Looking Down on the Patent System from the Ivory Tower

Like the dog days of summer stimulating an algae bloom in a stagnant pond, there seems to be a burst of articles asserting that the patent system is harmful to innovation. The tendency is to ignore such attacks, but as we’ve learned to our sorrow unless rebutted theories that patents exploit the public interest can take root in a society where fewer and fewer people know how the products that we all depend upon are created.

Soon after Gene Quinn rebutted a recent article in The Economist attacking the patent system a friend sent me The Case Against Patents by Professors Michele Boldrin and David K. Levine, upon which The Economist based much of its argument. The authors are “Distinguished University Professors of Economics” at Washington University and “Research Fellows” with the Federal Reserve Bank of St. Louis.  Here’s the gist of the paper:

The case against patents can be summarized briefly: there is no empirical evidence that they serve to increase innovation and productivity, unless productivity is identified with the number of patents awarded—which, as evidence shows, has no correlation with measured productivity. This disconnect is at the root of what is called the “patent puzzle”: in spite of the enormous increase in the number of patents and in the strength of their legal protection, the US economy has seen neither a dramatic acceleration in the rate of technological progress nor a major increase in the levels of research and development expenditure.

Both theory and evidence suggest that while patents can have a partial equilibrium effect of improving incentives to invent, the general equilibrium effect on innovation can be negative. The historical and international evidence suggests that while weak patent systems may mildly increase innovation with limited side effects, strong patent systems retard innovation with many negative side effects.

There follows pages of citations from studies “proving” that patents are harmful until we come to the punch line. While Boldrin and Levine believe we should abolish the patent system, they would settle for another approach:

We do believe, along with many of our colleagues, that a patent system designed by impartial and disinterested economists and administered by wise and incorruptible civil servants (emphasis added) could serve to encourage innovation. In such a system, very few patents would ever be awarded: only those for which convincing evidence existed that the fixed costs of innovation were truly very high, the costs of imitation were truly low, and demand for the product was really highly inelastic.

Perhaps Boldrin and Levine have themselves in mind as the kind of “impartial and disinterested economists” needed to run this imperious patent system.

[Joe-Allen]

Not content with “fixing” the patent system, the professors also call for reforming the pharmaceutical industry. One idea is having the National Institutes of Health fund Phase II and III clinical trials as “public goods,” deciding through bidding which companies are allowed to perform them. The winners would be required to sell resulting drugs at “economic cost” since the government is now running the show. They gloss over who would bother to make new drug discoveries knowing that the government would take them away. But not to worry, with “impartial, disinterested, wise and incorruptible” bureaucrats rather than companies in charge of drug development, what could possibly go wrong?

An indication of how innovators would fare in the professor’s system is shown by their dismissal of the Wright brothers as having “made a modest improvement in existing flight technology that they kept secret until they could lock it down on patents, then used their patents both to monopolize the US market and to prevent further innovation for nearly 20 years.” Somehow that description seems to miss something. While it’s true the Wright brothers spent years in patent litigation, shouldn’t we note they were the first humans in history to successfully fly and control—others had flown and crashed– a heavier than air machine?

The story of the development of the airplane underscores a serious flaw in the professor’s theory:

In the period preceding the December 17, 1903 Wright brothers’ triumph at Kitty Hawk, North Carolina, the U.S. government spent $70,000 on a grant to Dr. Samuel Langley to develop a heavier-than-air flying machine. The award of this grant followed standard bureaucratic procedures. Dr. Langley, director of the Smithsonian Institution, was one of the most renowned scientists of the time. When Dr. Langley became interested in investigating flight he was able to marshal tremendous technical and financial resources.

The selection of Langley as the recipient of government funding was technically unassailable. It was the type of decision that a well motivated government bureaucracy would make time and again. The credentials were impressive. The funding was more than adequate. Yet, despite the head start and more lavish budget enjoyed by Dr. Langley, it was the Wrights who succeeded.

On October 7, 1903, the aircraft developed by Dr. Langley’s team was deemed ready for a test flight. The aircraft was to be launched from a catapult on a houseboat in the Potomac River, with Charles Manly serving as pilot. Excitement filled the air as the houseboat reached the launch site. A large crowd gathered, fireworks were set off, and newspapermen jockeyed for position in the hope of witnessing the momentous occasion of man’s first flight.

Hopes were raised and hearts quickened as the aircraft’s engine roared to life. At full throttle the craft was released from restraint and lunged along the catapult track toward launch. A few seconds of glorious acceleration were followed by an unceremonious plunge into the Potomac by the would-be airplane. The pilot and aircraft were salvaged and preparations were made for another flight. On December 8, 1903, with diminished fanfare, another test flight was attempted. Unfortunately the aircraft became entangled in the launching mechanism, was severely damaged, and toppled into the river.

Little more than a week later the Wright brothers successfully flew a heavier-than-air machine. Disappointed at being bested in the effort to develop an airplane, Dr. Langley, in a fashion that has come to characterize the persistent failure of government undertakings, laid much of the blame on “inadequate” Federal funding.

It’s not hard to guess what would happen if the government took over drug development.

