaceutical
R&D is. The point here is that the top 30 firms spend about twice
as much in promotion and advertising as they do in R&D; and the
top 30 are where private R&D expenditure is carried out, in the
industry.
Next we note that no more than 1/3 – more likely 1/4 – of
new drug approvals are considered by the FDA to have therapeutic
benefit over existing treatments, implying that, under the most
generous hypotheses, only 25-30% of the total R&D expenditure
goes toward new drugs. The rest, as we will see better in a
moment, goes toward the so called “me-too” drugs. Related to this,
is the more and more obvious fact that the amount of price
discrimination carried out by the top 30 firms between North
America, Europe and Japan is dramatically increasing, with price
ratios for identical drugs reaching values as high as two or three.
The designated victims, in this particular scheme, are apparently
the U.S. consumers and, to a lesser extent, the Northern European
and the Swiss. At the same time, operating margins in the
pharmaceutical industry run at about 25% against 15% or less for
other consumer goods, with peaks, for US market-based firms, as
high as 35%. The U.S. pharmaceutical industry has been topping
the list of the most profitable sectors in the U.S. economy for
almost two decades, never dropping below third place; an
accomplishment unmatched by any other manufacturing sector.
Price discrimination, made possible by monopoly power, does
have its rewards.
Summing up and moving forward, here are the symptoms
of the malaise we should investigate further.
• There is innovation, but not as much as one might think
there is, given what we spend.
• Pharmaceutical innovation seems to cost a lot and
marketing new drugs even more, which makes the final
price for consumers very high and increasing.
• Some consumers are hurt more than others, even after the
worldwide extension of patent protection.
Very interesting data. Perhaps some kind of government sponsorship cud do better?
–
Where do Useful Drugs Come From?
Useful new drugs seem to come in a growing percentage
from small firms, startups and university laboratories. But this is
not an indictment of the patent system as, probably, such small
firms and university labs would have not put in all the effort they
did without the prospect of a patent to be sold to a big
pharmaceutical company.
Next there is the not so small detail that most of those
university laboratories are actually financed by public money,
mostly federal money flowing through the NIH. The
pharmaceutical industry is much less essential to medical research
than their lobbyists might have you believe. In 1995, according to
a study by two well reputed University of Chicago economists, the
U.S. spent about $25 billion on biomedical research. About $11.5
billion came from the Federal government, with another $3.6
billion of academic research not funded by the feds. Industry spent
about $10 billion.26 However, industry R&D is eligible for a tax
credit of about 20%, so the government also picked up about $2
billion of the cost of “industry” research. That was then, but are
things different now? They do not appear to be. According to
industry’s own sources27
, total research expenditure by the industry
was, in 2006, about $57 billion while the NIH budget in the same
year (the largest but by no means the only source of public funding
for biomedical research) reached $28.5 bn. So, it seems, things are
not changing: private industry pays for only about 1/3rd of
biomedical R&D. By way of contrast, outside of the biomedical
area, private industry pays for more than 2/3rds of R&D.
Many infected with HIV can still recall the 1980s when no
effective treatment for AIDS was available, and being HIV
positive was a slow death sentence. Not unnaturally many of these
individuals are grateful to the pharmaceutical industry for bringing
to market drugs that – if they do not eliminate HIV – make life
livable.
the “evil” pharmaceutical companies are, in fact, among
the most beneficent organizations in the history of mankind
and their research in the last couple of decades will one
day be recognized as the revolution it truly is. Yes, they’re
motivated by profits. Duh. That’s the genius of capitalism –
to harness human improvement to the always-reliable yoke
of human greed. Long may those companies prosper. I owe
them literally my life.28
But it is wise to remember that the modern “cocktail” that is used
to treat HIV was not invented by a large pharmaceutical company.
It was invented by an academic researcher: Dr. David Ho.
–
The bottom line is rather simple: even today, more than
thirty years after Germany, Italy and Switzerland adopted patents
on drugs and a good half a century after pharmaceutical companies
adopted the policy of patenting anything they could develop, more
than half of the top selling medicines around the world do not owe
their existence to pharmaceutical patents. Are we still so certain
that valuable medicines would stop to be invented if drug patents
were either abolished or drastically curtailed?
This is not particularly original news, though. Older
American readers may remember of the Kefauver Committee of
1961, which investigated monopolistic practices in the
pharmaceutical industry.33 Among the many interesting findings
reported, the study showed that 10 times as many basic drug
inventions were made in countries without product patents as were
made in nations with them. It also found that countries that did
grant product patents had higher prices than those who did not,
again something we seem to be well aware of.
