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In Patents We Trust: How the U.S. Government Learned to Stop Worrying about Monopoly and Love Intellectual Property

Today, patents supposedly exist to provide an incentive for new discoveries. Patents had a different purpose at their origin. When the Venetians invented what today we would call intellectual property in the fifteenth century, governments openly treated it as an element of state power.  Workers could enjoy monopolistic privileges only if they continued to strengthen the national economy.  Even so, these inducements proved insufficient to prevent skilled workers from taking their knowledge to other countries in exchange for a more remunerative offer. As Italian craftsmen — particularly glass workers — fanned out across Europe, they expected monopolistic privileges in return for bringing their expertise (Penrose 1951, p. 2).  In effect, then, patents were a bribe for stealing intellectual property from other states.

In the United States, intellectual property rights played a relatively small role until the late 19th century.  Occasionally, courts awarded damages to individual inventors, but the probability was low enough that corporations rationally disregarded the claims of intellectual inventors.

For example, in the early 1870s, in response to the violation of patent rights for braking systems, the federal courts in Illinois twice affixed damages of several hundred dollars per car for each year of service (Usselman 1999, p. 71).  The railroads successfully appealed the judgment.  The Supreme Court ruled in their favor in October 1878 in the Tanner brake case (Railway Co. v. Sayles, 97 US 554).  Not only did the Court support the railroads, it even based its ruling on the arguments that the railroad industry provided.  Justice Joseph P. Bradley confidently wrote, “Like almost all other inventions, that of double brakes came when, in the progress of mechanical improvement, it was needed; and being sought by many minds, it is not wonderful that it was developed in different and independent forms.”  Expressing a philosophy of technical change in which the railroads and others who employed patented technologies could find great comfort, he continued, “[I]f the advance towards the thing desired is gradual, and proceeds step by step, so that no one can claim the complete whole, then each is entitled only to the specific form of device which he produces” (Usselman 1999, pp. 73-74).

The courts were not alone in their lack of support for patents.  Academic economists, who were almost unanimous in supporting laissez-faire, disapproved of patents, which they regarded as unjustified monopolies inconsistent with a free market.

Three factors changed the attitude toward patents.  First, 1873 unleashed a devastating depression.  With the onset of the Depression, economists, as well as the public in general, became less confident that market forces could successfully guide the economy.  At that point, economists began to look upon patents with more favor. Second, corporations at the time were becoming producers as well as consumers of inventive activity by creating their own laboratories.  As a result, they became far more sympathetic to the rights of inventors.  Finally, the Sherman Antitrust Act of 1890 prohibited corporate collusion.  Corporations quickly realized that the creation of patent pools would allow them to circumvent the intention of the law.

Patents still remained a relatively minor part of the economic landscape.  Even so, the government soon had to recognize how patents could stifle economic progress in cutting-edge technologies.  Two cases were especially important because of their military implications.

In the early 20th century, radio was a cutting-edge technology, which actually laid the groundwork for the modern computer revolution.  Nobody at the time ever anticipated the potential of broadcasting entertainment.  Instead, the most vital use of the radio seemed to be point-to-point communication, especially between ships and land-based command centers.  Naturally, the United States Navy took a great interest in this technology.

A diverse group of inventors and corporate interests laid conflicting patent claims to this rapidly evolving technology, so much so that progress was bogging down in drawn-out patent disputes.  The Navy stepped in to resolve the situation by demanding that all the parties pool their patents and give control of them over to a new jointly-owned corporation, the Radio Corporation of America.  In other words, a free-for-all patent system hampered progress, so the Navy gave virtual control of the technology to a small group of corporations.

In the case of the airplane industry, a different problem existed.  The Wright brothers held a single basic patent, which gave them a chokehold over the industry.  Robert Merges and Richard Nelson explained what was at stake:

Other creative people and companies, however, wanted to enter the aircraft design and manufacture business.  They had their own ideas about how to advance the design of aircraft, and they strongly resisted being blocked by the Wright patent.  The early attempts by the Wright brothers and Glen Curtiss, who was the most prominent such potential competitor, to reach an agreement came to naught.  Litigation followed. . . . The situation was so serious that, during World War I, at the insistence of the secretary of the navy, an arrangement was worked out to enable automatic cross-licensing.  (Merges and Nelson 1994, p. 135)

As a result of the government intervention, the industry was able to manufacture a plane in far less time than would otherwise have been required (Clark 1917; Bittlingmayer 1988).  In addition, Merges and Nelson concluded: “There is good reason to believe that the Wright patent significantly held back the pace of aircraft development in the United States by absorbing the energies and diverting the efforts of people” (Merges and Nelson 1994, p. 135).