You might imagine after turning the patent and drug development systems on their heads that the professors would have exhausted their arsenal of theories, but they also provide guidance for managing government funded research. They recommend a return to the pre Bayh-Dole policy “according to which the results of federally subsidized research cannot lead to patents, but should be available to all market participants. This reform would be particularly useful for encouraging the dissemination of innovation and heightening competition in the pharmaceutical industry.” (emphasis added)

Actually, such nonsense underscores why relying on those with only theoretical expertise for policy advice is so dangerous. It was the utter failure of these practices that led to the enactment of Bayh-Dole. Before the law injected the incentives of patent ownership into government funded R&D, Congress found that not a single drug had been commercialized when the government took away academic inventions, offering them for development under non-exclusive licenses. No company was willing to invest the considerable time and money needed to take a new drug to market without adequate patent protection. And this phenomena wasn’t limited to pharmaceuticals. Less than 5% of the 28,000 patents that government had amassed in its portfolio before Bayh-Dole were ever licensed under the policies the professors would have us restore.

Since Bayh-Dole allowed universities and small companies to own and manage inventions they make under federally-funded R&D more than 153 new drugs and vaccines are now on the market. See The Role of Public-Sector Research in the Discovery of Drugs and Vaccines. Before Bayh-Dole companies were reluctant to have their best and brightest work with their academic counterparts because resulting inventions would be taken by the government. Now industry-academic R&D partnerships are a driving force in our economy. A recent study calculates the contribution of academic patent licensing at $1.18 Trillion to our economy while supporting almost 4 million U.S. jobs.

The Economist Technology Quarterly best summarized what the Bayh-Dole Act accomplished:

Remember the technological malaise that befell America in the late 1970s? Japan was busy snuffing out Pittsburgh’s steel mills, driving Detroit off the road, and beginning its assault on Silicon Valley. Only a decade later, things were very different. Japanese industry was in retreat. An exhausted Soviet empire threw in the towel. Europe sat up and started investing heavily in America. Why the sudden reversal of fortunes? Across America, there had been a flowering of innovation unlike anything seen before.

Possibly the most inspired piece of legislation to be enacted in America over the past half-century was the Bayh-Dole act of 1980… (that) unlocked all the inventions and discoveries that had been made in laboratories throughout the United States with the help of taxpayers’ money. More than anything, this single policy measure helped to reverse America’s precipitous slide into industrial irrelevance. (emphasis added)

There’s a good reason why the Bayh-Dole Act still works like a finely honed machine after 35 years. When crafting it we didn’t go to theorists. Instead, we sought those with actual commercialization experience. With their input, the law relies on the incentives of patent ownership to drive the system. The role of the federal agencies is to fund the research, enforce some simple rules, and get out of the way. Bayh-Dole’s become an internationally recognized best practice for a simple reason: it works.

So what about the value of patents to small companies? The article Don’t believe those who tell you American innovation is losing its way makes an interesting observation:

Josh Wolfe, founding partner of Lux Capital (a venture capital firm), reckons the overall pace of innovation in America hasn’t changed—just that where it happens is shifting. The new model is that small, private firms do the innovation and, if successful, are bought by big public firms…

That has already happened in pharmaceuticals. Big pharma firms do less and less R&D in-house, relying instead on small biotech startups to come up with new potential drugs, and then buying them or licensing their technology. That’s visible in this chart from Jeff Kindler, also of Lux, which shows the growing share of new drugs that originated with small companies:

FDA approvals of “new molecular entities” (i.e. drugs). (Jeff Kindler/Lux Capital)

You can bet the farm that small companies looking to be acquired or expand in the life sciences market protect their discoveries through patenting.

A report by to the U.S. Small Business Administration concludes: “Our earlier reports found that small firms participate extensively in the patent system, they produce large numbers of patents relative to their size, and these patents tend to have very strong quality metrics.”

The report flags the reduction in small business patent filings during the ’07- ’09 recession as a cause for national concern: “Since small firms have been shown to develop high impact technologies, and a higher percentage of green and leading edge technologies, this result has significant policy implications.” This certainly implies that patenting by small entrepreneurial companies is critical to U.S. competitiveness.

US patent applications from innovative firms, by size. (US Small Business Administration)

Thus, the patent system is not a tool for entrenched interests to stifle competition as Professors Boldrin and Levine would have us believe. Patents allow independent inventors and small companies to compete against better funded rivals, who would otherwise simply take away their inventions.

The next time your flight lands safely, you might say a silent thank you to the Wright brothers. They never graduated from high school, yet showed the world how to travel up into the air and come back down again. Our system allowed two mechanics from Dayton, Ohio– who paid for their research out of sales from their bicycle shop– to beat an elite, government funded competitor. Modern equivalents of the Wright brothers still bet everything they own on their patented inventions, despite knowing the odds are stacked against them. The patent system may look a lot more valuable to these entrepreneurs fighting for survival in the marketplace than it does to someone gazing down from the Ivory Tower.

And perhaps one reason our nation is in such distress is that so many policies are based on recommendations from those without any practical experience. Anyway, that’s my theory.