The next question then is, if not in fundamental new
medical discoveries, where does all that pharmaceutical R&D
money go?
Rent-Seeking and Redundancy
There is much evidence of redundant research on
pharmaceuticals. The National Institutes of Health Care
Management reveals that over the period 1989-2000, 54% of FDA-
approved drug applications involved drugs that contained active
ingredients already in the market. Hence, the novelty was in
dosage form, route of administration, or combination with other
ingredients. Of the new drug approvals, 35% were products with
new active ingredients, but only a portion of these drugs were
judged to have sufficient clinical improvements over existing
treatments to be granted priority status. In fact, only 238 out of
1035 drugs approved by the FDA contained new active ingredients
and were given priority ratings on the base of their clinical
performances. In other words, about 77% percent of what the FDA
approves is “redundant” from the strictly medical point of view.34
The New Republic, commenting on these facts, pointedly
continues
If the report doesn’t convince you, just turn on your
television and note which drugs are being marketed most
aggressively. Ads for Celebrex may imply that it will enable
arthritics to jump rope, but the drug actually relieves pain
no better than basic ibuprofen; its principal supposed
benefit is causing fewer ulcers, but the FDA recently
rejected even that claim. Clarinex is a differently packaged
version of Claritin, which is of questionable efficacy in the
first place and is sold over the counter abroad for vastly
less. Promoted as though it must be some sort of elixir, the
ubiquitous “purple pill,” Nexium, is essentially
AstraZeneca’s old heartburn drug Prilosec with a minor
chemical twist that allowed the company to extend its
patent. (Perhaps not coincidentally researchers have found
that purple is a particularly good pill color for inducing
placebo effects.)35
Sad but ironically true, me-too or copycat drugs are largely
the only available tool capable of inducing some kind of
competition in an otherwise monopolized market. Because of
patent protection lasting long enough to make future entry by
generics nearly irrelevant, the limited degree of substitutability and
price competition that copycat drugs bring about is actually
valuable. We are not kidding here, and this is a point that many
commentators often miss in their “anti Big Pharma” crusade.
Given the institutional environment pharmaceutical companies are
currently operating in, me-too drugs are the obvious profit
maximizing tools, and there is nothing wrong with firms
maximizing profits. They also increase the welfare of consumers,
if ever so slightly, by offering more variety of choice and a bit
lower prices. Again, they are an anemic and pathetic version of the
market competition that would take place without patents, but
competition they are. The ironic aspect of me-too drugs, obviously,
is that they are very expensive because of patent protection, and
this cost we have brought upon ourselves for no good reason.
Very interesting. One thing i want to point out, tho, is that it may be worth it to develop drugs that work via a different route or with a slightly different form. Even tho to many people these differences make no difference medically, they can increase comfort by being administered by a difference route. Compare orally taking a pill vs. getting a shot vs. suppositories. It might also be the case that some patients cannot use, for medical reasons, a given route of delivery. In such cases it is medically useful to use another route, ofc. Finally, some patients may be allergic to a drug, and in that case having slightly different form may help.
But in general, i agree with the authors.
–
The Bad
Despite the fact that our system of intellectual property is
badly broken, there are those who seek to break it even further.
The first priority must be to stem the tide of rent-seekers
demanding ever greater privilege. Within the United States and
Europe, there is a continued effort to expand the scope of
innovations subject to patent, to extend the length of copyright, and
to impose ever more draconian penalties for intellectual property
violation. Internationally, the United States – as a net exporter of
ideas – has been negotiating dramatic increases in protection of
U.S. intellectual monopolists as part of free trade agreements; the
recent Central American Free Trade Agreement (CAFTA) is an
outstanding example of this bad practice.
