In what can only be characterized as a bizarre, rambling, and intellectually dishonest article, The Economist has inexplicably taken the position that patents are not necessary for innovation. This anti-patent hit piece is full of inaccuracies and outright falsehoods, masquerading as thoughtful commentary on an issue where the authors are quite clearly ignorant.
In an article titled A question of utility, which published on August 8, 2015, the author argues that there is plenty of evidence to suggest that patents are unnecessary and simply do not promote innovation. A lofty claim no doubt, but by the time you finish reading the article you are wondering exactly how any sane, rational person could conclude there is “plenty of evidence” to support the conclusion. If there is so much evidence to support the proposition, then why wasn’t any objective evidence provided in the article?
The article takes the reader on a journey through history, discussing how patents were not necessary for innovation at various times during the 17th, 18th and 19th centuries, as if the world as it existed 150+ years ago offers useful clues for business and innovation today. The complexity of innovation today and the required investment necessary to innovate, as well as the highly speculative nature of innovation, seems lost on the author. It is surprising, and disappointing, that a publication like The Economist would turn a blind-eye to the underlying financial realities of innovation. One would expect the editors of The Economist to have a better sense of the business realities and not pretend that the state of innovation and how it occurred prior to or even during the Industrial Revolution sheds any light on how innovators and investors operate during the Information Age of today.
False Claims About the Industrial Revolution
With respect to the Industrial Revolution, the article makes an assertion that is simply untrue, which should call into question the entire premise of the article. At one point the article makes what the authors characterize as a “knockout argument.” They write: “[M]ost of the wonders of the modern age, from mule-spinning to railways, steamships to gas lamps, seemed to have emerged without the help of patents. If the Industrial Revolution didn’t need them, why have them at all?”
If inventors during the Industrial Revolution did not rely on patents, then perhaps that would be some evidence that patents are not necessary for at least some types of innovation. Unfortunately, the truth is quite different. Not only did inventors turn to the patent system to protect their innovations during the Industrial Revolution, numerous scholars — including a Nobel Laureate — conclude that the existence of the patent system in England provided the predicate for the Industrial Revolution.
First, according to Dr. Mariano Zukerfeld, “patenting trends in England skyrocketed toward the end of the 18th century.” Indeed, patent grants in England started to significantly increase beginning in 1757 and continued to increase throughout the Industrial Revolution. Zukerfeld also concludes that “the English patent system contributed to the industrial revolution by a curious and unintended balance: it encouraged dreams of individual enrichment that were not going to be realized for the vast majority of the inventors.” Therefore, patents worked as they were designed — as an incentive to innovate. Indeed, patents during the Industrial Revolution fostered innovative activity much as they do today.
Moreover, according to Sean Bottomly, author of The British Patent System and the Industrial Revolution, during the eighteenth and nineteenth centuries inventors were able to obtain and enforce patent rights in England with relative ease, thus encouraging them to develop the new technology industrialization required. Bottomly writes:
There are three reasons to suppose that patents did play at least some role during the Industrial Revolution. First, as Mokyr points out, the number of patents awarded in England began to increase in the 1750s and 60s… Second, until patent laws were passed in France and the United States in 1790s, no other country in he world (with the exception of the Venetian Republic) had instituted a functional patent system that inventors chose to use on a regular basis… Third, very few important inventions or inventors of the Industrial Revolution bypassed the patent system entirely.
Indeed, it is perplexing that The Economist would use steam engines as an example where patents played no role. Steam engines are almost always pointed to by most patent critics as a terrible example of the patent system run amok because there were so many patents on the steam engine technology. Furthermore, one of the most common sayings of all time comes as the result of a patented innovation in steam engine technology. As Ray Millien wrote for us several years ago, the saying “the real McCoy” is in tribute to inventor Elijah McCoy. Millien explained:
Elijah McCoy, son of Kentucky runaway slaves, received United States Patent No. 129,843 for an improved steam engine lubricator. This revolutionary invention allowed steam engines and other machinery to be lubricated while still in motion, thereby reducing costly maintenance shut-downs. The lubricator was sold by McCoy, then based in Michigan, under his brand name. Soon, competitors began offering imitations of McCoy’s lubricator. These imitations were inferior, leading many consumers to ask: “Is this the real McCoy?” Today, the expression “the real McCoy” remains ingrained in our lexicon and used when requesting “the real thing,” or wanting to know “the real story.”
