Broken Symmetry

A tabloid for every profession? The democratisation of gossip.

It is commonplace for us to observe that the Internet is changing the face of modern mass media.  One interesting consequence of the granularization of media coverage made possible by declining costs of distribution and marketing is the emergence of tabloid-style gossip rags for relatively small markets.

In the past, newspapers or magazines serving niche markets couldn't afford to be too risque in their news coverage because of the need to appeal to everyone in the niche market in order to maximize circulation and hence advertising revenue.  For example, it would have been unwise for a venture capital newspaper to run stories on the sex trade.  Similarly, it would have been unheard of for a newspaper on events relevant to practicing lawyers to report on the affairs of prominent legal academics.  But we have seen both over the past few months on Valleywag and AboveTheLaw.

In the future, we might expect to see similar developments in nearly every professional or non-professional field in which writers can pander to the prurient interests of readers educated well-enough to know and care about the gossip in a given field or industry.  A gossip page for dentists?  Why not, we already have too many straight-laced dental blogs: see here, here, and here.  What about a gossip blog for pharmacists?  We've already got The Angry Pharmacist,  The Angriest Pharmacist, and  Drugs 'R' Phun!  Even postal workers have their own blog.

Here's another prediction: the common law of defamation, libel, and slander isn't setup for this world.  How are courts going to handle defamation claims that arise from posts on the Internet?

When failure = success? Patents stimulate new ventures.

"If I had a world of my own, everything would be nonsense. Nothing would be what it is because everything would be what it isn't. And contrary-wise; what it is it wouldn't be, and what it wouldn't be, it would. You see?"

- Alice in Wonderland

The PatentlyO posts from Bessen and Meurer are taking a trip to crazy town.  Today, their post on "patent failure" focuses on the impact that the patent system has had on publicly traded companies.  The authors conclude the post with the following remark:

"Third, we find that small publicly traded firms get small positive R&D incentives from patents. This is also very likely to be true for small, non-publicly traded firms and non-profit inventors."

Yet the point of their post is that the patent system has failed to promote R&D.  Since when are large publicly-traded companies the source of innovation in our economy?  I fail to see reasoning to support their conclusion that the patent system fails because (net) it imposes a "tax" on large publicly traded companies.  If I understand them correctly, it seems that their facts and the inferences they themselves draw from those facts and inferences suggest that the patent system is a success.

If a patent "tax" that requires manufacturers to pay inventors for R&D work ends up creating more social value than the tax plus the transactions and administrative costs of maintaining it, then it's what most economists would call a success.  Bessen and Meurer observe that publicly-traded companies are net payers of this tax, while smaller, private companies are net receivers.  Without knowing the magnitude of the payments and receipts on both ends, we can't definitively say that the system is creating social benefits.  But it seems that even Bessen and Meurer are conceding that the system works in the pharmaceutical arena.  What evidence do we have that the same might not be true in the other industries they have studied -- and at a growing rate as transactions and administrative costs decline?

As a society, we should not be concerned that big companies are paying small companies for new technology so long as they're paying a fair price.   And without patents, how would smaller companies convince larger companies to pay for valuable technology that cannot be protected with trade secrets?  Would it be better for the economy if more publicly traded companies simply bought-out smaller R&D-focused companies and then fired the employees who don't have valuable know-how?  Because of the benefits of divisions of labor (and very possibly antitrust issues), I think not.   

Specifically, R&D often requires a very different environment from the one that most publicly-traded companies can provide, both socially and financially.  First, almost by definition most publicly-traded companies have a vested interest in an older technology that provides their revenue stream.  Think of Micrsoft and its OS and productivity software.  They were and are at a disadvantage to Google (which has no legacy products or services) in moving into the online services business.  Second, private companies have the ability to attract young, top-quality engineers and scientists through options compensation, which publicly-traded companies have trouble competing with.  Google has been having this problem in Silicon Valley over the past few years as top-quality engineers are passing on Google for new ventures like VMware.

Patents, Property, and Corporations: a Historical and Economic Reminder

Economists Bessen and Meurer have published a book, Patent Failure, detailing the results of their study of the economic benefits of the patent system.  In their own words, a central theme in the conclusions from their study is that "patents often fail to perform effectively as property rights."  One legitimate answer to this claim is, "So what?  Patents aren't exactly property rights anyway."  But what are patents then?  The purpose of this post is to explain how historically and economically patents can also be analogized to corporations.  Thus, the criticisms that Bessen and Meurer make against the patent system tell only part of the story.

The Ancient History of Patents

Historically, no system for granting patents of invention existed in the United States or probably anywhere in the world (except possibly Venice for about 100 years ending in the 16th century) until 1836.  Prior to that, patents were indeed granted in the United States and elsewhere.  But few of these patents underwent any systematic examination.  Thus, many were in fact patents of importation, i.e., exclusive rights granted to entrepreneurs for introducing a technology pioneered abroad into a domestic market.  The analogy between property rights and patents could only be made after the registration system was replaced by a system of examination, and the public gained access to the record of patents kept at the Patent Office.  The first Superintendent of patents, William Thornton who served before patent reform in 1836, had a nasty habit of refusing to provide copies of issued patents to the public.  In one case he refused to provide a copy of an issued patent to named inventor's own brother!  On Thornton's (now almost incredible) reasoning, this measure was necessary to protect the trade secrets disclosed in the patent applications.