Just as the depression of the late 19th century led to a strengthening of the patent system, so too did the economic slowdown of the 1970s. In the United States, a longstanding surplus in the balance of trade turned negative.  As manufactured goods poured into the United States in the late 1960s, government leaders agonized about finding ways to increase exports.  Strengthening intellectual property rights seemed to be an ideal strategy for promoting exports from the United States.

The most powerful multinational corporations in the United States took advantage of this climate and energetically lobbied for stronger intellectual property rights (Granstrand 2000, pp. 39 and 53; Ryan 1998).  A valuable journalistic study of the subject described the change in the perception of intellectual property:

[A]s a flood of imports washed away millions of domestic manufacturing jobs, attitudes toward patents and their role in the economic equation began to change.  The interests of industry and labor coalesced in the search for viable weapons in the fight against foreign competition.  The election of Ronald Reagan further shifted the mood toward protection of intellectual property.  The major philosophical argument against patent protection — that it was inherently monopolistic — was no longer politically or, even more to the point, economically correct in an era of increasing trade competition.  The policy of using antitrust laws against companies that refused to license their patent technologies was reversed by the Justice Department.  (Warshofsky 1994, p. 8; see also R. Hunt 1999, p. 19)

Despite this philosophical change, the U.S. government’s first reaction to growing exports was to coerce individual countries to restrain their exports.  In the words of Paul David, an economic historian who specializes in matters concerning science and technology:

[D]uring the 1980s, the U.S. government responded to the concerns of American producers — especially chemical, pharmaceutical, electronic and information technology industries — by trying to reverse the trend of the preceding two decades.  Acting with some encouragement from other industrially advanced countries, the United States pursued a direct, unilateral course of action.  It did not make any major effort to negotiate agreements within the framework of the Paris Convention for the Protection of Industrial Property (patents and trademarks); the Berne Convention for the Protection of Literary and Artistic Works (copyrights) or other international conventions, nor did it offer some quid pro quo to other developing nations that would agree to such conventions.  Instead, by threatening within the context of bilateral trade negotiations to impose sanctions on developing and newly industrialized nations whose retaliatory leverage was quite limited, the United States achieved considerable leverage in convincing foreign governments to acquiesce to its position on the treatment of various forms of intellectual property.  (David 1993, p. 20)

Then, the government reversed course, but not without prodding.  In the words of Edmund J. Pratt, Chairman Emeritus of Pfizer, published on the company Web site:

In 1983, Pfizer joined with other corporations such as Merck, Johnson & Johnson, Bristol-Myers, IBM, Hewlett Packard, General Motors, General Electric, Rockwell International, Du Pont, Monsanto, and Warner Communications to form the Intellectual Property Committee to advocate intellectual property protection. The committee helped convince U.S. officials that we should take a tough stance on intellectual property issues, and that led to trade-related intellectual property rights being included on the GATT agenda when negotiations began in Punta del Este, Uruguay, in 1986.

Then in 1986, six months before the Punta del Este meeting launching the Uruguay Round of the General Agreement on Tariffs and Trade, the chief executive officers of 12 major corporations belonging to the committee met again.  The result was profound:  “The IPC [Intellectual Property Committee], in conjunction with its counterparts in Europe and Japan, crafted a proposal based on existing industrialized country laws and presented its proposals to the GATT Secretariat.  By 1994, the IPC had achieved its goal in the Trade Related Aspects of Intellectual Property (TRIPs) accord of the Uruguay trade round. . . . In effect, twelve corporations made public law for the world” (Sell 1999, pp. 169 and 172).

While this strengthening of intellectual property laws might have provided a short-term respite from economic pressures, it is sure to create a wide range of negative repercussions.  Business interests are already recognizing one of the most obvious problems.  The same sort of expensive litigation that plagued the early radio industry is becoming pervasive.  Multimillion dollar trials are now commonplace.  The mere threat of litigation causes a host of wasteful preventative measures, such as the accumulation of trivial patents, none of which represent any real technological contribution.