The Economist would also do well to consult the seminal work of Nobel Laureate Douglas C. North and Professor Robert Paul Thomas — The Rise of the Western World: A New Economic History. North and Thomas explain that the patent system in England set the stage for the Industrial Revolution. North and Thomas wrote:
It is important to understand the difference between the rate of innovative activity which will occur in the absence of the ability to capture externalities and the rate that will occur if these externalities can be internalized. Innovation could and did occur historically, as we have seen, in a world when no property rights protected the innovator. However, only that kind of innovation occurred in which the costs (or risks of losses) where so small that the private rate of return exceeded them. Any innovation involving substantial costs (or the possibilities of large losses) would not occur until the private rate of return could be increased sufficiently to make the venture worthwhile. To illustrate the point: an improvement in a manufacturing process might occur by accident or by trial and error, but no “research” would be undertaken as long as the benefits from such an improvement were immediately available to all other manufacturers and the costs of research were greater than that manufacturer’s private gains from it. However, the ability to keep the improvement secret or to maintain a monopoly or exclusive patent rights would so increase the potential private profits that much higher research costs could be undertaken and the improvement would occur at an earlier time.
More recently Jay Walker, the founder of Priceline.com and one of the most prolific inventors of this or any other generation, explained in everyday terms the importance of owning rights. “At the end of the day if you do not own the exclusive rights to the problems you are solving you are going to get copied at an astronomical rate,” Walker explained. “If we can’t own the solution to the problem the last thing I want to do is invest in the solution.”
The ridiculous assertion that patents played no role in the Industrial Revolution is symptomatic of a poorly researched and intellectually bankrupt article. If you look closely at the entire article you will find that in addition to getting a great many things wrong, the author, time and time again, undermines the very proposition asserted. For example, the author writes: “It is true that, encouraged by the prospects of patents, pharma companies do a lot more research today than in the 1960s and 1970s.”
Not surprisingly, I agree. Pharmaceutical companies do far more research today than they ever have, which has lead to numerous revolutionary medical breakthroughs. Of course, the fact that pharmaceutical companies are innovating more because of the patent system is an admission that directly contradicts the nonsensical blather of the article foisted on the reader.
The process of developing a drug is incredibly expensive and costs have skyrocketed over the past few decades. According to the Pharmaceutical Research and Manufacturers of America (PhRMA), the cost for developing a single new drug, including money spent on researching unsuccessful drugs which do not pass FDA screening, was $1.2 billion in the early 2000s, up from about $140 million during the 1970s. Estimates released in August 2013 by Forbes indicate that the price of developing a single drug is about $5 billion per medicine accepted by the FDA. Without a patent system no rational actor would ever invest the billions of dollars necessary to take a new drug from laboratory conception to marketplace. Anyone who believes different is just fooling themselves. Without exclusive rights there would be little, if any, new drug development. There can be no serious, intellectually honest discussion that entertains the contrary.
Finally, one of the most ridiculous claims made in the article says, “If you look at things such as the number of inventions presented at international fairs, the evidence suggests that 19th-century countries that lacked patent systems were no less innovative…” Again, it seems utterly ridiculous to draw any conclusion about lack of patenting from the 1800s given the technical sophistication and complexity of innovations today versus those from the 1800s. Putting that aside, however, it is curious that the authors would look all the way back to the 1800s when there is a wealth of information available from the 21st century about those countries without a patent system.
Innovation Around the World
If a weak patent system were the answer you would expect countries that have a weak patent system, or no patent system at all, to have run away innovation. After all, when anyone can copy the innovations of others you would expect to see all kinds of innovation and investment, at least if those claiming patents are unnecessary are correct. What you see, however, is the exact opposite. Each year the Global Innovation Index (GII) ranks the innovation performance of 143 countries and economies around the world, based on 81 indicators. Each year the countries that score best are those that grant strong patent rights. Similarly, each year the countries that make up the bottom of the rankings either have no patent system or they have no real or functioning patent system. In 2014, countries like Sudan, Yemen, Myanmar, Pakistan, Zimbabwe, Ethiopia, Nicaragua, Venezuela, Zambia, and Iran make up the bottom of the list. Countries like Syria, North Korea, and Afghanistan are not even ranked.
Further proof of this comes from how the World Bank classifies countries based on gross national income (GNI) per capita. In 2007, high-income countries had a GNI per capita of over USD $11,456; upper middle income of USD $3,706 – $11,455; lower middle income of USD $936 – $3,705 and low income of USD $935 or less. Where do you suppose you see the most patenting? If patents inhibit economic growth and opportunities, then you would expect to see a higher percent of patents in the low-income economies, but oddly enough that is not what you see. You find that the overwhelming majority of patent activity is in the high-income economies. Indeed, upward of 85% of patent activity is in high-income economies. With that being the case how can anyone logically argue that patents get in the way of economic development?
Furthermore, a 2012 World Bank report explains:
A poorly functioning system to administrate patents and enforce property rights may create a deadweight loss for the economy and make it more likely for countries to be caught in a middle-income trap. Conversely, improved enforcement of property rights enhances innovation and translates into higher wages in the design sector, which would draw more high- ability workers into that sector.
