Patently wrong: why patents do not encourage innovation

Patents are government enforced monopolies on ideas. They are supposed to reward and encourage innovation by granting innovators exclusive rights to exploit their idea while the patent lasts. At the same time, as patents requires ideas to be publicised, supposedly allowing others to build upon them, the system should advance innovation. The appeal is obvious and the utility of a patent system is generally accepted. Why would you spend resources on R&D if others could just wait for you to finish and then copy your result? The pharmaceutical industry is often highlighted as an example where large research programmes yield products that are cheap to mass produce and easily copied: without patents, the argument goes, investing in pharmaceutical research would be bad business.

It is however puzzling that there seems to exist no evidence to suggest that the massive increase in and strength of patent legislation over the years have coincided with increases in R&D spending or technological progress. So, while the case for patents sounds intuitively reasonable, it is however far from clear that the patent system is in any way beneficial to innovation.

The main reason is that though patents do seem to reward research and the mandatory publication of ideas arguably does promote innovation, by restricting the actual use of new knowledge, cross-fertilisation of ideas is greatly reduced. Building upon someone else’s idea may require paying a license fee or hiring an army of lawyers. Patents law has become a jungle navigated by specialised lawyers, who use the law to protect incumbents from competition. Patents are routinely bought with no other purpose than holding on until someone else comes up with a way of exploiting it, then charging them for the right to do so. Large companies purchase patents as part of an arms race to defend against potential lawsuits from competitors, not because they have any need for the actual technology. Litigation costs has been estimated to have made up 14% of total R&D spending in the 1990s.

Also, while the idea of securing a patent seems alluring, it is not clear that the availability of patenting actually influences the behaviour of innovators. Michele Boldrin and David Levine from the Federal Reserve Bank of St. Louis published a paper in 2012 entitled ‘The Case Against Patents’. In the introduction, it reads: ‘There is no empirical evidence that [patents] serve to increase innovation and productivity, unless the latter is identified with the number of patents awarded – which, as evidence shows, has no correlation with measured productivity.’

Even in pharmaceuticals, empirical evidence shows no support for the benefit of patents. Before the introduction of patent law in Germany in 1967, German drugs companies produced more new drugs than British ones, who enjoyed patent protection at the time. Similarly, Italian drugs producers contributed a larger share of global new medicines before than after patent law was introduced in 1978. And what about costs? Companies protected by patents enjoy enhanced pricing power. A study form 2005 estimated the cost of patents to US health care to be as high as three quarters of the total prescription drugs bill.

There is no case then, that patents are instrumental in promoting research. On the contrary, evidence suggests a patent system may indeed retard innovation. In any case, the system is cumbersome, expensive to maintain and opens up for lobbying and rent-seeking. Government granted monopolies leaves companies free to overcharge for the duration of the patent.

The evidence supports what we already knew: markets work best if left free from intervention from government. The market for research and development is no different.

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