At best, the accumulation of patent portfolios might be only a system of defense against unscrupulous litigants.  More likely, these patent portfolios will provide further fuel for suits against others.  At the same time, so-called patent trolls buy up bankrupt companies in order to gain control of obscure patents, knowing that settling a dispute out of court is cheaper than litigation.  The multiplication of patents, together with the threat of litigation, forces people to convert valuable research resources to maneuvering around pre-existing patent claims, no matter whether they are justified or not.

Smaller companies, which tend to be more innovative, are at a serious disadvantage in this environment.  As result, the strengthening of intellectual property rights hobbles the sectors of the economy which should be most vibrant.

The strengthening of intellectual property laws also amplifies the degree of inequality between rich and poor within a country, while holding less developed countries at a substantial disadvantage.  The growing emphasis on patents also distorts the nature of science.  The high rewards for patents create a disincentive to engage in the kind of basic science, which forms the foundation for future scientific development.

As intellectual property rights continue to become more rigid, the negative consequences will continue to multiply.  Science is what I call a meta-public good.  With normal goods, when you consume them you are also preventing me from consuming them — as when you eat a sandwich.  With meta-public goods, the more you use them the more there are for everybody.  The more people engage in science, the more knowledge there will be.  Markets are incapable of managing such activities.

 

Bittlingmayer, George. 1988. “Property Rights, Progress, and the Aircraft Patent Agreement.” Journal of Law and Economics, Vol. 31, No. 1 (April): pp. 227-48.

Clark, John M. 1917. “The Basis of War-Time Collectivism.” American Economic Review, Vol. 7, No. 4 (December): pp. 772-90.

David, Paul A. 1993. “Intellectual Property Institutions and the Panda’s Thumb: Patents, Copyrights, and Trade Secrets in Economic Theory and History.” Mitchel B. Wallerstein, Mary E. Mogee, and Robin A. Schoen, eds. Global Dimensions of Intellectual Property Rights in Science and Technology (Washington, D.C.: National Research Council): pp. 19-62. <http://www.nap.edu/books/0309048338/html/19.html>.

Granstrand, Ove. 2000. The Economics and Management of Intellectual Property: Towards Intellectual Capitalism (Edward Elgar).

Hunt, Robert M. 1999. “Patent Reform: A Mixed Blessing for the U.S. Economy?” Business Review of the Federal Reserve Bank of Philadelphia (November-December): pp. 15-29.

Merges, Robert P. and Richard R. Nelson. 1994. “On Limiting or Encouraging Rivalry in Technical Progress: The Effect of Patent-Scope Decisions.” Journal of Economic Behavior and Organization, Vol. 25, No. 1 (September): pp. 1-24; reprinted in Richard R. Nelson. 1996. The Sources of Economic Growth (Cambridge: Harvard University Press): pp. 120-44.

Penrose, Edith T. 1951. The Economics of the International Patent System (Baltimore: Johns Hopkins University Press).

Ryan, Michael P. 1998. Knowledge Diplomacy: Global Competition and the Politics of Intellectual Property (Washington, D.C.: Brookings Institution Press).

Sell, Susan K. 1999. “Multinational Corporations as Agents of Change: The Globalization of Intellectual Property Rights.” in Private Authority and International Affairs, eds. A. Claire Cutler, Virginia Haufler, and Tony Porter (Albany: State University of New York Press): pp. 169-98.

Usselman, Steven W. 1999. “Patents, Engineering Professionals, and the Pipelines of Innovation: The Internalization of Technical Discovery by Nineteenth Century American Railroads.” in Learning by Doing in Markets, Firms, and Countries, Naomi R. Lamoreaux, Daniel M. G. Raff, and Peter Temin, eds. (Chicago: University of Chicago Press): pp. 64-91.

Warshofsky, Fred. 1994. The Patent Wars: The Battle to Own the World’s Technology (NY: Wiley).


Michael Perelman
Michael Perelman is professor of economics at California State University at Chico, and the author of fifteen books, including Manufacturing Discontent: The Trap of Individualism in Corporate Society, Steal This Idea: Intellectual Property Rights and the Corporate Confiscation of Creativity, and The Perverse Economy: The Impact of Markets on People and the Environment. His forthcoming books include Railroading Economics: The Creation of the Free Market Mythology (Monthly Review Press).


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