There seems to be no end to the list of bad proposals for
strengthening intellectual monopoly. To give a partial list starting
with the least significant
# Extend the scope of patent to include sports moves and plays.2
# Extend the scope of copyright to include news clips, press
releases and so forth.3
# Allow for patenting of story lines – something the U.S. Patent
Office just did by awarding a patent to Andrew Knight for his
“The Zombie Stare” invention.4
# Extend the level of protection copyright offers to databases,
along the lines of the 1996 E.U. Database Directive, and of the
subsequent WIPO’s Treaty proposal.5
# Extend the scope of copyright and patents to the results of
scientific research, including that financed by public funds;
something already partially achieved with the Bayh-Dole Act.6
# Extend the length of copyright in Europe to match that in the
U.S. – which is most ironic, as the sponsors of the CTEA and
the DMCA in the USA claimed they were necessary to match
… new and longer European copyright terms.7
# Extend the set of circumstances in which “refusal to license” is
allowed and enforced by anti-trust authorities. More generally,
turn around the 1970’s Antitrust Division wisdom that lead to
the so called “Nine No-No’s” to licensing practices. Previous
wisdom correctly saw such practices as anticompetitive
restraints of trade in the licensing business. Persistent and
successful, lobbying from the beneficiaries of intellectual
monopoly has managed to turn the table around, portraying
such monopolistic practices as “necessary” or even “vital”
ingredients for a well functioning patents’ licensing market.8
# Establish, as a relatively recent U.S. Supreme Court ruling in
the case of Verizon vs Trinko did, that legally acquired
monopoly power and its use to charge higher prices is not only
admissible, it “is an important element of the free-market
system” because “it induces innovation and economicgrowth.”9
# Impose legal restrictions on the design of computers forcing
them to “protect” intellectual property.10
# Make producers of software used in P2P exchanges directly
liable for any copyright violation carried out with the use of
their software, something that may well be in the making after
the Supreme Court ruling in the Grokster case.11
# Allow the patenting of computer software in Europe – this we
escaped, momentarily, due to a sudden spark of rationality by
the European Parliament.12
# Allow the patenting of any kind of plant variety outside of the
United States, where it is already allowed.13
# Allow for generalized patenting of genomic products outside of
the United States, where it is already allowed.14
# Force other countries, especially developing countries, to
impose the same draconian intellectual property laws as the
U.S., the E.U. and Japan.15
–
Pharmaceuticals
Handling properly the pharmaceutical industry constitutes
the litmus test for the reform process we are advocating. Simple
abolition, or even a progressive scaling down of patent term, would
not work in this sector for the reasons outlined earlier. Reforming
the system of intellectual property in the pharmaceutical industry is
a daunting task that involves multiple dimensions of government
intervention and regulation of the medical sector. While we are
perfectly aware that knowledgeable readers and practitioners of the
pharmaceutical and medical industry will probably find the
statements that follow utterly simplistic, when not arrogantly
preposterous, we will try nevertheless. In sequential order, here is
our list of desiderata.
• Free the pharmaceutical industry of the stage II and III
clinical trials’ costs, which are the cost-intensive ones.
Have them financed by the NIH, on a competitive basis:
pharmaceutical companies that have completed stage I
trials, submit applications to the NIH for having stages II
and III financed. In parallel, medical clinics and university
hospitals submit competitive bids to the NIH to have the
approved trials assigned to them. Match the winning drugs
to the best bids, and use public choice common sense to
minimize the most obvious risks of capture. Clinical trial
results become public goods and are available, possibly for
a fee covering administrative and maintenance costs, to all
that request them. This would not prevent drug companies
from deciding that, for whatever reason, they carry out their
clinical trials privately and pay for them; that is their
choice. Nevertheless, allowing the public financing of
stages II and III of clinical trials – by far the largest
component of the private fixed cost associated with the
development of new drugs – would remove the biggest
(nay, the only) rationale for allowing drugs’ patents longer
than a handful of years.
• Begin reducing the term of pharmaceutical patents
proportionally. Should we take pharmaceuticals’ claims at
their face value, our reform eliminates between 70% and
80% of the private fixed cost. Hence, patent length should
be lowered to 4 years, instead of the current 20, without
extension. Recall that, again according to the industry,
effective patent terms are currently around 12 years from
the first day the drug is commercialized, hence we are
proposing to cut them down by 2/3, which is less than the
proportional cost reduction. To compensate for the fact that
NIH-related inefficiencies may slow down the clinical trial
process, start patent terms from the first day in which
commercialization of the drug is authorized. A ten year
transition period would allow enough time to prepare for
the new regulatory environment.
• Sizably reduce the number of drugs that cannot be sold
without medical prescription. For many drugs this is less a
protection of otherwise well informed consumers than a
way of enforcing monopolistic control over doctors’
prescription patterns, and to artificially increase distribution
costs, with rents accruing partly to pharmaceutical
companies and partly to the inefficient local monopolies
called pharmacies.
• Allow for simultaneous or independent discovery, along the
lines of Gallini and Scotchmer.29 Further, because patent
terms should be running from the start of
commercialization, applications should be filed (but not
disclosed) earlier, and mandatory licensing of “idle” or
unused active chemical component and drugs should be
introduced. In other words, make certain the following
monopolistic tactic becomes unfeasible: file a patent
application for entire families of compounds, and then
develop them sequentially over a long period of time,
postponing clinical trials and production of some
compounds until patents on earlier members of the same
family have been fully exploited.
–