What About Investors
As ridiculous and poorly researched as the claims in the article were, the most astonishing aspect of the nonsense spewed by The Economist is the shockingly short attention that was given to the reality that investors love patents. Indeed, it is difficult for any new business to raise capital. For a technology company without any patents raising capital will become even more challenging than it already is.
On the issue of investment, the article merely says:
The evidence that the current system encourages companies to invest in research in a way that leads to innovation, increased productivity and general prosperity is surprisingly weak. A growing amount of research in recent years, including a 2004 study by America’s National Academy of Sciences, suggests that, with a few exceptions such as medicines, society as a whole might even be better off with no patents than with the mess that is today’s system.
That’s it. While a claim is made that there is “a growing amount of research in recent years,” the only citation is to a single study that is over a decade old. Proving that there is a growing trend logically requires more than a single data point coupled with a self serving and inaccurate conclusion.
If there really is a growing amount of research to support the dubious assertion that patents do not encourage investment why not cite it so everyone can review the literature? Apparently the reader is just supposed to take the word of the author without any proof and in complete disregard for the mountain of evidence to the contrary.
The truth that eludes The Economist is that investors love patents. It is undeniably correct to say that without patents there would be less investment in research and development. For example, in a recent Wall Street Journal op-ed explaining his opposition to patent reform Scott Sandell, managing partner of a fund that manages $10 billion in assets, explains: “Those of us who back startups view enforceable patents as a fundamental requirement for many investments.”
Venture Capital investors that oppose patent reform are not the only ones who recognize the importance of patents. In fact, dozens of investors who support patent reform wrote to Congress earlier this year asking for additional patent litigation reforms while being careful to explain the importance of patents. They wrote: “Many of our companies own patents, and we believe in a robust patent system. We do not want to undermine legitimate enforcement of properly-issued patents by responsible patent owners.” In other words, these investors want help dealing with extortion-like abusive patent litigation but do not want the system to strip their companies of the legitimate and important rights granted by a robust patent system.
Furthermore, a study conducted by IPVision, Inc. several years ago focused on analyzing the intellectual property positions of over 9,000 US venture capital backed technology companies. The study was conducted with the assistance of faculty at the MIT Sloan School of Management, and not surprisingly determined that there is a strong correlation between intellectual property assets, particularly strong patent portfolios, and success. In fact, the IPVision study shows that VC-backed technology “[w]inners are many times more likely to hold intellectual property than losers.”
Similarly, a 2008 study conducted by the University of California at Berkeley Law School found that patents are viewed as essential by investors, finding: that “many potential investors… said that patents were important to their investment decisions.” See Patenting by Entrepreneurs: The Berkeley Patent Survey (Part III of III). In fact, the study revealed that “[o]f companies negotiating with VC firms, 67% report that these firms indicated that patents were an important factor in their investment decisions.” The Study also revealed that the importance of patents was not limited by industry, finding that patents are an important factor with VC firms as follows: “60% for software companies, 73% for biotech, and 85% for medical devices.” The survey of respondents also found “that substantial percentages of other types of investors, such as angels, investment banks, and other companies found patents important to their investment decisions.” So if investors on every level are interested in whether you have a patent portfolio or one in the works, why would you handicap yourself right out of the gate?
It should be self evident that without funds to innovate innovation doesn’t happen. This absolute truism is lost on so many who ideologically carry a deep hatred in their hearts for patents. Still, it is shocking that any rational person would question the real world reality that patents are a critically important driver of investment. That The Economist would question this truth is both appalling and disgraceful. To merely reach an erroneous conclusion without support for the proposition asserted is shameful. For a publication that is allegedly knowledgeable about markets and the economy they know remarkably little about innovation, where it comes from and how it is funded.
Truthfully, The Economist owes its readers a sincere apology for this entire article. Getting something so fundamentally wrong, when it is so easily researched, is astonishing. Getting a factual statement about the Industrial Revolution that was the self-proclaimed center piece of the premise is downright perplexing. People will read the article in The Economist and believe it to be true, when in fact it and the so-called “knockout argument” are a complete and total fabrication. Some could, and probably should, call into question the motivations for building an anti-patent argument upon such a rotten foundation.
For a publication that is supposedly as authoritative as The Economist I would have expected some economic argument or rationale to support the proposition offered. There is a great irony that to get any economic data on the question of whether patents foster innovation you have to come to IPWatchdog.com. Rather than weave a fictitious tale like The Economist, my analysis is based on the work of a Nobel Laureate in Economics, factual data about actual patenting activities in England during the Industrial Revolution, data from the World Bank, innovation rankings published by Cornell University and studies of venture backed technology companies.
The great thing about being honest and telling the truth is you have plenty of support for your position. Sadly, The Economist made bold claims that there was plenty of evidence to support their anti-patent premise and then failed to deliver.