Going back further, to the period from which the term "patent" itself originated, one observes that patents of importation or invention were only one type of a whole array of rights or privileges that the sovereign could grant to subjects in society.  Chartered corporations, such as the 1628 charter for the Massachusetts Bay Company shown, were another form of open letter, or "letters patent" that were issued by the sovereign.  Land grants were also be made by letters patent, as students of the shameful legal history of the colonization of North America know.  On a more positive note, not many citizens today remember or reflect upon how our self-government through a written constitution is related in this way to corporations, and so also (albeit indirectly) to our modern system of patent law.  The first written constitutions were colonial corporate charters.

The Economics of Patents and Corporations

What does all of this ancient history have to do with patents now?  The point is that patents, property, and corporations are entwined in subtle and interesting ways that have not been fully explored.  This should caution us to consider lots of analogies, especially historically motivated analogies.  Historical analogies can bear fruit in our understanding of the public and private costs and benefits of implementing a system of exclusive rights in ideas; but we can't too wedded any one analogy.  What we're doing here in the United States right now is completely new in the history of the world.  It can't hurt to consider the decisions we're making through a variety of lenses.  In particular, the legal analogy between patents and corporations is an under-explored and under-appreciated one in current debates about patent reform.

As I described in an earlier post, some academics (including Prof. Paul Heald from the University of Georgia where Bessen and Meurer will be presenting their work) have begun to uncover the underlying economic mechanisms whereby patents and corporations perform similar roles in the structuring of human and physical capital, respectively.  In a nutshell, one reason that investors form corporations is to shield (or "partition") invested assets from the investors' own creditors.  Similarly, one reason inventors file patents is to partition the ideas they have at one point in time while working for one employer from the stream of ideas that they have had and will have over the course of their productive career. 

This "intangible asset partition" role for patents is not one that comes out immediately through the analogy of patents to property rights.  Yet is a very important one in accounting for the social benefits of the patent system.  There is far less incentive for scientists or researchers to engage in potentially commerically valuable activities when they cannot be sure that they will internalize any benefit from those activities either through employment or part ownership of the profits from their work.  And without the intangible asset partition of patents, trade secret lawsuits and contracts are the only way for inventors (and their prospective employers) to control who internalizes the benefits from inventive work.

Are patents more like property or more like corporations?  Both.  Neither.  Why do you ask?

Nobody puts patents in a corner!

"Many of life's failures are people who did not realize how close they were to success when they gave up."

-Thomas Edison

As regular readers know, the author is well aware of some imperfections in the current patent system in the United States.  In that regard, he was very pleased to read about what looks like some good work done by some economists on the patent system.  In particular, these economists have studied and offered many insights into the ways in which the patent system is not functioning perfectly as a system of property rights.

What may be missing from a backward-looking analysis, however, are some recent changes in the economic landscape.  The biggest of these changes is the Internet.  As I have pointed out in an earlier post, the emergence of the Internet and digital media technology is having a dramatic effect on the overall costs of having a patent system.  As the transactions costs drop, markets emerge -- even markets in imperfectly defined property rights.  Sometimes the past is not prologue.

[Note to Bessen and Meurer: I would love to review your new book if you'd like to send me a copy.]

Did Bayh-Dole End Corporate R&D?

Thirty-years ago, many large corporations had entire in-house divisions devoted to R&D.  Think of IBM's Watson and ARC Labs, AT&T Bell Labs, and Xerox PARC.  Since that time, these R&D labs have greatly diminished in size or disappeared altogether.  At the same time, the pace of innovation in the United States has not been slowed.  Assuming that R&D is necessary for innovation, it's very important for us to ask what happened.  Where did the R&D go?  The Bayh-Dole Act is a prime suspect.

The fundamental economics of R&D changed overnight with its passage on December 12, 1980.  Because of their academic role in teaching and publishing basic research, universities have a cost advantage to corporations in performing early-stage R&D.  Think of the many federal grants that go to fund universities.  Even without the grants, corporations can't offset the costs of R&D against undergraduate tuition dollars by requiring their researchers to stand in front of a classroom for a few hours per week.  Once universities were permitted to take title to their R&D, many corporations gave up on building a top quality R&D division, and instead started sponsoring research at universities in exchange for patent rights.  Hence the explosive growth in university technology transfer in parallel with the disappearance of many corporate R&D labs.

Check out the following graph, which is shown in this highly recommended article by a former Chief Economist to the European Patent Office:

The author asserts that funding of academic R&D is promoting later funding of private R&D, the idea being that funding of academic research generates ideas for a pipeline that eventually results in new products and services.  Something like this is probably true in the U.S., although those in technology transfer at universities would caution that there exists a very real gap between early-stage R&D funding and venture capital financing.  But it would be worth knowing if part of the "industry-financed R&D" isn't going to universities -- if even a part of it were, it could explain most of the correlation.

Overall, corporate R&D spending hasn't decreased since Bayh-Dole.  What used to be spent on an in-house division is now spent on sponsorship of university research and the acquisition of intellectual property from smaller companies.  The few exceptions to this rule (Google labs?) seem to be for companies that have trade secret protection as a viable alternative to patenting as a durable means for maintaining competitive advantage.